Mortgage Servicing Considerations In Light of The Amendments Made To The United States Bankruptcy Code Under The Consolidated Appropriations Act
Congress recently passed the Consolidated Appropriations Act (“CAA”), which was signed into law on December 27, 2020. In particular, the CAA amends various provisions of the United States Bankruptcy Code to assist borrowers in consumer bankruptcy cases. The following amendments are to sunset after one year, on December 27, 2021.
1. Discharge still permitted even if a Debtor has defaulted on post-petition payments or plan payments
The CAA amends Section 1328 of the Bankruptcy Code to permit the court to still grant a discharge to a Chapter 13 debtor even if at the time, the debtor has failed to pay up to three monthly payments due on a residential mortgage on or after March 13, 2020. The amendment also allows a discharge when the debtor has not completed plan payments on a cure and maintain plan, but has entered into a forbearance agreement or loan modification agreement with the mortgage holder or servicer. It is important to note that this amendment does not discharge the debtor from the debt owed on the mortgage. Rather, it simply allows a debtor to receive a discharge on other eligible debts.
2. Filing claims pursuant to forbearances granted under the CARES Act
As widely known, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), passed this past spring, entitles a borrower with a federally backed mortgage loan or a federally backed multifamily mortgage loan who has been impacted by the COVID-19 pandemic to a forbearance on their mortgage payments for up to six months, with the possibility of an additional six-month extension. While this has surely assisted many borrowers, its implementation has caused confusion and issues when the borrower is in a Chapter 13 bankruptcy, particularly as to repayment of the deferred amount once the forbearance period expires. The CAA has attempted to address that issue by amending Section 501 of the Bankruptcy Code to permit a servicer to file a supplemental proof of claim for the deferred amount or modified amount, should the mortgage subsequently be modified in connection with the forbearance. The proof of claim is permitted to be filed past the claims bar date, so long as it is filed within 120 days of the expiration of the forbearance period. This proof of claim must outline the relevant terms of the forbearance or modification, provide a copy of the forbearance or modification if it is reduced to writing, and include a description of the deferred payments.
After a servicer has filed this supplemental proof of claim, the debtor may file a request to amend the plan to provide for the claim. Should the debtor fail to do so within thirty days of the filing of the supplemental proof of claim, the court, upon its own motion or upon the motion of any party in interest, may request the plan be modified to provide for the claim.
3. Protection for Debtors Against Discriminatory Treatment
Finally to note, Section 525 of the Bankruptcy Code has been amended under the CAA to specifically prohibit servicers from denying borrowers relief pursuant to certain CARES Act provisions, including the federal foreclosure moratorium and the above-described right to request a forbearance on a federally backed mortgage loan or a federally backed multifamily mortgage loan solely because the borrower is currently or was a debtor in a bankruptcy.
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