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COVID-19 and BANKRUPTCY
IMPORTANT: THIS FIRM MAKES NO REPRESENTATIONS AS TO THE ACCURACY OR CURRENT STATUS OF ANY LAW, CASE, ARTICLE OR PUBLICATION CITED HEREIN OR LINKED TO.
WARNING – SOME OF THESE REFERENCES ARE PRE-BAPCPA.
COVID Tax Tip 2021-101, July 14, 2021
The IRS recently upgraded the Child Tax Credit Update Portal to enable families to update their bank account information so they can receive their monthly Child Tax Credit payment. The tool also allows families to unenroll from the advance payments if they don’t want to receive them. The Update Portal is available only on IRS.gov.
Any updates made by August 2 will apply to the August 13 payment and all subsequent monthly payments for the rest of 2021. Families will receive their July 15 payment by direct deposit in the bank account currently on file with the IRS.
People without current bank account information can use the online tool to update their information so they can get the payments sooner by direct deposit. Those who are not enrolled for direct deposit will receive a check.
On Child Tax Credit, the letter cites
Instruct chapter 7 trustees not to attempt to take child tax credit payments. The Rescue Plan Act provides vital support for children, taking many out of poverty, through the enhanced child tax credit. Child tax credit payments will be made monthly, as a form of additional income. The expectation of such postpetition income should be treated like wages, and excluded from the chapter 7 estate. It is fundamentally different than tax credits accrued prior to the bankruptcy petition, which in some cases can be property of the estate. Moreover, such payments are intended to benefit the debtor’s children. Many courts have held that child support payments are not property of the estate and are held for the benefit of the child. See, e.g., In re Palidora, 310 B.R. 164 (Bankr. D. Ariz. 2004), following Boston v. Gardner, 365 F.2d 242 (9th Cir. 1966).
From ATLAS: The Legislation passed on March 11, 2021, has expanded the amount of Child Tax Credit (CTC) available to taxpayers. Below is a summary of these changes.
The “Qualifying Child” & Credit Amount:
The new law changes the “qualifying child” age to one who has not turned 18 as of 12/31/21, or 17 and under. This age requirement is only for 2021 and only for the CTC. Please note there are requirements other than age to be a qualifying child. In general, the child must live with the taxpayer in the United States, for more than half the year and be a US citizen.
Once a qualifying child has been identified, the CTC for 2021 increases from $2000 per child to $3600 for each child under 6 and increases to $3000 for each child between 6 & 17. The credit amount is phased out based on a modified income calculation, which is not discussed in this article.
Payments & Un-Enrollment:
The legislation directs the IRS to make advance monthly payments of one-half the estimated annual CTC starting in July of 2021 and ending in December 2021. This means the advanced amount will NOT be available on the 2021 tax return. A very important note is that if the taxpayer does not want the advance payments, they MUST unenroll. Per the IRS, the un-enrollment instructions will be available by June 30, 2021. Un-enrollment should be done as soon as possible as the first payment is July 15, 2021.
Here is an example: For a 4-year-old qualifying child the total credit for 2021 would be $3600, the advance payments would be 50% or $1800.00. The monthly amount received would be $300 each month from July – December 2021. Only $1800 would be available for credit on the 2021 tax return. For a 6-year-old qualifying child the total credit for 2021 would be $3000, the advance payments would be 50% or $1500. The monthly amount received would be $250.00 each month July – December 2021. Only $1500 would be available for credit on the 2021 tax return.
Taxpayers who have filed their 2019 or 2020 tax returns and had qualifying children on the return should be receiving IRS letters soon if you haven’t already. One with a brief discussion of the credit and one on how to unenroll from the advance payments. Non-filers will use a tool at IRS.gov to sign up for the credit.
COVID-19 Bankruptcy Relief Extension Act Signed by President March 27
On March 27, 2021, just hours before the CARES Act bankruptcy provisions were about to sunset, President Biden signed COVID-19 Bankruptcy Relief Extension Act of 2021, Pub. L. No. 117-5 (Mar. 27, 2021) (H.R. 1651). The bill extends the temporary bankruptcy provisions under the CARES Act for an additional year, until March 27, 2022.
The original bill passed by the House also would have extended the bankruptcy provisions in the Consolidated Appropriations Act of 2021 (CAA). However, the CAA extension provisions were stripped from the bill in the Senate. As a result, the CAA provisions will continue to sunset on December 27, 2021.
To help attorneys deal with the different sunset dates, this “cheat sheet” of the ten bankruptcy provisions in the CARES Act and Consolidated Appropriations Act lists the provisions by sunset date. Each provision is accompanied by the Public Law and United States Code cites, links for more detail in NCLC articles (open to the public), and to NCLC’s Consumer Bankruptcy Law and Practice (subscribers only). The cheat sheet is also available in table format here.
- CAA = Consolidated Appropriations Act of 2021, Public Law No. 116-260
- CARES Act = Coronavirus Aid, Relief, and Economic Security Act, Pub. L. No. 116-136
Bankruptcy Relief Provisions Sunsetting on December 27, 2021
COVID stimulus payments (recovery tax rebates) are not property of the estate (CAA, div. FF, tit. 10, § 1001(a); 11 U.S.C. § 541(b)(11)). More detail at: NCLC’s “New Consumer Bankruptcy Protections Now Effective”; NCLC’s “Consumer Law Implications of the American Recovery Plan Act”; NCLC’s Consumer Bankruptcy Law and Practice § 2.5.6.
COVID stimulus payments (recovery tax rebates) are not subject to the “operation of any bankruptcy or insolvency law” (CAA, div. N, § 272(d), [amends Internal Revenue Code, adding new 26 U.S.C. § 6428A). More detail at NCLC’s “New Consumer Bankruptcy Protections Now Effective”; NCLC’s Consumer Bankruptcy Law and Practice § 2.5.6.
Chapter 13 debtors may seek an early discharge if the debtor has missed three or fewer mortgage payments due to a COVID-related hardship or has entered into a loan forbearance or modification (CAA, div. FF, tit. 10, § 1001(b); 11 U.S.C. § 1328(i)(1)). More detail at NCLC’s “New Consumer Bankruptcy Protections Now Effective”; NCLC’s Consumer Bankruptcy Law and Practice § 8.8.1 and § 15.1.
Debtors who are in a pending bankruptcy or have received a discharge cannot be denied a mortgage forbearance, protection under the foreclosure and eviction moratorium, and related relief provided under the CARES Act (CAA, div. FF, tit. 10, § 1001(c); 11 U.S.C. § 525(d)). More detail at NCLC’s “New Consumer Bankruptcy Protections Now Effective”; NCLC’s Consumer Bankruptcy Law and Practice § 22.214.171.124a.
Mortgage servicers may file a “CARES forbearance claim,” which is a supplemental proof of claim for the amount forborne under a loan forbearance granted to a debtor under the CARES Act (CAA in div. FF, tit. 10, § 1001(d); 11 U.S.C. § 501(f) and § 502(b)(9) (claim must be filed no later than 120 days after expiration of forbearance). More detail at NCLC’s “New Consumer Bankruptcy Protections Now Effective”; NCLC’s Consumer Bankruptcy Law and Practice § 126.96.36.199a.
Debtors and any parties, including a mortgage creditor, may move to modify the debtor’s plan to provide for a CARES forbearance claim (CAA div. FF, tit. 10, § 1001(e); 11 U.S.C. § 1329(e)). More detail at NCLC’s “New Consumer Bankruptcy Protections Now Effective”; NCLC’s Consumer Bankruptcy Law and Practice § 188.8.131.52a.
Debtors may have utility service maintained or restored after filing bankruptcy without paying a deposit, as long as the debtor pays for postpetition service (CAA div. FF, tit. 10, §1001(h); 11 U.S.C. § 366(d)). More detail at NCLC’s “New Consumer Bankruptcy Protections Now Effective”; NCLC’s Consumer Bankruptcy Law and Practice § 9.8.2.
Bankruptcy Relief Provisions Sun setting on March 27, 2022
COVID-related payments, including recovery tax rebates and child tax credit payments, are excluded from current monthly income (CARES Act § 1113(b)(1)(A); 11 U.S.C. § 101(10A)(B)(ii)(V)). More detail at NCLC’s New Consumer Bankruptcy Protections Now Effective”; NCLC’s Consumer Bankruptcy Law and Practice § 184.108.40.206.7.
COVID-related payments, including recovery tax rebates and child tax credit payments, are not disposable income (CARES Act § 1113(b)(1)(B); 11 U.S.C. § 1325(b)(2)). More detail at NCLC’s “New Consumer Bankruptcy Protections Now Effective.”
Chapter 13 debtors may seek plan modification, if the plan was confirmed before March 27, 2021 and the debtor is experiencing a COVID-related hardship, that would extend plan payments for up to seven years after initial payment on original plan was due (CARES Act § 1113(b)(1)(C); 11 U.S.C. § 1329(d)(1)). More detail at: NCLC’s “Major Consumer Protections Announced in Response to COVID-19”; NCLC’s Consumer Bankruptcy Law and Practice § 8.7.4 and § 12.6.3.
All provisions sunset after one year:
• Amends the Small Business Reorganization Act to increase the eligibility threshold to file under subchapter V of chapter 11 of the U.S. Bankruptcy Code to businesses with less than $7,500,000 of debt.
• Amends the definition of income in the Bankruptcy Code for chapters 7 and 13 to exclude coronavirus-related payments from the federal government from being treated as “income” for purposes of filing bankruptcy.
• Clarifies that the calculation of disposable income for purposes of confirming a chapter 13 plan shall not include coronavirus-related payments..
• Explicitly permits individuals and families currently in chapter 13 to seek payment plan modifications if they are experiencing a material financial hardship due to the coronavirus pandemic, including extending
their payments for up to seven years after their initial plan payment was due.
VA Partial Claim Program – This is new. Have you heard of it?
The VA Partial Claim Payment is a temporary program that is intended to assist Veteran borrowers specifically impacted by the COVID-19 pandemic to resume making their regular (pre-COVID) mortgage payments after exiting forbearance. VAPCP will only be available from July 27, 2021 through October 28, 2022.
To participate in the COVID-VAPCP program, the following requirements must be met:
- You must have a VA-guaranteed loan.
- Your VA loan must have been current or less than 30 days past due on March 1, 2020 or originated on or after March 1, 2020.
- You received a COVID-19 forbearance and missed at least one payment under the terms of the original mortgage note.
- You currently occupy the property securing the guaranteed loan as your residence.
- You have recovered from the hardship and can resume making timely, full monthly payments under the terms of the original mortgage note.
- You agree to repay the partial claim amount to VA and allow VA to create a second mortgage lien on the property.
IS AN INDIVIDUAL OR COMPANY IN BANKRUPTCY OR SUBSEQUENTLY FILING BANKRUPTCY ELIGIBLE TO RECEIVE A LOAN OR TO USE THE LOAN PROCEEDS IN THE BANKRUPTCY UNDER THE PAYCHECK PROTECTION PROGRAM (PPP)?
This morning (4/24/20), the US Small Business Administration released new set of Interim Final Administrate Rules related to the PPP program. While most of the rules seek to address criticisms about potential abuse of the PPP program, they also address the bankruptcy question. Among other clarifications, the interim final regulations are effective immediately and state the following:
- Eligibility of Businesses Presently Involved in Bankruptcy Proceedings
Will I be approved for a PPP loan if my business is in bankruptcy?
No. If the applicant or the owner of the applicant is the debtor in a bankruptcy proceeding, either at the time it submits the application or at any time before the loan is disbursed, the applicant is ineligible to receive a PPP loan. If the applicant or the owner of the applicant becomes the debtor in a bankruptcy proceeding after submitting a PPP application but before the loan is disbursed, it is the applicant’s obligation to notify the lender and request cancellation of the application. Failure by the applicant to do so will be regarded as a use of PPP funds for unauthorized purposes.
The Administrator, in consultation with the Secretary, determined that providing PPP loans to debtors in bankruptcy would present an unacceptably high risk of an unauthorized use of funds or non-repayment of unforgiven loans. In addition, the Bankruptcy Code does not require any person to make a loan or a financial accommodation to a debtor in bankruptcy. The Borrower Application Form for PPP loans (SBA Form 2483), which reflects this restriction in the form of a borrower certification, is a loan program requirement. Lenders may rely on an applicant’s representation concerning the applicant’s or an owner of the applicant’s involvement in a bankruptcy proceeding.
4/14/20 – press release from UST’s Office of Public Affairs
The USTP provided notice to case trustees on the CARES Act to help ensure that the direct payments that many debtors will receive under the law are protected from turn over during bankruptcy proceedings. “Recovery rebates.
Your clients can update their bank account info on the IRS website in order to change the account for depositing their COVID-19 rebates: “Get my payment”.
Economic Impact Payments | Internal Revenue Service https://www.irs.gov/coronavirus/economic-impact-payments
HAVING TROUBLE WITH CARES ACT FORBEARANCES IN CHAPTER 13? YOU’RE NOT ALONE! (reprint for education purposes only)
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.
Bradley Arant Boult Cummings LLP – Christopher L. Hawkins, Christy W. Hancock and Alexandra Dugan