As many of you already know, under the CARES Act of 2020, borrowers are able to request forbearance of their payments on FNMA/FHMLC-backed mortgages for up to two 180-day periods if they were experiencing financial hardship caused by the COVID-19 emergency. Forbearances are mandated (not discretionary, so long as the hardship element is satisfied for eligible loans), and “[n]o additional interest, fees, or penalties are allowed beyond the amounts scheduled or calculated as if the borrower made all contractual payments on time and in full under the terms of the mortgage contract.”[1]
Once the forbearance period ends, the payments have to be addressed – are the payments due in a lump sum, does the borrower have to pay “make-up” payments over a period of time to catch up, or are the payments deferred to the end of the loan? If the parties agree on how those payments are treated, how is that agreement documented?
Some borrowers may obtain forbearance on their mortgages outside of a bankruptcy court, but their economic hardship circumstances continue to the point where they seek relief under the bankruptcy code before the forbearance period ends. Others may be in the middle of a confirmed chapter 13 bankruptcy plan but require forbearance during the plan period. Depending on their financial circumstances at the beginning of their case, they may have started their case with a current mortgage and continued to make payments directly to their mortgage lender/servicer. Or, they may have started their bankruptcy case to avoid foreclosure due to mortgage defaults.
In a chapter 13 bankruptcy, where the debtors are required to make payments pursuant to the terms of a chapter 13 plan, forbearance poses additional administrative problems. Debtors who obtain a forbearance on their mortgage payments while in bankruptcy but make their payments through the trustee may not get the benefit of the forbearance without a plan modification. Debtors with a chapter 13 plan provided for direct payment of their mortgage payments to the creditor may need to forbear those payments during a period of financial hardship to avoid plan default and dismissal of their bankruptcy case.
Congress enacted the Consolidated Appropriations Act of 2021 (“CAA”), specifically Title X, to resolve these and other questions arising from the continued impact the COVID-19 pandemic has on our economy. These changes are in effect until December 31, 2021 (unless extended).
The CAA requires creditors to file a supplemental proof of claim in the debtor’s bankruptcy case when a mortgage is provided for by a plan under 11 U.S.C. § 1322(b)(5)[2], and the creditor did not receive mortgage payments during a forbearance period of a loan granted forbearance under 15 U.S.C. §§ 9056, 9057. The form that will be used for this supplement can be found at form_4100s_0221_0.pdf (uscourts.gov). Note: although the Bankruptcy Code requires proofs of claim to be filed no later than 70 days after the petition is filed (with any supplemental documentation filed no later than 120 days after the petition date), the forbearance supplemental claim may be filed even if the initial claims bar date passed.
The CAA amended Section 501 of Title 11 of the U.S. Bankruptcy Code[3] to provide that if the parties enter into a forbearance of the debtor’s obligation to the mortgagee and there is an agreement to cure those mortgage payments, the mortgage creditor (and ONLY the mortgage creditor) must file a supplemental proof of claim for a CARES forbearance claim. The supplemental proof of claim must include the terms of the modification or deferral, a copy of the modification or deferral if in writing[4], and a description of the payments to be deferred to the date on which the mortgage loan matures.
Under newly amended section 502(b)(9)[5], the deadline for filing a CARES forbearance claim is before 120 days after expiration of the forbearance period of a loan granted forbearance under section 4022 or 4023 of the CARES Act (15 U.S.C. 9056, 9057).
Section 1329 of title 11 is amended to provide that when a creditor files a CARES Act supplemental claim, the debtor may file a request for plan modification to provide for it. If the debtor does not, the court, the Trustee, or any interested party (including the creditor) may file a motion to request modification of the plan. The deadline for filing the modification is 30 days after the supplemental claim is filed.
How does forbearance impact the debtor’s discharge?
Generally, at the end of the chapter 13 plan period, the Trustee files a notice of final cure relative to a mortgage secured by the debtor’s principal residence. This notice gives the mortgage creditor a limited period of time to tell the Court whether the mortgage is current or not, and if not, what remains to be paid, before the Court enters the discharge. If the creditor fails to timely respond, the case is discharged, and the mortgage is deemed current whether it was or not.[6]
Under the new statute, the debtor may still obtain a discharge even if he has defaulted on his mortgage payments, as long as he is no more than 3 months behind, unless there is a forbearance agreement or loan modification agreement. Notice and a hearing are required.
This new statute will require careful monitoring at the servicer and attorney levels. On the servicer’s side, account monitoring will require deadlines to be set for compliance with the new proof of claim deadlines and requirements. On the attorney’s side, case management will require careful monitoring and follow-up to make sure that any forbearance claim is properly documented and timely filed. Please contact Cheryl D. Cook, Supervising Bankruptcy Attorney, at Potestivo & Associates, P.C., for any questions.
[1] cfpb_csbs_industry-forbearance-guide_2020-06.pdf (consumerfinance.gov)
[2] § 1322(b)(5) provides, “Subject to subsections (a) and (c) of this section, the plan may…notwithstanding paragraph (2) of this subsection, provide for the curing of any default within a reasonable time and maintenance of payments while the case is pending on any unsecured claim or secured claim on which the last payment is due after the date on which the final payment under the plan is due.”
[3] 11 U.S.C. § 501(f).
[4] In most states, modification of a mortgage loan must be in writing to satisfy the applicable statute of frauds.
[5] 11 U.S.C. § 502(b)(9).
[6] See 11 U.S.C. § 1328; Fed. R. Bankr. P. 3002.1(f) – (i).