The following is a guest post – by Gary R. Stickell, a great Arizona bankruptcy attorney and my friend and mentor for more than 20 years.
COVID-19 and CHAPTER 13 BANKRUPTCIES
Most, if not all, mortgage servicers are offering programs of forbearance to homeowners affected by income loss due to the COVID-19 Pandemic. These seem to be for 90 days or three calendar months, possibly extendable to 180 days. (“COVID-19 Hold”). However, these COVID-19 Holds raise several issues for Debtors in Chapter 13 Bankruptcies. These include the process of notifying the Chapter 13 Trustee of these holds and how to treat the unpaid mortgage payments within the Chapter 13 case. I am concerned that Chapter 13 Debtors are not well served by seeking COVID-19 Holds and might endanger both their Chapter 13 cases and/or loan modifications.
Forbearance versus Deferment
In usual times, a forbearance means that the mortgage servicer will not seek enforcement of missed mortgage payment for some given period. At the end of the forbearance period, the missed payments will need to be repaid by an agreement between the mortgage servicer and the borrower.
In usual times, a deferment means that the missed mortgage payments will be deferred to the end of the loan by extending out the maturity date and/or adding a balloon payment.
These are not usual times
According to mortgage modification lawyer Ellen Lawson, the mortgage servers are not sure how they will treat COVID-19 Holds at the end of the hold period. They may choose to treat them as deferments or require some time of repayment. The crisis is too new for the lenders to formulate uniform treatments so lenders are agreeing to a COVID-19 Hold, but are not explaining right now when or how the missed payments will need to be repaid.
Chapter 13 Bankruptcy
In pending Chapter 13 Bankruptcies, there are three general circumstances as to mortgages. They are cases with conduit payments, cases without conduit payments and cases with loan modifications in process or completed.
Conduit and non-conduit mortgage payments
A conduit payment in an Arizona case requires that the Chapter 13 Plan payment include payment of ongoing mortgage payments as well as payments for mortgage arrears and other debts. If a mortgage server grants a COVID-19 Hold during a conduit plan, the Trustee will need to stop making the ongoing payments to the mortgage lender. The Arizona Chapter 13 Trustees advise that an Amended Plan or Modified Plan must be filed to stop the ongoing payments to the mortgage lender reducing the Plan payment. When the COVID-19 Hold period is over, then whatever arrangement is made as to the missed mortgage payments must be set out in a subsequent Amended Plan or Modified Plan.
In a case without a conduit payment, there appears to be no need to file an Amended Plan or Modified Plan at the outset of the COVID-19 Hold. However, at the end of the hold period, whatever arrangement is made as to the missed mortgage payments will need to be included in an Amended Plan or Modified Plan.
Failure to comply with Chapter 13 plan provisions
Failure to make ongoing mortgage payments may result in the dismissal of a Chapter 13 case without a discharge if arrangements are not made with the mortgage lender. If the mortgage servicer reports a delinquency to the Chapter 13 Trustee, the Trustee will move for dismissal of the case. This not only endangers any provision regarding the mortgage but the other debts, car loans, tax debts and unsecured debts.
Loan Modification in Chapter 13
For those borrowers seeking a loan modification through the Bankruptcy Court’s program or otherwise, the COVID-19 Hold puts everything on hold including any pending loan modification application. This means an active loan modification review under the Bankruptcy Court’s Mortgage Modification Mediation (“MMM”) Program will be put on hold for ninety days and will not proceed forward. All of the documents previously provided to the mortgage servicer will become outdated and a new financial package will need to be uploaded in 90 days. When the loan modification review starts 90 days later, after the COVID-19 Hold expires, the Debtor will be three months more delinquent on their loan making a loan modification review more difficult. If the Debtor has been approved for a trial plan or is in the middle of an active trial plan, and then requests a COVID-19 Hold, the COVID-19 Hold will most likely cause the trial plan to be forever broken.
If a Debtor has been so impacted economically by COVID-19 that they cannot make their Chapter 13 Plan payment, then the COVID-19 Hold is a possible option to consider, but the COVID-19 Hold should only be used by Chapter 13 Debtors as a last resort if they are pursuing loan modification.
As to loan modifications already in place, the COVID-19 Hold could nullify incentives dependent upon the borrower making timely payments under the modification agreement. An example of one such incentive that could be lost is partial forgiveness of the loan balance for timely payments for X number of years after the effective date of a permanent modification.
I thank my friend and mortgage modification guru, Ellen Lawson, Arizona attorney, for much of the information concerning how mortgage servicers are handling forbearances. https://ellenlawsonlaw.com.MUSINGS FROM DIANE: