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Feb 2011To get a HAMP modification, does bankruptcy help?
Posted by Robert Weed / in After Bankruptcy / 19 comments
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.
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Robert Weed has helped fifteen thousand people file bankruptcy in Northern Virginia. Robert Weed is a frequent panelist and speaker at the meetings of the National Association of Consumer Bankruptcy Attorneys. He is one of Northern Virginia’s most experienced personal bankruptcy lawyers. As an expert on changing consumer bankruptcy laws, Robert Weed has been interviewed on local and national TV and quoted in newspapers across the country.
Robert Weed
Just got an email from the client, who has been trying to get a pre-bankruptcy loan mod. (I recommend exhausting your pre-bankruptcy chances, first. Then, if necessary, hit them with the bankruptcy and try again.)
My client was just told on the phone by Bank of America he wasn’t eligible for a mod. Why? Too much debt on his credit report.
“I called B of A last night 1-800-669-0102 and requested a modification. He collected my new financial info and entered it into their computer for a preliminary screening. The answer that came out was negative. He said he has to count all of the existing debt until it no longer appears on my credit report (including the truck that I do not own). ”
This backs up what I’m saying here. For some people, you have to file bankruptcy in order to be eligible for a loan mod.
gene thompson
Iwas turned down for loan modification because my debt to income ratio was not 31 percent. My income has come down so therefore it won’t be 31 percent I have claimed bankruptcy what do I do now?AURORA BANK FSB.
Robert Weed
All that I can tell you is apply again. I know lots of people in Virginia who got approved after bankruptcy.
Now from your note I’m not sure you are saying they turned you down because of too much income, or not enough. If it was too much, there’s not a lot you can do about that. (Unless they were picking up a one-time bonus or something; then applying again would help.)
If it was not enough, then the bankruptcy gives you some time to get more income. Can you pick up another part time job or rent a room.
Bridgette
Hello, I read your blog posts and they are really helpful. Here is my situation. I applied for modification with Chase-lender for my primary residence and has been doing the paperwork game with them for the past 9 months. I stopped paying on the mortgage back in February 2011. I have a warrant in debt case that resulted in judgment against me and I am trying to decide if I should wait out the modification process before I file for chapter 7. I also have a few complicating factors, since I recently received a wage increase, if I wait to the november or later, I may not pass the means test as a single person in Virginia. I have about 80-100k in student loans, 55k in credit card debt and I also have a rental property which is current-I received a forbearance payment for 1yr with my lender. I want to keep my primary residence.
Robert Weed
I really wrestle with that with my clients. Generally I like to hold off the BK until we have a definite yes or no on the loan mod–and then try again after BK if there’s a no. But once there’s a judgment, usually I shift and say it’s time to go ahead with the BK and try for the mod again on the back end. How are you going to live if you get garnished? And what have you done to yourself if the pay increase wrecks your eligibility?
Ryan Maltese
Im a senior loan consultant in Southern California and what your saying Robert about not being able to do a loan modification if your back end DTI is over 55 percent is completely untrue.If your back end DTI is above 50 percent under HAMP guidelines all this means is you have to agree to credit counseling.If anybody is skeptic look on the official government website.Have a great day!
Ryan Maltese
FHA-HAMP however your correct.Clarify this so people arent mislead.Thanks.
Robert Weed
Thanks for your clarification. I’m a bankruptcy lawyer, not a mortgage guy. All I can say for sure is that SOMETIMES it’s a lot easier to get approved for a HAMP after the bankruptcy than before, because your debt to income ratio is better. As far as possible, I suggest people try for a loan mod before filing bankruptcy; then if that doesn’t work, try again, after.
Pamela
My question is my husband and had our 341 hearing Sept 4, 12 – we haven’t heard anything, on way to being discharged, we applied for a mod while going thru chapter 7, did trial payments, sent mod agreement this week, now mortgage company wanting approval from the court for a mod..Is this correct ?
Robert Weed
Pam:
I see that a lot. However, the court in chapter 7 has no authority to approve a loan mod. (At least that’s what the judges think here and I agree.) Maybe your judge sees it differently–otherwise you need to keep dancing until the case is discharged and closed–probably around Thanksgiving.
Tim
I am working in a loan modification with my bank (Hamp). I owe the mortgage but my girlfriend and I live in it. I am applying but she is providing information as well so we can demonstrate more income. She has $40.000 in credit card debt. Can she stop paying the credit cards and then file a BK without affecting our application for HAMP?
Robert Weed
Tim:
You have two chances to get a modification–before bankruptcy and after. so I tell people to try to get a mod before the bankruptcy. If that doesn’t work, try again after. Often the bankruptcy helps, because it improves the debt to income ratio, but I don’t like to throw away that before chance.
bonnie
My husband and I are filing chapter 7. His loss of a fulltime job a year and half ago and me on permanent disability. he works a parttime job 20 hours per wk at 8 per hour and 33 hours per wk at 9 per hour at another parttime job. i have 660 per month disability. Our lawyer says we cannot try to modify with a HAMP to keep our house after bankruptcy because we don’t make enough money. Q: does he have the right to keep us from trying? Q:If we apply and are denied, will we still have to pay the mortgage during the 3 to 4 months we are given to move out of our home after the foreclosure is “stayed” upon filing our chap. 7? background: our mortgage holder is PNC. We were in process of applying for HAMP before chap. 7 and were NOT denied…but the process was not fully explained to us by PNC. during the 10th week i became hospitalized a month, requests were being made for resubmissions for nearly the entire package.we could not meet deadline due to my illness.
Robert Weed
Bonnie:
No, of course your lawyer cannot block you from applying for a HAMP. For a bankruptcy lawyer, a I know a lot about HAMP but I don’t know enough to tell people “don’t even both to try.” Sometimes it works.
Should you keep paying? Sometimes when there’s a modification in, they tell people to stop paying. Sometimes they tell people to keep paying.
I’ve found PNC to be harder to deal with than almost anyone. Apply, apply, apply.
Are you both on the house? Does your husband hope to get more hours or higher pay when the economy improves?
Sometimes I have people split the bankruptcies, in order to get more time. More time to get a better job….or more time to save money if you need to move.
Before we talk about that, are your current? If you are current, have you seen if you are eligible for HARP?
If you are not current, one approach would be to stop paying and file bankruptcy for your husband right before the foreclosure date.
That will throw them off for several months. Then you file bankruptcy for you, and stop the foreclosure again.
Sometimes that gets you a year–a year to live there for free, at worst. A year you hope to land your HAMP on the desk of someone who will say yes…maybe because the year also has some income improvement for your husband and now you are eligible.
Now, I said that I know a lot about HAMP for a bankruptcy lawyer. Maybe you are talking to someone in your area who really knows A LOT ABOUT HAMP. I don’t.
Noah
I filed Chapter 7 in 2010. I am trying to remodify my home mortgage through Wells Fargo after 6 months they are telling me I am not eligable for HAMP because I did not reaffirm my loan at the time of filing for bankruptcy. Is this true?
Robert Weed
Noah:
No, it’s not. I know plenty of people who have gotten post bankruptcy HAMPs.
John
I have filed received chapter 7 discharge, did not reaffirmed the mortgage, on July 2012, about 6 weeks ago I have applied for FHA Hamp, servicer, Bank of America just denied due to bankruptcy.Do you know ( based on your past comments) anyone had FHA Hamp after Chapter 7 discharge. Thanks
Robert Weed
John:
Yes, I know dozens of people who have gotten Bank of America HAMPs after a Chapter 7 discharge. You are also the second person I’ve talked to this week! who has gotten that letter from Bank of America saying they can’t. Here’s the link to the Justice Department memo saying that they can. http://www.justice.gov/ust/eo/public_affairs/consumer_info/docs/HAMP_FAQs.pdf.
On this one, I’d suggest you write to your Congressman with a copy of the BofA letter, and a copy of the Justice Department memo, and ask them to ask Justice what about it. With a copy back to BofA. Let me know how that works.
John
Thanks for the quick response, According to Bank of America that they are fallowing FHA guide lines and FHA-Hamp different than HAMP.
I also find this, could you explain what it means(2 questions asked at same time, borrower in Active Bankruptcy is required court approval for sure, discharged BK? ) ?
US Department of Housing and Urban Development’s latest guide FHA loan
modification as of March 8, 2013, section J. Eligibility-Borrower
2.Can an FHA-HAMP be offered to a Borrower in active Bankruptcy? A Borrower previously discharged?
Yes, Lender would need to check with their counsel and may also need to obtain Bankruptcy
approval.
I am going to appeal with Bank of America at first and escalate to FHA/ HUD, any information greatly appreciated. Will fallow your advise, thank you.
I would let you know what what happens