Modifying Your Mortgage in Chapter 13 Bankruptcy

New mortgage modification rules make it easier to combine a HAMP or "Obama Plan" mortgage modification with a Chapter 13 Bankruptcy. Combining a HAMP mortgage modification may be beneficial to many homeowners.

The filing of a chapter 13 bankruptcy generally stays all foreclosure and collection actions by mortgage companies and other creditors. This allows a person to formulate a chapter 13 plan to reorganize their financial situation.

A typical homeowner who owes more on their home than it is valued at will propose a chapter 13 plan to avoid their second mortgage lien and categorize it with other unsecured claims, such as credit cards. The homeowner will also file a HAMP mortgage modification request if they haven't already file it. The chapter 13 plan will provide for payment of the estimated and anticipated HAMP modified mortgage payment. The chapter 13 plan provides also provides for a percentage dividend to unsecured creditors.

Filing for a HAMP modification together with a chapter 13 bankruptcy may increase the likelihood of obtaining a HAMP modification for various reasons, including the increased feasibility of making the new payment for the first mortgage, as the second mortgage is avoided and categorized as an unsecured creditor. Also, as the HAMP is being filed in the context of the chapter 13 case, it may receive more prompt review by the mortgage company.

A typical HAMP modified mortgage payment is calculated as 31% of the homeowner's gross income. The 31% amount would cover principal, interest, taxes, insurance and associations.

Mortgage Modification and Chapter 13 Bankruptcy

The new HAMP rules that went into effect June 1, 2010 greatly increased the attractiveness of Chapter 13 as a platform to obtain a HAMP mortgage modification. Basically, by filing both a HAMP mortgage modification and a chapter 13 bankruptcy at the same time, one may be able to do all of the following at the same time:

1. Obtain a modification of the first mortgage
2. Avoid the second mortgage (ie. "equity line") if it is "underwater" due to a fall in value
3. Reorganize unsecured debt
   

The new HAMP guidelines provide the following new provisions:

• Bankruptcy - Homeowners in chapter 13 are required to be considered for HAMP upon request.
  

• Chapter 13 Plan - The chapter 13 plan may provide for anticipated or estimated HAMP modified mortgage payment which is normally 31% of gross income.
  

• Waiver of Application - The mortgage servicer may accept the bankruptcy schedules in lieu of the Request for Modification and Hardship Application to determine eligibility for HAMP.
  

• Cooperation Required - Mortgage servicer must work with the homeowner to obtain Bankruptcy Court approval.
  

• Waiver of Trial Period - Mortgage servicer may waive trial period mortgage modification and provide a permanent mortgage modification if the chapter 13 plan had been providing the amount of the proposed modified mortgage payment.
  

• Investor Approval - Mortgage servicers must use "reasonable efforts" to obtain approval from investors to participate in HAMP.
  

• Reconsideration - Ability to seek reconsideration of HAMP denial.
  

Observations on the South Florida Foreclosure Crisis

The mortgage foreclosure crisis in South Florida is far from resolved. I offer the following observations.

• It is astounding to note that about 30% of all foreclosure sales in Miami-Dade County, Florida are being canceled on recent calendars. Not clear whether this is an indication that the mortgage holders are not that eager to become the owners of more South Florida real estate or whether they are cooperating more in efforts by homeowners to modify their mortgages.

• The Federal Reserve Bank of Cleveland issued a report on August 3, 2010 on the mortgage cramdown policy debates and lessons that may be learned from the chapter 12 agricultural bankruptcy reform in the 1980's.

• Miami condos for less than the price of a car.

• Foreclosure crisis and abandoned homes contributes to Miami being rated 9th worst place to live in the USA, behind El Centro, California, Cleveland, Detroit, and Las Vegas