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Can HAMP Help in Bankruptcy?

By Katie Porter

About six months ago, the government rolled out guidelines for how HAMP should work for people in bankruptcy. Given that bankruptcy's historical role as a foreclosure prevention device, it never made sense to me why from its inception, HAMP did not envision ways for homeowners in existing chapter 13 cases to seek loan modifications and for people to try to obtain a loan modification as part of their chapter 13 bankruptcy. This may have just resulted from the right people not being in touch in a timely fashion. But now that HAMP is available for people in bankruptcy, does it really provide much?

Putting aside all of the proclamations (which I too have uttered) about HAMP's huge weaknesses, what are the particular challenges to using HAMP in bankruptcy? As an initial matter, the guidance says that people in bankruptcy "must be considered fro HAMPif the borrower, borrower's counsel, or bankruptcy trustee submits a request to the servicer."  This is weird. Surely the bankruptcy trustee cannot initiate a HAMP modification without the debtor's consent--right? Or is this supposed to basically give pro se debtor's the trustee as their attorney in pursuing HAMP modifications? And what is the incentive for chapter 13 trustee to do this? Ostensibly, it might be that a lowered mortgage payment frees up more income that a debtor can devote to unsecured creditors, but if this is all a shell game among creditors, why would a debtor consent?

I can also envision situations in which the UST Program, which has been aggressively advertising that it supports HAMP (they even made a video--gee technology arrives at the USTP website; what's next--a blog?) finds itself in a conflict of its own policies. For example, what if someone was in progress for a HAMP modification and filed chapter 13. They are above-median but pass the means test because of their mortgage payment. If the HAMP modification is approved, their monthly expenses go down. Is this grounds for a modification? Is this the kind of "known or virtually certain" changes in expense that Hamilton v. Lanningwould permit courts to take account of in determining what a debtor can pay? Or is the extra income a debtor has each month after a HAMP approval just retained by the debtor and the creditors get the payment they would have gotten without HAMP. If the latter is true, it is odd that the trustee would be encouraging HAMP. Perhaps the thinking here is that HAMP modifications will increase plan completion and ultimately increase recovery to unsecured creditors; that is, the percentage stays the same but the dollars paid out are higher because more plans go to completion.

The guidance does have some helpful aspects for debtors who want to pursue a HAMP modification. For example, servicers may accept copies of the bankruptcy schedules in lieu of some of the HAMP documentation. And even better, borrowers in an active chapter 13 may be "converted" to a permanent modification without completing a trial period under HAMP if the bankruptcy court approves the modification, the investor guidelines permit a waiver of the trial period, and the borrower is current post-petition. How often will these be true? No idea. I also have no idea what standard the bankruptcy court is supposed to apply in considering the modification. Insights from the trenches? Are you seeing a lot of HAMP modifications now that we've had this guidance for more than 6 months? If not, are the barriers problems with HAMP or with using bankruptcy in HAMP?

Full post as published by Credit Slips on November 22, 2010 (boomark / email).