Monthly Archive for March, 2010

Treasury Department Issues Guidelines for Use of HAMP in Bankruptcy

Published
by
Monette Cope
on March 30, 2010
in Bankruptcy Filings, Homeowners Affordable Modification Program and Real Estate
. 0 Comments

A recent post advised lenders and servicers of a strategy proposed by a prominent Chapter 13 Trustee to file bankruptcy and apply for a HAMP modification at the same time. To recap, theoretically, the servicer will lower the mortgage payments and a modification would be in executed within 60 days of filing the bankruptcy, and the plan would be ready for confirmation.  However, this not only overlooks likely delays in the process, but also the three month trial period during which the debtor must make full and timely modified payments before the modification is permanent.  During the process, the servicer can be bound by automatic stay for months while awaiting completion of the modification, and so confirmation.

Now the U.S. Treasury is promoting the idea through its just-issued Supplemental Directive 10-02.  It includes guidelines for HAMP modifications in bankruptcy, which will become effective June 1, 2010.  These guidelines may in some cases help ease the expected delays in Chapter 13 confirmations.

The Treasury acknowledges that the HAMP process may cause delays in Chapter 13 cases, and further permits (but does not require) servicers to extend the trial payment period from three to five months to accommodate any legal proceedings needed to approve the modification or to receive trial payments from the Chapter 13 trustee.  This would obviously create more delay, but gives the servicer control over such an extension.

Even better, servicers can waive the three month trial period when:

  1. Post-petition payments on the loan are current prior to entering into a HAMP agreement; and
  2. The payments are equal to or more than the payment as modified; and
  3. The Bankruptcy Court approves the modification, if necessary; and
  4. The investor agrees to the waiver.

If a debtor qualifies, the Treasury Directive’s waiver provision could prevent months of delay before confirmation, and could allow a plan to be confirmed within 60 days of filing in some cases.

Coordinating HAMP with a Chapter 7 bankruptcy is much less complicated.  The only new requirement applies in the event a debtor obtained a discharge, and a reaffirmation agreement was not filed.  If a debtor later enters into a modification agreement, the servicer must include specific language that it will not hold the debtor personally liable for any debt arising out of the agreement.

In both Chapter 13 and Chapter 7, the servicer may choose (but is not required) to accept bankruptcy schedules and tax returns provided in the case as evidence of income in lieu of the Affidavit of Hardship and Form 4506T-EZ. The only restriction is that the schedules must be less than 90 days old.

These guidelines, where appropriate, are avenues that can reduce delay where a Chapter 13 case is combined with a HAMP application.  However, servicers still need to take quick and aggressive action in this circumstance because all too often, it may lead to unjustified delay.

If you have any questions, please contact Ms. Monette W. Cope, Esq. Monette is a junior partner in the bankruptcy department of Weltman, Weinberg & Reis Co., L.P.A. located in the Chicago office. She can be reached directly at 312-253-9614 or via email at mcope@weltman.com.

New HAMP Guidelines Announced Affecting Foreclosures

Published
by
Jack Day
on March 29, 2010
in Bankruptcy Filings, Homeowners Affordable Modification Program and Real Estate
. 0 Comments

On March 24, 2010, the Treasury Department announced new guidelines for handling pending or threatened foreclosure actions for lenders participating in the Home Affordable Modification Program (HAMP) effective June 1, 2010. Lenders participating in HAMP include Fannie Mae (FNMA) and Freddie Mac (FHLMC) loans, lenders accepting TARP funds, and other lenders who voluntarily agree to participate.

Under the new guidelines, a participating servicer or lender may not refer any loan to foreclosure or conduct a scheduled foreclosure sale unless and until at least one of the following circumstances exists:

  1. The borrower is evaluated for HAMP and is determined to be ineligible for the program; or
  2. The borrower is offered a trial period plan, but fails to make a trial period payment by the last day of the month in which such payment is due; or
  3. The servicer has established right party contact, has sent at least two written requests asking the borrower to supply required information in accordance with HAMP guidelines and has otherwise satisfied the Reasonable Effort solicitation standard, and the borrower failed to respond by the dates indicated in those requests; or
  4. The servicer has satisfied the Reasonable Effort solicitation standard without establishing right party contact; or
  5. The borrower or co-borrower states he or she is not interested in pursuing a HAMP modification and such statement is reflected by the servicer in their servicing system

Existing foreclosure sales must be immediately halted when a borrower submits a request for HAMP consideration, so long as the request is received at least 7 full days prior to the sale date. The only exception is where the sale cannot be stopped because the local official fails or refuses to halt some or all of the activities. For example, in some jurisdictions, a sale may not be stopped without the approval of the judge assigned to that case. The local judge may not be available or may otherwise not approve stopping the sale.

When a borrower is in foreclosure and is simultaneously either being evaluated for HAMP or is in a trial period plan, the servicer/lender must provide the borrower with a written notification that explains, in clear language, the concurrent modification and foreclosure processes and which states that even though certain foreclosure activities may continue, the home will not be sold at a foreclosure sale while the borrower is being considered for HAMP or while the borrower is making payments under a trial period plan.

Lenders need to review these new requirements carefully to make sure they are in compliance by June 1, 2010.

If you have any questions, please contact Mr. Jack Day, Esq. Jack is a Partner in the Bankruptcy department of the Cincinnati office of Weltman, Weinberg & Reis Co., LPA. He can be reached at 513-723-2206 or via e-mail at jday@weltman.com.

Sixth Circuit Rules That Negative Equity Is Purchase Money

Published
by
David Yunghans
on March 26, 2010
in Chapter 13 and Motor Vehicle
. 0 Comments

On March 24, 2010 the Sixth Circuit Court of appeals which covers Ohio, Michigan, Kentucky, and Tennessee, in line with a recent decision in the Seventh and past decisions of the Second, Fourth, Fifth, Tenth, and Eleventh Circuit Courts of Appeal, ruled that negative equity is purchase money and cannot be crammed down through bankruptcy proceedings. 

Under bankruptcy law, a debtor cannot cram down a secured claim when the creditor has a purchase money security interest in a motor vehicle acquired for the debtor’s personal use within 910 days of the debtor’s bankruptcy filing.  In some vehicle purchase transactions, debtors trade in a vehicle in order to purchase a new vehicle.  If there is a difference between the value of the vehicle that the buyer trades in and the amount of the buyer’s preexisting debt, this shortfall is financed into the purchase of the new vehicle.  This is referred to as negative equity.  Debtor attorneys have argued that the negative equity is not considered purchase money, therefore a debtor can cram down the difference of the value of the negative equity financed into the new car purchase.

The decision, which affects the Sixth Circuit Court, ensures that debtors must pay the negative equity amount as fully secured in their Chapter 13 bankruptcy.  The favorable ruling for creditors now encompasses 26 states.

If you have any question, please contact David Yunghans directly at 513-723-2211 or via email at dyunghans@weltman.com.

Beware of Chapter 13 Plans That Depend on HAMP Modification

Published
by
Monette Cope
on March 25, 2010
in Chapter 13, Homeowners Affordable Modification Program and Real Estate
. 0 Comments

The bills in both the House and Senate which would have allowed bankruptcy judges to modify the terms of certain mortgages died long ago.  However, one prominent Chapter 13 bankruptcy trustee is promoting his own version of reform by promoting the use of HAMP (Homeowners Affordable Modification Program) in concert with a Chapter 13 bankruptcy.  Lenders and Servicers need to be aware of this and the issues it presents.

The idea is to submit an application for a HAMP modification at the same time a Chapter 13 bankruptcy is filed.  Because both require proof of income, a budget, and the debtor’s most recent tax return, it should be “easy” for the debtor’s attorney to submit them to HAMP along with the Request for Modification and Affidavit of Hardship.  Because lenders and servicers are required to respond to applicants within 30 days with a yea or nay, it would in theory dovetail perfectly with the timing of most districts’ confirmation hearings, and result in reduced mortgage payments and so affordable plan payments.

The assumptions behind this idea show its inherent problem – delay.  Among the assumptions are the following: the debtor is a viable candidate for a HAMP modification; the documents the attorney sends are complete and sufficient the first time; the lender or servicer will be able to respond within the 30 days; the debtor can afford the proposed modification; the modification is accepted immediately; the plan will work with the modification; and the modification documents are signed soon after the 30 day response period has passed.  It is more likely that there will be snags in the process and it will not move as smoothly as the trustee assumes.   Debtor’s counsel will certainly use any delay in the HAMP process to delay the Chapter 13 proceedings.

Even if the modification process goes smoothly, a huge delay is overlooked.  Confirmation hearings are usually set within 60-90 days after a case is filed, and plans can be confirmed in 60 days in some jurisdictions. Under HAMP, a signed modification will not be permanent until and unless the debtor pays according to the modification for three consecutive months. Assuming that a plan cannot be confirmed until the modification is finalized, it will be at least 4 ½ months until the plan can be confirmed. Meanwhile, the creditor is bound by the automatic stay.

Moreover, if the debtor cannot afford the existing mortgage payments, how will it be paid after the bankruptcy is filed?  If a post-petition default accumulates, creditors have grounds for relief from stay.  Will courts put off granting relief while a HAMP application or trial period is pending?  More delay.

How could a debtor propose a budget and a plan if he or she cannot afford the current mortgage payments?  If not, the debtor must file a budget and plan that are unfeasible or based on a future unknown payment.  With either option, creditors have grounds for denial of confirmation, dismissal of the case or relief from stay. Will courts delay or deny creditors this relief while a debtor is waiting for a loan modification?  Again, more delay.

Or would debtor’s counsel seek and obtain an extension of time to file a plan and budget while waiting for a HAMP decision?  In cases where a loan modification gets approved, confirmation will be extended to at least 5 ½ months after filing.  In cases where modification is not successful, the case will either have to be dismissed or converted to a Chapter 7.  Again, the creditor is delayed from exercising its state court rights because the automatic stay has been in effect during the Chapter 13 case.

While a HAMP modification plan could be a win-win for both creditor and debtor in certain cases even with the delay it would cause, chances are that the creditor will be frustrated with the process.  Creditors must move aggressively and quickly if a Chapter 13 case is filed that is dependant upon a HAMP modification.

If you have any questions concerning this matter, please contact Ms. Monette W. Cope, Esq. Monette is a Junior Partner in the Bankruptcy department located in the Chicago office. She can be reached directly at (312) 253-9614 or via email at mcope@weltman.com.

Pandora’s Box Opens: Chapter 13 Plans May Be Final Even If Contrary to the Bankruptcy Code

Published
by
Beth Schenz
on March 24, 2010
in Bankruptcy Filings, Chapter 13 and Federal Rules of Bankruptcy Procedure
. 0 Comments

By Beth Ann Schenz, Esq. and Milan Kubat, Esq.

The Supreme Court admits that its decision from March 23, 2010, “is potential for bad-faith litigation tactics” by debtors. 

The Facts
A Chapter 13 debtor listed his student loan debt in his plan.  In the Chapter 13 plan, the debtor proposed to repay only the principal while the remainder (accrued interest) would be discharged.  The United States Department of Education (the “Government”) did not object to the plan or appeal the order confirming the plan.  During the bankruptcy case, the Government filed a proof of claim and received the principal on the debt.  When the Government proceeded to collect on the debt after the debtor received a discharge in the Chapter 13, the debtor filed a motion to enforce the discharge order and direct the Government to cease all collection efforts.  The Government responded to the debtor’s motion to enforce and filed a motion under Federal Rule 60(b)(4) to set aside the confirmation order as void. 

The Court’s Ruling
Whether the confirmation order is void was the focus of the Supreme Court’s ruling.  For a judgment to be void, there must be some jurisdictional issue (the court does not have the power to hear the matter) or a due process issues (the creditor did not receive sufficient notice to defend the matter).  The Supreme Court states that there was no jurisdictional error or due process violation so the confirmation order providing for a discharge on student loans is binding on the creditor. 

Normally, a Chapter 13 debtor receives a discharge for all his or her debts except in some situations.  One example where a Chapter 13 debtor would not receive a discharge is under 11 U.S.C. §523(a)(8) – the student loan exception.  Some student loans are excepted from discharge and such exception is self-executing.  The caveat is that the Court can find that such non-dischargeable student loans create an undue hardship for the debtor and can be discharged.  According to the Bankruptcy Rules, such action requesting a finding of undue hardship is brought by the debtor in an adversary proceeding upon summons and complaint. 

The Supreme Court found that the undue hardship provision in the Bankruptcy Code is not a limitation on the bankruptcy court’s jurisdiction but only a precondition to obtaining a discharge order.  Also, the Court stated that the Bankruptcy Rules that require a complaint to be brought to determine undue hardship are only procedural rules and not jurisdictional rules.  Therefore the confirmation order was well within the jurisdictional authority of the Bankruptcy Court and can not be determined as void. 

On the positive side, the Court found that, “[g]iven the Code’s clear and self-executing requirement for an undue hardship determination, the Bankruptcy Court’s failure to find undue hardship before confirming the plan was a legal error.”  Unfortunately for the Government, a legal error does not make an order void.

Going further, the Supreme Court stated that the Government’s due process rights were not violated as they had ample time to either object to the Chapter 13 plan or appeal the confirmation order.  A finding of due process by the Supreme Court means that the confirmation order can not be found as void.

Where the Supreme Court said that the lower court’s ruling went too far is when they considered that any plan can be confirmed if it provides for a discharge of a non-dischargeable debt.  “Failure to comply with the self-executing requirement should prevent confirmation of the plan even if the creditor fails to object, or to appear in the proceeding at all.”

What This Means To You
A debtor can put any provision in his or her plan, which may be contrary to the code (i.e. discharging a debt that is otherwise non-dischargeable).  This provision should prevent confirmation.  However, the creditor may be bound under the order if the Chapter 13 plan confirms.  If the creditor fails to object to the plan or appeal the confirmation order in a timely manner, the confirmation order whether contrary to the Bankruptcy Code or not will be binding on the creditor.

As a creditor, you will need to make a business decision whether to object or not. WWR can help guide you through the decision making process.

If you have any questions concerning this matter, please contact Ms. Beth Ann Schenz, Esq. or Mr. Milan Kubat, Esq.  Beth is an associate in the Bankruptcy department located in the Brooklyn Heights office. She can be reached directly at 216-739-5645 or via email at bschenz@weltman.com. Milan is also an associate in the Bankruptcy department located in the Brooklyn Heights office. He can be reached directly at 216-739-5647 or via email at mkubat@weltman.com.