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  • Robert Weed

To get a HAMP modification, does bankruptcy help?

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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