Guest Author: Karlene A. Archer of Karlene A. Archer Law P.L.L.C.
Consumers that have pending Chapter 13 bankruptcy cases undoubtedly suffered from financial hardship prior to the COVID-19 pandemic. For many of those consumers, the pandemic may have exacerbated that hardship. The CARES Act’s mortgage forbearance provisions allow some breathing room for consumers that anticipate a temporary inability to pay their mortgage. These provisions also apply to consumers in bankruptcy and in that sphere present unique difficulties.
Section 4022 of the CARES Act allows consumers who have been financially affected by the COVID-19 pandemic and who have a federally backed mortgage to seek a forbearance of their mortgage payments for up to six months, with a possible extension of up to an additional six months. If the consumer seeks such a forbearance and attests to a hardship, the servicer is required to allow for this forbearance. During the forbearance time period, extra interest and fees will not accrue, and the suspension of payments under the forbearance will not impact the borrower’s credit rating. At the end of the forbearance, the payments will come due, provided the consumer and servicer do not reach another arrangement regarding those payments.
For consumers outside of bankruptcy, the forbearance process is simple – the consumer contacts the servicer, attests to a COVID-19-related hardship, and receives the forbearance requested. For consumers in bankruptcy, requesting a forbearance due to COVID-19 may be just as simple, but complications arise for the consumer’s attorney, the servicer, and the Chapter 13 trustee. The consumer bankruptcy process requires that all interested parties have notice of the payments that are required during the bankruptcy case. While the consumer and servicer may be aware of the forbearance terms, they must provide such notice to the court and the Chapter 13 trustee as well. Unfortunately, this forbearance does not fit into the generally neat boxes defined by the Federal Rules of Bankruptcy Procedure or the CM/ECF process used to file bankruptcy pleadings and notices electronically.
As of now, there has been no nationwide guidance on how servicers should notice forbearance agreements. On a recent webinar provided by the National Association of Chapter 13 Trustees, the panel provided several options that are currently being used. Here are those options with the benefits and difficulties of each:
- File a general notice on the docket indicating the terms of the forbearance.
- This option provides transparency into the forbearance terms and provides flexibility for the servicer. It also allows for any later documents adjusting the terms to be linked.
- The CM/ECF process may not permit a document like this to be filed without linking to another pleading.
- This type of notice may be more difficult for Chapter 13 trustees to efficiently process, as their systems generally are more closely tied to the claims register.
- File a general notice on the claims register indicating the terms of the forbearance.
- This option permits the servicer to attach the terms of the forbearance directly to the affected claim.
- The CM/ECF process typically does not allow for a “general notice” on the claims register, so there is a risk that filing under an available option on the CM/ECF dropdown menu (such as Notice of Payment Change) may be rejected by the clerk of court as a deficient filing.
- Write a letter to the Chapter 13 trustee providing the terms of the forbearance.
- This option eliminates CM/ECF issues.
- Trustees may not have processes in place to implement these changes solely based on a letter. Additionally, this may not provide the transparency needed since there is no evidence in the docket.
- Another option would be to file a modified Notice of Payment Change on the claims register indicating the terms of the forbearance.
- This option allows for servicers to use a notice function that already exists and is familiar to all parties, and servicers would not need to engage counsel to file these documents.
- This is not a true payment change, as the forbearance payments are still “coming due.” Additionally, the forbearance will have occurred prior to the filing of the notice, giving rise to timing issues under the requirements of Rule 3002.1(b).
There is no “right answer” for this question. These options all have technical difficulties. We hope for additional guidance in the next few weeks, but for now servicers should work with local firms, be mindful of local practices, and choose the option best suited for them.
The payments that were delayed due to the forbearance come due in a lump sum at the close of that term. However, this is unlikely to be feasible for consumers affected by COVID-19 and may be less feasible for those in bankruptcy. Servicers are therefore coming to agreements with borrowers to pay back those payments over a longer period of time. These post-forbearance agreements must also be noticed within the bankruptcy process. Absent other guidance, they fit more neatly into the Notice of Payment Change process, with the “new payment” being the original mortgage payment plus the portion of the forbearance mortgage payment. If, however, the post-forbearance arrangement involves a deferral of the payments or other loan modification, a motion to approve the loan modification or separate Chapter 13 trustee approval likely will be necessary, depending on the local rules and orders of the court.
A Final Note
During the forbearance time period, the time for a mortgage loan’s escrow analysis or interest rate change may come. Those payment changes still must be noticed in accordance with Rule 3002.1(b) even though the borrower is not making those payments. This permits the Chapter 13 trustee to keep track of the amount due during the forbearance period.