Written by attorney John Mark Wilk

Home Affordably Modification program (HAMP) & Bankruptcy

Previously, borrowers actively involved in a bankruptcy were eligible for HAMP at the servicer's discretion; now servicers must consider borrowers in active bankruptcies for HAMP modifications if a request is received from the borrower, borrower's counsel, or bankruptcy trustee.

  • Benefit: Many times, lenders won't talk to borrowers unless they are behind on their mortgage payments. Under a Chapter 13 reorganization program, they are required to talk to you.

Borrowers who are in a loan modification trial period plan and then file for bankruptcy may not be denies a HAMP modification due to their bankruptcy status.

  • Benefit: You are protected from discrimination and may still choose to resolve your debts within a bankruptcy plan without jeopardizing your loan modification status.

Servicers and their counsel must work with borrowers to obtain any court or trustee approvals in accordance with local court rules.

  • Benefit: There is a defined court process to keep the mortgage company accountable and pursue a legal loan modification.

Servicers should extend the trial period plan to accommodate delays in obtaining court approvals or receiving a full remittance of payments when made to a trustee (not required to extend beyond two months though)

  • Benefit: Lenders are asked to be flexible and work within the parameters of the court process.

Servicers cannot object to confirmation of a borrower's Chapter 13 plan, move to have court protection removed from the borrower, or move for dismissal of the case when the borrower has made post-filing payments in the amount required by the trial period plan.

  • Benefit: This protects the homeowner with additional legal rights and court protection.

Borrowers who receive a Chapter 7 bankruptcy discharge who did not reaffirm are still eligible for HAMP.

  • Benefit: This provides additional options & possibilities for homeowners after filing for Chapter 7 total debt relief. By reducing debt through a Chapter 7, homeowners may be in a better position to qualify for a loan modification.

Servicers may accept copies of the bankruptcy schedules and tax returns in lieu of the RMA and Form 4506T-EZ to determine HAMP eligibility (unless such schedules are more than 90 day old)

  • Benefit: Reduces paperwork and streamlines the loan modification process.

At the servicer's discretion, borrowers in an active Chapter 13 who are eligible for HAMP may be converted to a permanent modification without a trial period plan if:

  1. Borrower makes all post-filing payments prior to the modification agreement & at least three of the payments are equal or greater that the proposed modified payment;
  2. Bankruptcy Court approves the modification (if required); and
  3. Trial period plan waiver is permitted by the applicable investor guidelines.
  • Benefit: Chapter 13 borrowers can bypass the trial period & streamline the process of achieving a permanent loan modification.

In addition to these benefits, the Chapter 13 Reorganization plan provides:

Full debt reorganization plan, to prioritize your budget, reduce and eliminate certain debts and provide a 36-60 month window to eliminated unsecured debts and become current on any arrearages on secured debts.

Improved credit rating throughout the course of the program due to focused principal debt reduction, timely payments to creditors and no negative reports top credit agencies.

Opportunity to remove a secondary mortgage or home equity loan if the value of the home no longer supports the loan.

Optimal terms for debt repayment, such as 0% interest on credit cards, medical bills, personal loans, etc. In most cases, we can also eliminate a portion of this debt upon plan completion.

Court protection from your creditors if you are facing a foreclosure, vehicle repossession, judgment, garnishment, etc. Similar to the new HAMP guidelines, your creditors must play by the court's rules.

Chapter 7 Fresh Start program offers:

Full debt relief from unsecured debts, such as credit cards, medical bills, personal loans, judgments, past utility bills, etc..

Protection from wage or tax refund garnishments.

Opportunity to improve credit by "wiping the slate clean." The Chapter 7 offers you the ability to begin rebuilding your credit immediately after your court discharge.

Court protection from your creditors throughout the filing process.

For questions regarding your rights under the new HAMP laws or to find out how to improve your finances and credit through a Chapter 13 or Chapter 7, call one of our licensed attorneys for a free, confidential consultation.

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