Author Archive for Monette Cope

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.

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.

Debtors May Not Use Bankruptcy To Extend Expired State Court Deadlines

Published
by
Monette Cope
on March 4, 2010
in Bankruptcy Filings and Real Estate
. 0 Comments

Lenders are faced with more and different challenges from debtors in these stressful financial times. One tactic being tried in Illinois is to use bankruptcy to attempt to extend a state court right of redemption on real estate in foreclosure.

Illinois Foreclosure law gives a mortgagor a specified and limited time to redeem a mortgage from foreclosure.  This time may not be extended by the state court judges.  Other states have similar laws.

Debtors are trying to use the bankruptcy courts to extend the time to redeem.  11 U.S.C. § 108 of the Bankruptcy Code is entitled “Extension of Time.”   § 108(b) deals with extensions of time to cure defaults inside a bankruptcy case.  The time to cure is either the state law deadline, or sixty days after the filing of the petition for relief, whichever is later.

If the state law redemption period has not expired when Debtors file bankruptcy, but will expire within 60 days after filing, they can extend the time to redeem to that 60 day date under Section 108. However, Debtors in Illinois are trying to use this section of the Code to extend the time to redeem when it had already expired before the bankruptcy was filed. 

One judge (Judge Schmetterer) in the Northern District of Illinois (Chicago) addressed these attempts in In re Brandi McKenith, in a written opinion that will be published.  While this judge is only one of eleven judges in this District, his is the only opinion on this issue in the District.  He found that an expired state court deadline to the right to redeem real estate from foreclosure could not be resurrected by filing of bankruptcy case.

By analogy, Section 108 could not be used to resurrect other state law deadlines.   For instance, Debtors could not extend an expired deadline to redeem a vehicle before sale at a public auction or extend the time to redeem purchased real estate taxes. 

If you encounter such unwanted improper demands by debtors, contact your bankruptcy attorney immediately to stop the attempt to resurrect expired state court deadlines. If you have any questions, please call Monette Cope at mcope@weltman.com.

Has Mortgage Cramdown Died Its Final Death?

Published
by
Monette Cope
on December 17, 2009
in Chapter 13 and Real Estate
. 1 Comment

The House on December 11, 2009 rejected an amendment to the Wall Street Reform and Protection Act of 2009 that would allow mortgage cramdowns in Chapter 13 bankruptcies.  The surprise is that this is the same amendment that the House passed earlier this year.  This time it was defeated by a vote of 241 to 188 with both Democrats and Republicans voting it down.

The proponents argued that it would have limited effect on the mortgage financing industry because it would only apply to existing loans, not future loans, while slowing the rate of foreclosures and home depreciation.

Opponents argued that it would create havoc and more losses to the already unstable mortgage and lending industries, while increasing interest rates and toughening mortgage standards for all home buyers. 

Because the measure has now been defeated by both the House and Senate, it is unlikely to reappear in another bill, and should ease one of the worries facing lenders and investors from the flurry of new financial regulatory legislation.

New Bankruptcy Filing Requirements In The Northern District of Illinois

Published
by
Monette Cope
on August 20, 2009
in Chapter 13, Local Procedures & Rules and Motion
. 0 Comments

NEW: A post-petition payment history must be attached to all Chapter 13 motions for relief in the Northern District of Illinois.

The Northern District of Illinois (Chicago) requires filers to attach a “Statement to Accompany Motions for Relief from Stay” to all motions for relief.  The Statement has been revised three times in the last year.  The revisions have progressively required more details about payment defaults.

The latest revision (sent to all practitioners on August 19, 2009, and effective immediately) requires a post-petition payment history be attached to the Statement in all Chapter 13 motions for relief.  This is not required in Chapter 7 or Chapter 11 cases.

The history must detail the dates of individual payments and the amounts of those payments.  This can be satisfied in most cases by attaching a computer record for the period beginning on the date of the filing of the bankruptcy through the date of the referral.  If no payments have been made, a payment history is still required.

In addition to including a post-petition payment history for all Chapter 13 cases, all motions for relief (for all chapters) must include the following information:  the current balance, the next due date on the account, the amount of arrears, the amount of the regular payments, and the value of the collateral. 

The change occurred in part because courts are now heightening their scrutiny of mortgage defaults, but the result is that courts are requiring creditors holding collateral other than real estate, such as vehicles, to make the detailed disclosures as well.