Beware of Chapter 13 Plans That Depend on HAMP Modification

The bills in both the House and Senate which would have allowed bankruptcy judges to modify the terms of certain mortgages died long ago. However, one prominent Chapter 13 bankruptcy trustee is promoting his own version of reform by promoting the use of HAMP (Homeowners Affordable Modification Program) in concert with a Chapter 13 bankruptcy. Lenders and Servicers need to be aware of this and the issues it presents.

The idea is to submit an application for a HAMP modification at the same time a Chapter 13 bankruptcy is filed. Because both require proof of income, a budget, and the debtor’s most recent tax return, it should be “easy” for the debtor’s attorney to submit them to HAMP along with the Request for Modification and Affidavit of Hardship. Because lenders and servicers are required to respond to applicants within 30 days with a yea or nay, it would in theory dovetail perfectly with the timing of most districts’ confirmation hearings, and result in reduced mortgage payments and so affordable plan payments.

The assumptions behind this idea show its inherent problem - delay. Among the assumptions are the following: the debtor is a viable candidate for a HAMP modification; the documents the attorney sends are complete and sufficient the first time; the lender or servicer will be able to respond within the 30 days; the debtor can afford the proposed modification; the modification is accepted immediately; the plan will work with the modification; and the modification documents are signed soon after the 30 day response period has passed. It is more likely that there will be snags in the process and it will not move as smoothly as the trustee assumes. Debtor’s counsel will certainly use any delay in the HAMP process to delay the Chapter 13 proceedings.

Even if the modification process goes smoothly, a huge delay is overlooked. Confirmation hearings are usually set within 60-90 days after a case is filed, and plans can be confirmed in 60 days in some jurisdictions. Under HAMP, a signed modification will not be permanent until and unless the debtor pays according to the modification for three consecutive months. Assuming that a plan cannot be confirmed until the modification is finalized, it will be at least 4 ½ months until the plan can be confirmed. Meanwhile, the creditor is bound by the automatic stay.

Moreover, if the debtor cannot afford the existing mortgage payments, how will it be paid after the bankruptcy is filed? If a post-petition default accumulates, creditors have grounds for relief from stay. Will courts put off granting relief while a HAMP application or trial period is pending? More delay.

How could a debtor propose a budget and a plan if he or she cannot afford the current mortgage payments? If not, the debtor must file a budget and plan that are unfeasible or based on a future unknown payment. With either option, creditors have grounds for denial of confirmation, dismissal of the case or relief from stay. Will courts delay or deny creditors this relief while a debtor is waiting for a loan modification? Again, more delay.

Or would debtor’s counsel seek and obtain an extension of time to file a plan and budget while waiting for a HAMP decision? In cases where a loan modification gets approved, confirmation will be extended to at least 5 ½ months after filing. In cases where modification is not successful, the case will either have to be dismissed or converted to a Chapter 7. Again, the creditor is delayed from exercising its state court rights because the automatic stay has been in effect during the Chapter 13 case.

While a HAMP modification plan could be a win-win for both creditor and debtor in certain cases even with the delay it would cause, chances are that the creditor will be frustrated with the process. Creditors must move aggressively and quickly if a Chapter 13 case is filed that is dependant upon a HAMP modification.

For more information, please visit our website at www.weltman.com or our bankruptcy blog at wwrbankruptcy.com.