This piece originally appeared in the January 2022 edition of DS News magazine, online now [1].
The CARES Act, enacted on March 27, 2020, provided a quick, simple, and truly brilliant solution that prevented an onslaught of foreclosures that would have otherwise surely resulted from the sudden and severe economic collapse caused by COVID-19. Interestingly, this solution was a direct result of Congress reaching out to mortgage industry leaders, specifically seeking a better mousetrap than the slow and arduous waterfall of loss mitigation programs that earmarked the solutions to the 2008 Great Recession.
The result was the federally related mortgage loan forbearance program (Sections 4022 and 4023 of the CARES Act, codified as 15 U.S.C. §§ 9056 and 9057). Under the program, a mere verbal claim that the borrower had been adversely affected by COVID-19 triggered the right to up to two six-month forbearance periods. While in the forbearance, borrowers were protected from late charges and adverse credit reporting. Almost 15% of all mortgage borrowers took advantage of the forbearance program, and the vast majority have resolved their problems during the forbearance period. It has been a great success. Today, less than 3% of borrowers remain in forbearance.
Those statistically few borrowers who exited the forbearance in default have been provided amazing options. For many, the defaulted payments were deferred to the end of the loan. Others were given highly favorable loan modifications. Still others were given time to sell their highly appreciated homes. Indeed, the combination of the right to forbearance and these generous loss mitigation programs obviated the need for borrowers to file bankruptcy and resulted in the lowest number of bankruptcy filings in decades.
However, despite the industry’s best efforts, not every borrower can be helped. An increasing percentage of the remaining forbearances are ending with borrowers in default, and with no viable loss mitigation option. Many of those borrowers are now filing a Chapter 13 bankruptcy to save their homes. In essence, bankruptcy is a type of loss mitigation of last resort. Unfortunately, Chapter 13 bankruptcy does not play well with forbearance.
Generally, in Chapter 13, a debtor pays the debtor’s pre-petition arrearages through a Chapter 13 plan of up to 60 months and maintains regular post-petition payments from the date of filing forward. The prepetition arrearages are determined by a proof of claim filed by a servicer within 70 days of the petition date. If all of the pre-petition arrearages are paid through the plan, and if all the regular post-petition payments are made, the debtor is current at the end of the Chapter 13 plan.
Congress recognized that layering forbearance on top of a Chapter 13 case was problematic. Chapter 13 requires regular payments, and yet forbearance allows the borrower to cease making payments during the forbearance term. In an attempt to ensure that borrowers could take advantage of both forbearance and a Chapter 13 bankruptcy, Congress added some temporary bankruptcy provisions in the Consolidated Appropriations Act (CAA), signed into law on December 27, 2020, a mere nine months after the CARES Act (2021 CAA)(Pub. L. No. 116-260 (H.R. 133)).
Mortgage servicers are most affected by three of those provisions. First, if the debtor’s plan was confirmed prior to March 27, 2021, and the debtor is experiencing a hardship directly related to COVID-19, a modified plan may be filed for up to 84 months past the date of the first payment made under the plan. This two-year expansion of the time limit for payment of Chapter 13 plans sunsets on March 27, 2022 (11 U.S.C. § 1329(d)(1)).
Second, even if the normal claims bar date has passed, the CAA allows servicers of federally related mortgage loans to file a proof of claim for the amount not received by a mortgage servicer while the mortgage loan was in forbearance. This is officially called a “CARES Forbearance Claim” but is often simply referred to as a “supplemental claim.” There is a director’s form (meaning an optional form) for this type of claim. In essence, it treats the defaulted payments that fell due during the forbearance period as distinct from traditional pre and post-petition payments. Pursuant to 11 U.S.C. § 501(f) and § 502(b)(9), the supplemental proof of claim must be filed no later than 120 days after expiration of the forbearance period. This change sunsets on December 27, 2021.
Third, the CAA authorizes the debtor to modify a confirmed Chapter 13 plan to address the missed forbearance payments as reflected in the CARES Forbearance Claim. If the plan is not modified by the debtor within 30 days of the filing of the supplemental claim, the bankruptcy court (on its own motion), the U.S. Trustee’s office, the Chapter 13 trustee and/or any party in interest, including a servicer, may move for such a modification. This change also sunsets on December 27, 2021 (Bankruptcy Code Section 1329(e)).
Although well-intentioned, the CARES Forbearance Claim has caused tremendous upheaval. Servicers, debtor’s counsel, Chapter 13 Trustees, and even the courts are often confused by this new animal especially where the supplemental claim includes post-petition payments. Reading between the lines, the whole point of Congress’ efforts with respect to these temporary provisions seems to be to allow missed post-petition payments that accrue during the forbearance period to be paid through an extended plan. The CARES Forbearance Claim provides the breakdown. The debtor, or if the debtor doesn’t act within 30 days of the filing of the supplemental claim, the servicer, or any other party in interest, can seek to modify the plan to include the forbearance arrearages. Finally, if the Chapter 13 plan was initially confirmed prior to March 27, 2021, the debtor can extend the plan up to a term of 84 months.
For unknown reasons, many servicers want to force payment of the forbearance arrearages over the life of an extended 84-month plan. Accordingly, they file the optional supplemental claim for those arrearages and attempt to get the debtor to both modify the plan to include those arrearages and to extend the plan term to 84 months. Some are requiring their local counsel to file motions to compel the debtor to modify the plan to include those arrearages. Others are asking their local counsel to limit a motion for relief from stay to one seeking only to modify the stay in the hope that this will cause the debtor to act without the stay terminating. Some servicers even go beyond the new bankruptcy provisions and file a supplemental proof of claim for a non-CARES Act forbearances, all again with the hope that the debtor will include those missed payments in the plan.
It is respectfully submitted that Congress got it wrong and the efforts of servicers to file these supplemental claims are misplaced. First, to the extent that the payments not made during the forbearance period were contractually due pre-petition, they are by definition pre-petition arrearages and paid through the Chapter 13 plan. These payments should be included in the normal proof of claim. As to the unpaid payments during the forbearance period that were contractually due post-petition, a servicer already has great flexibility in requiring how and when those payments must be made.
Typically, if the debtor fails to make a post-petition payment, a mortgage servicer brings a motion for relief from stay. This generally results in some type of adequate protection order requiring the debtor to bring the post-petition payments current within six months—the maximum post-petition default cure period allowed by most servicers and the period of time accepted by most courts. If the debtor fails to make regular future payments or fails to bring all post-petition payments current by the end of the six-month period, the adequate protection order generally provides a mechanism to have the stay terminated so that the servicer can proceed with foreclosure.
While servicers generally require post-petition arrearages to be paid within six months, there is no magic to that time period. Nothing in the Bankruptcy Code requires post-petition arrearages to be cured within six months. The six-month period to cure the post-petition default has simply evolved as the custom and practice followed by the mortgage industry and most courts. In resolving a motion for relief from stay, a servicer can certainly allow the post-petition arrearages to be paid over a longer period of time. Similarly, in all but a handful of jurisdictions, a servicer can voluntary agree to resolve the post-petition default by allowing those payments to be added to the plan. Sometimes the order resolving the motion for relief from stay is enough by itself to include the post-petition payments in the plan. In other jurisdictions, the debtor must jump through some hoops to amend the plan to include those payments.
Finally, in some Circuits, even where a servicer objects to putting the post-petition arrearages in the plan, courts regularly resolve the motion for relief from stay by ordering that those defaulted payments be added to the Chapter 13 plan (see e.g., Green Tree Acceptance, Inc. v. Hoggle (In re Hoggle), 12 F.3d 1008 (11th Cir. 1994) and Mendoza v. Temple-Inland Mortg. Corp. (In re Mendoza), 111 F.3d 1264, 37 C.B.C.2d 1691 (5th Cir. 1997)) In short, Congress’ belief that a special mechanism was required to place missed post-petition payments into a plan seems misplaced.
The ability to file a CARES Forbearance Claim will end on December 27, 2021, as will the right of a creditor to move to modify a plan to include the missed forbearance payments. But, as noted above, the same result can be achieved by the filing, and appropriate resolution, of a motion for relief from stay.
The motion provides tremendous flexibility in fashioning a solution to the post-petition default while the pre-petition arrearages, including any pre-petition forbearance arrearages, are paid through the Chapter 13 plan. Also, the motion for relief from stay approach allows both federally related and non-federally related loans to be similarly treated. Servicers are encouraged to use the flexibilities in resolving a motion for relief from stay to provide the loss mitigation results they want.
Finally, and as with anything bankruptcy related, check with your local bankruptcy counsel on the best approach to resolve defaulted payments that occur during the forbearance term. Local rules and custom may argue for strikingly different approaches.