Consolidated Appropriations Act (CAA) Passes Congresses, Signed Into Law

On December 22, 2020, Congress passed the Consolidated Appropriations Act, 2021 (“CAA”), which was signed into law by the President on December 27, 2020. Aside from providing stimulus payments, the CAA also amends some provisions of the bankruptcy code, particularly related to Chapter 13. Much like with the Cares Act, it will be too soon to tell the Court’s practical application. However, the below provides a summary on what is affected and items that PLG will continue to keep its pulse on.

Early Discharge Under §1328(i)
Subsection (i) was added to §1328 which provides in part that the court may grant a discharge to a debtor if:

1. The debtor defaults on not more than 3 monthly payments due on a residential mortgage under section 1322(b)(5) (i.e. the cure and pay provision) on or after March 13, 2020, to the trustee or a creditor caused by a material financial hardship due, directly or indirectly, by the coronavirus disease 2019 (COVID-19) pandemic; or
2. The plan provides for the curing of a default and maintenance of payments on a residential mortgage under section 1322(b)(5); and
3. The debtor has entered into a forbearance agreement or loan modification agreement with the holder or servicer.

Let’s break this down even further. A careful reading suggests that this does not necessarily limit application to principal residence since the language only says residential mortgage. It is entirely possible for this to apply to rental property that is secured by a mortgage. In addition, must the plan be confirmed for this apply? Although not specified, one can infer that the plan must be confirmed in order to provide for treatment under §1322(b)(5).

Perhaps the most confusing and questionable aspect is a reading of numbers 2 and 3 together. This means that a debtor, who has a plan providing for cure & pay and who has entered into a loan modification agreement or forbearance agreement (regardless of COVID-19) may receive a discharge having not completed payments under the plan.

Interesting enough, there is no mention as to when the forbearance or loan modification agreement must have been entered into. It may be entirely possible for a debtor to obtain a loan modification prior to filing bankruptcy, then file a bankruptcy and propose a cure & pay plan and then receive a discharge.
What also makes this provision unclear is that it defeats the entire purpose of §1322(b)(5). That section is intended to allow debtors to cure defaults on mortgages so that they come out of bankruptcy without arrears. If debtors are allowed to receive an early discharge and the debtors do not complete payments under the plan, then this may defeat the purpose of filing bankruptcy (aside from getting a discharge) since debtors are not able to the “fresh start” that the code provides for—at least in terms of their mortgage.

On the other hand, this may be a good vehicle for a debtor who has a loan modification or forbearance agreement but has racked up a lot of unsecured debt. It should also be noted that this provision sunsets after one year.

Forbearance Claims
The CAA provides that an eligible creditor, which is defined as a servicer of a federally backed mortgage loan, may file a supplemental claim for the amount that was not received by an eligible creditor during the forbearance period. This is intended to allow a debtor to cure the forborne amount under the plan. The claim must include:

1. The relevant terms of the modification or deferral;
2. For a modification or deferral that is in writing, a copy of the modification or deferral; and
3. A description of the payments to be deferred until the date on which the mortgage loan matures

Section 502(b)(9) was also amended to clarify that a forbearance claim is deemed timely filed if the claim is filed before the date that is 120 days after the expiration of the forbearance period.
Although it is not mandatory for this claim to be filed, it is recommended since a creditor may have to waive any amounts that are not accounted for via the filing of this supplemental claim. This usually comes about when responding to a notice of final cure or motion to deem current. This provision sunsets after one year.

Plan Modifications
§1329 was amended to ad subsection (e) which provides in part that after a creditor files a forbearance claim (described above), the debtor has 30 days to file a request to modify the plan to address the forbearance claim. In the event the debtor fails to do so, after notice, the court, on a motion of the court of 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.

This means that a creditor, such as a mortgage servicer or lender, may request a modification of the plan to provide for the proof of claim addressing the forbearance amount. The creditor may (and should) request reimbursement for its fees in having to engage in this course of action.

One of the questions yet to be determined is what occurs when a debtor defaults on the forbearance agreement? Will the courts require that the creditor modify the plan to account for the supplemental claim before seeking stay relief? Or will the creditor be allowed to move for relief without modifying the plan (assuming the debtor, trustee and no other party in interest requests a modification). This may vary amongst each jurisdiction. This provision sunsets after one year.