Posted By USFN,
Monday, April 12, 2021
Updated: Wednesday, April 14, 2021
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by Rachael A. Stokas, Esq.
Codilis & Associates P.C.
USFN Member (IL)
Imagine sitting at a table with puzzle pieces dumped randomly from a box directly in front of you. What questions would go through your head? “Where do I start? How do I organize? How much time will this take?” The swift legislation passed over the last year in response to COVID-19 Pandemic and the temporary changes to Bankruptcy Code are like those puzzle pieces. The passage of The Coronavirus Aid, Relief, and Economic Security (CARES) Act, 2020 and the Consolidated Appropriations Act, 2021 (CAA) has left lenders scrambling to piece together their legal obligations and provide sufficient relief to borrowers impacted by COVID-19.
The forbearance section under the CARES Act provides relief from mortgage payment obligations to borrowers impacted by COVID-19. The forbearance period was initially up to a year but has been extended. These statutory initiatives presented challenges for lenders from the start, but even more so if the borrower is in an active bankruptcy case. Borrower outreach to the lender to request relief under the Act proved challenging from the start due to the automatic stay. Various components of the legislation, such as filing Notice of a Forbearance in the bankruptcy required updated processes on servicer systems and procedures for attorney reach outs with respect to these notices.
The passage of the CAA provided additional clarity on resolving forborne payments for borrowers in bankruptcy. 11 U.S.C. § 501(f) was amended to allow mortgage servicers of federally backed mortgages to file supplemental claims for delinquent post-petition payments resulting from a forbearance under the CARES Act. The lender may file a claim for these amounts within 120 days of the expiration of the forbearance period for the forborne payments. However, this seemingly positive piece of the puzzle is not a neat solution for lenders’ rights to obtain payment for forborne payments. Plan provisions in Chapter 13, 12, and 11 still control most payments of claims and unless local rules in plan-control districts provide for payment of the supplemental claims, many trustees throughout the country will require amended plans to pay default amounts. Additionally, the CAA also does not preclude filing Motions for Relief prior to the filing of or in conjunction with a supplemental claim, further complicating the puzzle.
How should lenders proceed in piecing together these new laws and what will this completed puzzle look like for lenders? Puzzles are completed more efficiently if there is shared responsibility and collaboration. Local counsel can provide a much-needed perspective on the legislation, assisting lenders with local rule updates and newly implemented general orders. Additionally, local counsel can provide input on processes needed to fully protect lenders’ rights in bankruptcy. The picture formed by solution of this puzzle must not only protect the contractual rights of the lender, but also provide much-needed relief to the borrower who has been impacted by COVID-19.
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April 2021 e-Update
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