Bankruptcy’s Effect on HAMP Loan Modification

In 2010, the Obama administration reworked its $75 billion Home Affordable Modification Program (AKA “HAMP”) in an attempt to better help those hardest hit by the housing crisis: homeowners who were unemployed or underwater in their mortgages (i.e., owing more on their loans than their homes are worth). Within these changes, (1) the unemployed could qualify for up to a six month stay on their mortgage payments;  (2) in turn, participating banks would receive financial incentives to reduce mortgage balances for underwater homeowners; and (3) lenders could refinance mortgage loans secured by the Federal Housing Administration.

More information about HAMP can be found at the Making Home Affordable FAQ section.

With millions of American homeowners facing foreclosure and in desperate need for modifications on their mortgage, in addition to assistance for consumer debts, medical costs, and more, you might be wondering: what is bankruptcy’s effect on your HAMP loan modification?

While many industry experts have criticized HAMP for its failure to help as many homeowners as promised, the program does include protections for homeowners in bankruptcy.

For example, let’s say you have a HAMP loan modification that was signed and finalized by your mortgage lender months ago. Since your modification, you’ve paid your mortgage on time. However, in the midst of your previous mortgage troubles you have several credit cards that you’ve fallen behind on, as well as a maxed out home equity line of credit in the form of a second mortgage from another lender, which you have not paid in a while.  You might be wondering which bankruptcy is best for you, considering the second mortgage—Chapter 7 or Chapter 13. You may also be worried that if you file for bankruptcy now to help alleviate your credit troubles, your modification will be canceled.

In truth, HAMP includes directives that are intended for mortgage servicers and set out numerous obligations for them to follow when dealing with bankruptcy bound borrowers.  As such, while it is advisable that you review your modification paperwork carefully to make sure there is no clause directed at bankrupt customers, a bankruptcy should not affect your HAMP modification.

As for your choice of Chapter, neither Chapter 7 or Chapter 13 have any negative effect on a HAMP modification. However, if you have a 2nd mortgage, it may be worth considering a Chapter 13, especially if your house is now worth less than the 1st mortgage balance. In this scenario, it's possible to "strip" the second mortgage under a Chapter 13 bankruptcy, removing the lien and saving you thousands of dollars- making the modification of your 1st more likely to succeed.

There are additional factors to be considered in determining whether a Chapter 13 or 7 is best for you. Because of the intricacies of the bankruptcy process, if you too have been affected by the housing crisis, knowing a qualified bankruptcy attorney can also help you to conquer your creditors and face your financial fears, yielding the right kinds of support, information and insights—at a low cost— for a safe and secure future in or out of your current home. The bankruptcy experts at the Law Offices of John T. Orcutt offer a totally FREE debt consultation and now, more than ever, it’s time to take them up on their offer. Just call toll free to +1-833-627-0115, or during off hours, you can make your appointment online at www.billsbills.com.