The Consolidated Appropriations Act of 2021 (CAA), which passed in Congress on Dec. 27, 2020, introduced some noteworthy additions to the Bankruptcy Code. One such issue is the changing relationship between chapter 13 debtors and mortgage lenders when it comes to forbearance requests under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).
The Code Gets More Defined
The CARES Act provides federally backed mortgage borrowers experiencing pandemic-related financial difficulties a mechanism by which to temporarily postpone mortgage payments. [1] In furtherance of that process, the CAA added four defined terms to § 501, the most notable of which is the “CARES forbearance claim” (CFC), which is
a supplemental claim for the amount of a Federally backed mortgage loan or a Federally backed multifamily mortgage loan that was not received by an eligible creditor during the forbearance period of a loan granted forbearance under section 4022 or 4023 of the CARES Act. [2]
This definition presents a bit of a chicken-or-egg situation. Although “supplemental claim” is not a defined term, the new language directs that “[o]nly an eligible creditor may file a supplemental proof of claim for a CARES forbearance claim,” suggesting that an original, timely claim must precede a CFC filing. [3] In turn, an “eligible creditor” is defined as “a servicer ... with a claim for a Federally backed mortgage loan or a Federally backed multifamily mortgage loan of the debtor that is provided for by a plan under section 1322(b)(5).” [4] Taken as a whole, these terms do no more than inform that a supplemental claim can only be filed by an eligible creditor, which must be the holder of a mortgage claim to be supplemented by a CFC.
CFC Specificity
An eligible creditor’s CFC must provide:
(i) the relevant terms of the modification or deferral; (ii) for a modification or deferral that is in writing, a copy of the modification or deferral; and (iii) a description of the payments to be deferred until the date on which the mortgage loan matures. [5]
The information to be included within a CFC is similar to the information that mortgage creditors disclose in COVID-19-related Notices of Mortgage Forbearance (Notice), which have been filed since the enactment of the CARES Act.
In addition to the § 501 changes, an amendment to § 502 provides that “a CARES forbearance claim ... shall be timely filed if the claim is filed before the date that is 120 days after the expiration of the forbearance period of a loan granted forbearance under ... the CARES Act.” [6] The CFC bar date is seemingly noncontroversial, as both the borrower and lender would have previously agreed upon the duration and termination of the forbearance period. However, in the event a dispute arises, reference to a Notice filed by the creditor should provide clarification.
“Provide For”
As is clear from many of the Notices filed during the pandemic, arrangements to cure forbearance arrears have yet to be finalized. [7] The addition of new subsection § 1329(e) attempts to bring certainty to the treatment of skipped payments by calling for a “modification of the plan to provide for the proof of claim (emphasis added).” [8] Specifically, § 1329(e)(1) affords debtors a 30-day exclusivity period after the filing of a CFC within which to modify a plan to provide for the claim. Upon expiration of that time, and
after notice, the court, on a motion of the court or on a motion of the United States trustee, the trustee, a bankruptcy administrator, or any party in interest, may request a modification of the plan to provide for the proof of claim. [9]
So, what does it mean for a plan “to provide for the proof of claim”? Surely it cannot amount to payment in full of a CFC. Take, for example, a debtor who just completed a nine-month forbearance and has only three remaining plan payments; the expectation of full payment of the CFC from such a debtor prior to plan completion is unrealistic. Given that the CAA amendments are silent as to the payment of a CFC during the pendency of a debtor’s case, provision for a CFC is expected to take the form of other long-term debt not paid off through the plan, such as a student loan.
CFC Forecast
The CFC provisions are due to sunset one year from the Dec. 27, 2020, CAA enactment date and are therefore not expected to be more than a footnote to U.S. bankruptcy history. However, CFCs are a topic that borrowers, eligible creditors and their counsel alike should be familiar with, certainly through 2021 and possibly beyond.
[1] To obtain a CARES Act forbearance, a mortgage borrower, regardless of delinquency status, need only submit a request to the borrower’s servicer that affirms the existence of a COVID-19-related financial hardship. Such a forbearance “shall be granted for up to 180 days and shall be extended for an additional period of up to 180 days at the request of the borrower.” 15 U.S.C. § 9056(b)(2). While the mortgage is in forbearance, “no fees, penalties, or interest 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, shall accrue on the borrower’s account.” 15 U.S.C. § 9056(b)(3).
[2] 11 U.S.C. § 501(f)(1).
[3] Indeed, Fed. R. Bankr. P. 3002(a) was revised in 2017 to clarify that a secured creditor must file a proof of claim for its claim to be allowed. See 11 U.S.C. § 501(f)(2)(A).
[4] 11 U.S.C. § 501(f)(1)(B). The phrases “Federally backed mortgage loan” and “Federally backed multifamily mortgage loan” retain the same meanings within § 501(f)(1)(C) and (D) as under the CARES Act, 15 U.S.C. §§ 9056(a)(2) and 9057(f)(2).
[5] 11 U.S.C. § 501(f)(2)(B). Director’s Bankruptcy Form 4100S, Supplemental Proof of Claim for CARES Forbearance Claim, was promulgated on Feb. 5, 2021, for use by eligible creditors
[6] 11 U.S.C. § 502(b)(9)(C).
[7] While some mortgage creditors have provided that “the postponed payment amounts may be added to the end” of the loan, most others provide a standard Notice refrain, such as “Creditor/Servicer will work with the Debtor, the Debtor’s attorney (if applicable) and the bankruptcy trustee on how to address the suspended payments in the long term.”
[8] 11 U.S.C. § 1329(e).
[9] 11 U.S.C. § 1329(e)(2).