by Lesley Bohleber, Esq.
Aldridge Pite, LLP
USFN Member (AL, CA, GA, HI, ID, OR, UT, WA)

By now, we are all familiar with COVID-19 forbearance procedures, and many borrowers have successfully applied for and received forbearance relief. With respect to loans in bankruptcy, most servicers filed Notices of Forbearance, but the majority of these Notices do not address repayment terms or provide for deferment of the forborne payments. Unless the servicer agreed to extend the forbearance period, many forbearance periods are expiring, and servicers must now address the forbearance arrears. 

For loans subject to the automatic stay, servicers should retain bankruptcy counsel to negotiate repayment terms with debtors’ attorneys to avoid potential stay violations. Repayment terms can include a lump sum payment and/or a cure of the arrears over a fixed time period, depending on the borrower’s current financial condition. Under the CARES Act, borrowers are not required to cure forbearance arrears in a lump sum unless they opt to do so. A repayment agreement can be similar to a standard agreed order typically utilized to resolve Motions for relief from the Automatic Stay and may include default terms for relief from stay. Also, servicers should be mindful that if a repayment agreement provides for relief from the automatic stay after default, then a Motion to Approve the repayment agreement must be filed with the bankruptcy court pursuant to Federal Rule of Bankruptcy Procedure 4001(d).

Borrowers may also amend or modify their Chapter 13 Plan to provide for the trustee to disburse payments on the forbearance arrears. In this scenario, the servicer will likely need to file an amended proof of claim that includes the contractual arrears up to the date the borrower agrees to resume regular payments. Servicers should memorialize any such agreement in a writing that provides for: (1) a deadline to file an amended Plan or obtain an Order granting the Motion to Modify Plan; and (2) the servicer to proceed with a Motion for relief from the Automatic Stay, if the deadline is not met.

If a borrower is financially unable to commit to a repayment agreement, the servicer should consider a deferment of the forbearance arrears until loan maturity or sale of the property or, alternatively, an extension of the loan term. However, a loan modification usually requires the borrower to submit financial information to the servicer’s loss mitigation department for approval of the agreement and the entry of an Order granting a Motion to Approve Loan Modification. If the arrears are deferred, a notice of the deferment agreement should be filed with the court and any Response to the Notice of Final Cure should not reflect the deferred amount as being in default to avoid any unnecessary litigation after the completion of a Chapter 13 Plan. 

Finally, if a debtor is unresponsive to attempts to address forbearance arrears, a servicer may be left with no alternative besides moving for relief from the automatic stay to address the forbearance arrears. 

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October 2020 e-Update