To get a HAMP loan modification, some people need to file bankruptcy first.
I’m a Virginia bankruptcy lawyer.
Usually, I urge people to try to get a HAMP modification before we file their bankruptcy. We hold the bankruptcy in reserve to stop a foreclosure if we need to. But sometimes, there’s no way a HAMP modification can be approved without filing bankruptcy first.
Why? One of the requirements for a modification is that your “back-end debt-to-income ratio” be less than 55%.
What does that mean? Suppose you make $4000 per month before taxes. If your mortgage payment now is $1500, you could ask for a modification to come down to $1240. That $1240 is 31% of your before tax income. HAMP requires lenders to consider–not always agree to but consider–dropping your payment down to 31% of your gross income.
So you could save $260 a month if your modification is approved. But, you will be turned down if your other debt is too high.
Suppose there’s a $500 per month car payment–and $600 total minimum on credit card payments. Your total debt payments are 58.5% of your gross income. Too high to get the modification. Because there is “No Affordable Solution.”
Now, you file a Chapter 7 bankruptcy and the $600 credit card payments are gone. Even with bankruptcy, you still are paying the car loan.
Now, after bankruptcy, your back-end debt-to-income ratio is only 43.5% Now your modification can be approved.
Here’s a short cut. If your credit card minimums plus car payments plus student loan payments total more than 25% of your before tax income, you can’t get a HAMP without filing bankruptcy. You can’t get because there is no affordable solution, because the total debt payment would be more than 55% of your gross income.
If filing bankruptcy gets the credit cards (none, now, we hope) plus car payments plus student loan payments below 25% of that before tax income, then you’ve fixed the “no affordable solution” problem. If you meet all the other requirements, then you can get your loan modification approved.