Congress recently signed off on the Consolidated Appropriations Act, 2021 (CAA 2021).
Like the March 2020 CARES Act, a number of temporary modifications to the Bankruptcy Code are incorporated in Title X of the CAA 2021. The main updates to consumer bankruptcy laws are summarized below. Note, however, that these changes are not permanent and will expire on either December 27, 2021 or 2022.
To provide some context, Section 1001 of Title X of the CAA 2021 relates to the matter of bankruptcy relief to include:
- Temporary re-write of the “property estate” definition excluding specific federal coronavirus relief payments;
- Temporary changes to Section 1328 to allow a discharge regardless of a borrower’s failure to meet all payment obligations per an agreed-upon plan;
- Anti-Discriminatory protective measures pertaining to the loss mitigation protocol;
- Allowing borrowers to file supplemental claims associated with CARES Act forbearances; and
- Modifications to Chapter 13 bankruptcy plans based on supplemental claims
CAA 2021’s Changes to Consumer Bankruptcy
Having set the scene, here is a closer look at the notable changes CAA 2021 has brought to the consumer bankruptcy scene.
Temporary Change #1: Courts Permitted to Grant Chapter 13 Discharges to Delinquent Borrowers
Section 1001(b) grants the judiciary discretion on a temporary basis to approve, following formal notice and hearing, a Chapter 13 discharge of a borrower’s outstanding debt—even in circumstances where the individual was delinquent for up to three months of residential mortgage payments after March 13, 2020 for circumstances related to COVID-19 factors.
In a similar vein, CAA 2021 provides the court discretion on a temporary basis to grant debt discharge to borrowers who list residential properties in a “cure and maintain” plan and subsequently enter into a qualifying loan modification or forbearance protocol. This change is effective until December 27, 2021.
In order to obtain Chapter 13 discharge after being delinquent on mortgage installments, the borrower is required to offer substantive proof that the outstanding payments were in some way predicated on factors associated with COVID-19. It is still to be determined what standard of proof will be sufficient in order to take advantage of this measure.
Creditors will still be entitled to post-discharge state statute remedies to include foreclosure in situations in which valid defaults are present; however, servicers will have to make sure that accounting of any such defaults is adequately documented to prevent any potential violations of applicable discharge injunctions.
Temporary Change #2: CARES Act Measures Apply Regardless of Previous Bankruptcies
Section 1001(c) of Title X of the CAA 2021 bars discrimination premised on a present or past bankruptcy process in a borrower’s history. The practical effect of this changes is that a borrower cannot be denied relief available from the CARES Act, such as the foreclosure moratorium or forbearance, based solely on the fact that they are currently or were in the past undergoing bankruptcy.
Temporary Change #3: Lenders Can File Late Supplemental Proofs of Claim
Section 1001(d) permits lenders to submit a supplemental proof of claim for mortgage installments impacted by provisions of the CARES Act regardless of whether it is past the claim bar date. Importantly, the CARES Act relief is also applicable to federally backed mortgages. These supplemental proofs of claim are required to incorporate a detailed description of the underlying forbearance agreement or loan modification as well as a copy of the forbearance agreement or loan modification if they exist.
These claims have a 120-day filing deadline following the expiration of the forbearance period. Accordingly, lenders should be cognizant of their borrower’s CARES Act relief expiration date in order to prepare any pertinent supplemental proofs of claim in accordance with the filing deadline. If any claims are filed late, they will likely be barred, and the lender will not be able to recover the outstanding debt.
Temporary Change #4: Servicers Can File Modification Motions to Chapter 13 Plans
Section 1001(e) permits borrowers, the judiciary, the United States Trustee’s Office, or any entity that holds an interest in the mortgage to pursue modification of a confirmed Chapter 13 plan to adjust in light of any deferred payments per the CARES Act. This modification will also expire on December 27, 2021.
Accordingly, servicers with supplemental proofs of claim pertaining to the CARES Act relief process should confirm that all Chapter 13 mortgages are updated to allow for payment on supplemental proofs of claim prior to the plan window ending and the Chapter 13 case being closed.
Planning for the Future
Collectively, these provisions related to the bankruptcy landscape mean that loan service providers will have to establish operational processes to make sure that they:
- Do not deny CARES Act relief to borrowers just because they are or have been involved in bankruptcy proceedings;
- File any pertinent supplemental proofs of claim for borrowers in receipt of CARE Act forbearance relief; and
- Modify their internal processes to account for updates to the Chapter 13 procedures
As the judiciary interprets these novel statutes, the industry will gain a clearer understanding of the practical implications they will have on creditors as well as what operational modifications will be needed to ensure compliance with the new regulations.
