This is the final part of a three-part series of articles about HAMP and bankruptcy that I wrote after attending a seminar of the National Association of Chapter 13 Trustees . Part One was: Bankruptcy Issues Involving HAMP (Home Affordable Modification Program) — Part One . The second part was: WARNING: HAMP Can Drive Homeowners Into Bankruptcy .
1. Can I Seek HAMP Relief If I am in Bankruptcy?
Debtors in active bankruptcies are eligible for HAMP but it is up to the discretion of the servicer. This is a significant concern because Chapter 13 debtors have no guarantee of getting their mortgage company to cooperate.
Some attorneys have reported instances in which the lender refused to cooperate with the debtor after the debtor filed for bankruptcy relief.
What can the homeowner do in such instances? Ask the servicer what their policy is. However, absent them putting it in writing (which is unlikely), the homeowner probably has little leverage against a lender that changes its mind or fails to follow through.
2. Can You Apply for HAMP in a Chapter 13 Bankruptcy Where the Plan has Already Been Confirmed?
If your plan was already confirmed, you would need to make a motion for a plan modification. Keep in mind that this would result in additional bankruptcy legal fees.
3. How Are Bankruptcy Debtor’s Attorneys Paid for HAMP Application Work?
This is a real problem because Chapter 13 debtor fees are governed by the Bankruptcy Code as well as local bankruptcy rules. These rules technically require counsel to bring an application before the bankruptcy court in order to be paid.
Hopefully some future regulations will make this aspect easier, especially considering that many of those homeowners who need HAMP assistance also need Chapter 13 bankruptcy relief.
4. What Can the Servicer Do if Homeowner Files for Bankruptcy During HAMP Application Process?
A mortgage servicer cannot withdraw a HAMP modification offer just because the borrower files for bankruptcy during the trial period.
The servicer must work with the borrower and borrower’s bankruptcy attorney to obtain any required court approvals.
5. How Do You Treat the Trial Period Payment in a Chapter 13 Plan?
A Chapter 13 debtor is ordinarily required remain current with post-petition mortgage obligations. However, a Chapter 13 plan can propose to treat the mortgage as current based on a trial period payment (TPP).
6. What Are Some Other Problems with HAMP, Bankruptcy Courts and Bankruptcy Law?
It appears that judges and trustees across the country are struggling to reach adequate solutions to balance bankruptcy statutory requirements with debtors who are seeking to obtain HAMP relief, and that right now, there is absolutely no uniformity whatsoever.
For example, many judges are unwilling to grant extreme and indefinite adjournments of the confirmation hearing while the debtor-homeowner is awaiting finality of the HAMP application.
In our jurisdiction of Long Island, we have not yet seen any standardized process for those debtor-homeowners who need HAMP relief.
It is also unclear whether a HAMP modification would have to be approved by the bankruptcy court. If it does, that could cause an additional delay and result in additional legal fees.
There is also an issue as to whether a HAMP modification that is already in place prior to filing for bankruptcy can be upset by the bankruptcy filing. It is possible that the bankruptcy filing could be deemed a violation of the modification plan. Again, there is no clear-cut guidance on this issue.
Not knowing exactly how the law should be interpreted in bankruptcy cases makes the entire situation confusing and perplexing for bankruptcy counsel, and frustrating for the debtor-client.
7. What Happens if the Debtor-Homeowner applies for HAMP and Is Turned Down?
Here’s a significant concern. The homeowner, who is a debtor in bankruptcy, receives a temporary trial period payment, and will pay a reduced mortgage payment. However, the debtor can subsequently turned down for a permanent modification.
If this happens, the lender will demand that the debtor come up with the difference. What should the debtor do in this situation?
It appears that the best way to handle this would be to modify the Chapter 13 plan and then provide for the arrears through the plan. However, this is not without its own set of complications as it would be incumbent upon the debtor to demonstrate that the he or she can make up the difference.
8. Can’t the Chapter 13 Trustee Argue that HAMP Savings Be Paid Instead to the Unsecured Creditors?
Here’s another significant issue that can result in potential litigation. The Chapter 13 Trustee can argue that the debtor, if he or she is successful in getting a permanent HAMP reduction in the monthly payment, should then pay the savings to the unsecured creditors if the plan provides for less than a 100% distribution.
The best solution is for the debtor to then revise his or her budget and increase their expenses, arguing that the debtor can now afford additional, reasonable expenses that they were unable to afford under the prior plan and budget.