Loan Modification & Bankruptcy
Homeowners seeking to modify their loans under the HAMP program may encounter issues with the loan modification when they file for Bankruptcy under Chapter 7 or Chapter 13. In the early days of the HAMP program I used to caution people who were still in their trial modification term to wait until it was over before filing a Chapter 7. The reason was that lenders would routinely cancel the trial modifications due to bankruptcy filings.
Over the past two years as the HAMP program has evolved such actions have become more rare. Although I still have clients who run into difficulty processing their modification applications when we file Chapter 7, it is becoming increasingly common for modifications to take place during and after bankruptcy filings. Naturally this makes sense. Under the HAMP guidelines, servicers are actually required to consider homeowners for the HAMP program even if they have filed for bankruptcy under Chapter 7 or Chapter 13. Therefore, filing bankruptcy (in theory) should not affect the loan modification process.
Section 1.2 of the MHA Guidelines, states:
Borrowers in active Chapter 7 or Chapter 13 bankruptcy cases are eligible for HAMP at the servicer’s discretion in accordance with investor guidelines, but servicers are not required to solicit these borrowers proactively for HAMP. Notwithstanding the foregoing, such borrowers must be considered for HAMP if the borrower, borrower’s counsel or bankruptcy trustee submits a request to the servicer.
See MHA Handbook, v. 3.0, Section 1.2 Additional Factors Impacting HAMP Eligibility.
Anyone in the process of applying for a modification or desiring to apply for a modification after or during a bankruptcy, should inform their bankruptcy attorney. Their attorney should then notify the loan servicer in writing as provided in the HAMP guidelines.
Some Bankruptcy Courts have also adopted special procedures for the Court to approve the terms of any loan modification. Servicers will usually require compliance with any such procedures and reaffirmation of the debt. Nevertheless, some Court without specific procedures can still approve the terms of a modification in a standard reaffirmation agreement. Reaffirmation agreements will usually be provided by the lender and must be filed no later than 60 days following the date set for the 341 Meeting of Creditors.
Also, a word of caution to borrowers: there are numerous websites out there that look like and purport to be official HAMP providers. Most of these sites are for-profit businesses looking for desperate homeowners. Be very careful about where you obtain your information. The official HAMP website is located at www.makinghomeaffordable.gov. Also, you should never pay anyone a fee to modify your mortgage–not even a law firm. Free help is available through HUD-approved counseling agencies. Simply search the HUD website to find one in your area: http://www.hud.gov/offices/hsg/sfh/hcc/fc/.