COVID-19 FORBEARANCE IN ARIZONA CHAPTER 13 BANKRUPTCIES
Published On: April 22, 2020
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:
This article should help you understand why it is very important to hire an attorney who knows what they are doing (my guess is that you did not understand some of the article above, but certainly you did not understand the implications). Any attorney who writes articles to help educate others is focused on the welfare of the client, not how much money they could get from the client. Education is the basis for a well planned bankruptcy. Today I saw nine new cases filed by an Arizona firm that does not fall into the category that Gary and several other good bankruptcy attorneys fit. Months from now several of those nine will face serious problems because no one educated them BEFORE the bankruptcy was filed. They will lose tax refunds, their family is sued and/or they lose their discharge (which is the entire reason they filed the bankruptcy to start with.
Consumer bankruptcy is complicated and takes work. Any law firm who makes it look simple is misleading their clients. Unfortunately, their clients will not know there is a problem until the ceiling falls in on them. Then it is too late to get out of the bankruptcy.
Be careful and use your common sense. Lastly, remember that you have a right to be treated with respect. IF ANY ATTORNEY TREATS YOU RUDELY – FIRE THEM because it is never going to get better. (Yes, I am thinking about specific attorneys when writing that last sentence.)
By Diane Drain|Published On: April 22nd, 2020|Last Updated: May 29th, 2022|
Diane is a well respected Arizona bankruptcy and foreclosure attorney. As a retired law professor, she believes in offering everyone, not just her clients, advice about bankruptcy and Arizona foreclosure laws. Diane is also a mentor to hundreds of Arizona attorneys.
*Important Note from Diane: Everything on this web site is offered for educational purposes only and not intended to provide legal advice, nor create an attorney client relationship between you, me, or the author of any article. Information in this web site should not be used as a substitute for competent legal advice from an attorney familiar with your personal circumstances and licensed to practice law in your state. Make sure to check out their reviews.*
5 / 5
“You folks are the BEST OF THE BEST in Arizona.” M.H.
You and Jay are the best attorneys I have ever had or needed and thank God for the Honorable Robert Gottsfield in recommending you folks – I would have never made it through the entire process without you and Jay and God Bless you both always and stay in touch as well. You folks are the BEST OF THE BEST in Arizona.
5 / 5
“My only regret is that I didn’t find Diane sooner.” K.H.
I can’t say enough good things about Diane. The way she handled my not typical circumstances was amazing. I was very nervous to start the bankruptcy process but Diane just has a very comforting way of explaining the whole process. My only regret is that I didn’t find Diane sooner. If you find yourself in a financial situation that you can’t correct on your own, please Call Diane Drain as soon as possible.
5 / 5
“Filing for bankruptcy can be a stressful life event” R.A.
Filing for bankruptcy can be a stressful life event, and selecting the right attorney can add to this stress. Diane and Jay were a pleasure to work with, and it is obvious that they are passionate about helping people get their life back on track. I would highly recommend them if you need a bankruptcy attorney.
WHAT HAPPENS AT THE END OF A COVID-19 FORECLOSURE FORBEARANCE? Can servicers demand a large balance? Generally, the servicers should not be demanding full payment following a COVID forbearance. There [...]
CFPB Releases Online Tool to Help Renters and Landlords Access Federal Assistance New resource helps renters and landlords find state and local programs distributing federal rental assistance funds WASHINGTON, D.C. [...]
There is so much mis-information about a forbearance of home mortgages during COVID-19. Know your options before making a decision not to pay your mortgage. (11/18/21 UPDATE - see summary of foreclosure alternatives) This [...]
CFPB Compliance Bulletin Warns Mortgage Servicers: Unprepared is Unacceptable Servicers Should Gear Up for Expected Surge in Homeowners Needing Assistance (April 1, 2021 – reprint from CFPB) The Consumer Financial [...]
My intention is to put you back in control of your life
Start with $0 down*. We provide affordable payment plans.
We are a debt relief agency; we help individuals and small businesses through the bankruptcy process. Attorney Advertising. This website is designed for general information only. Any information you obtain from this website should not be construed as legal advice, nor as grounds for forming an attorney-client relationship. You should consult an attorney for information on obtaining formal legal advice.