Treasury Department Issues Guidelines for Use of HAMP in Bankruptcy

A recent post advised lenders and servicers of a strategy proposed by a prominent Chapter 13 Trustee to file bankruptcy and apply for a HAMP modification at the same time. To recap, theoretically, the servicer will lower the mortgage payments and a modification would be in executed within 60 days of filing the bankruptcy, and the plan would be ready for confirmation. However, this not only overlooks likely delays in the process, but also the three month trial period during which the debtor must make full and timely modified payments before the modification is permanent. During the process, the servicer can be bound by automatic stay for months while awaiting completion of the modification, and so confirmation.

Now the U.S. Treasury is promoting the idea through its just-issued Supplemental Directive 10-02. It includes guidelines for HAMP modifications in bankruptcy, which will become effective June 1, 2010. These guidelines may in some cases help ease the expected delays in Chapter 13 confirmations.

The Treasury acknowledges that the HAMP process may cause delays in Chapter 13 cases, and further permits (but does not require) servicers to extend the trial payment period from three to five months to accommodate any legal proceedings needed to approve the modification or to receive trial payments from the Chapter 13 trustee. This would obviously create more delay, but gives the servicer control over such an extension.

Even better, servicers can waive the three month trial period when:

1. Post-petition payments on the loan are current prior to entering into a HAMP agreement; and
2. The payments are equal to or more than the payment as modified; and
3. The Bankruptcy Court approves the modification, if necessary; and
4. The investor agrees to the waiver.

If a debtor qualifies, the Treasury Directive’s waiver provision could prevent months of delay before confirmation, and could allow a plan to be confirmed within 60 days of filing in some cases.

Coordinating HAMP with a Chapter 7 bankruptcy is much less complicated. The only new requirement applies in the event a debtor obtained a discharge, and a reaffirmation agreement was not filed. If a debtor later enters into a modification agreement, the servicer must include specific language that it will not hold the debtor personally liable for any debt arising out of the agreement.

In both Chapter 13 and Chapter 7, the servicer may choose (but is not required) to accept bankruptcy schedules and tax returns provided in the case as evidence of income in lieu of the Affidavit of Hardship and Form 4506TEZ. The only restriction is that the schedules must be less than 90 days old.

These guidelines, where appropriate, are avenues that can reduce delay where a Chapter 13 case is combined with a HAMP application. However, servicers still need to take quick and aggressive action in this circumstance because all too often, it may lead to unjustified delay.

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