Economically fragile debtors that have pending Chapter 13 bankruptcy cases may be some of the hardest hit financially due to the coronavirus pandemic (“COVID-19”). The restrictions necessarily imposed to address COVID-19 has exacerbated their financial fragility. The CARES Act offers some reprieve and allows bankrupt debtors some flexibility in repaying their mortgages.
The modification of a confirmed Chapter 13 plan is governed by 11 U.S.C. section 1329 of the Bankruptcy Code. “The policy underlying section 1329 is to allow upward or downward adjustment of plan payments in response to changes in debtor’s circumstances which substantially affect the ability to make future payments.” In re Wetzel, 381 B.R. 250, 252 (Bankr. M.D. Fla. 2000).
Pursuant to section 1329, a proposed modified plan should satisfy general requirements for plan confirmation. In re Prieto, No. 3:08-bk-3308-PMG, 2010 Bankr. LEXIS 3379 (Bankr. M.D. Fla. Sep. 22, 2010) citing In re Ludwig, 411 B.R. 632, 635 (Bankr. N.D. Iowa 2008). Typically, a confirmed Chapter 13 Plan cannot be modified to extend the plan for more than five years. In re Webb, No. 3:10-bk-4737-PMG (M.D. Fla. March 10, 2018).
On March 27, 2020, in response to the COVID-19 crisis, the federal government enacted emergency legislation titled, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) “to provide emergency assistance and health care response for individuals, families, and businesses affected by the coronavirus pandemic.” Interim Final Rule, 13 C.F.R. Part 120, ECF 7-2. Profiles, Inc. v. Bank of Am. Corp., 2020 U.S. Dist. LEXIS 64330, at *2 (D. Md. Apr. 13, 2020). Section 1113(b)(1)(C) of the CARES Act temporarily amends section 1329 to allow Chapter 13 plan modification when (a) a debtor is experiencing a material financial hardship due to COVID-19 and (b) the plan modification is approved after notice and a hearing. The CARES Act allows a plan to be modified to extend for up to seven years after the time the first payment under the original confirmed plan became due. Section 1329 would otherwise limit Chapter 13 plans to a period of five years.
Specifically, the CARES Act provides that:
(C) Modification of plan after confirmation.— Section 1329 of title 11, United States Code, is amended by adding at end the following:
(1) Subject to paragraph (3), for a plan confirmed prior to the date of enactment of this subsection, the plan may be modified upon the request of the debtor if—
(A) the debtor is experiencing or has experienced a material financial hardship due, directly or indirectly, to the coronavirus disease 2019 (COVID-19) pandemic; and
(B) the modification is approved after notice and a hearing.
(2) A plan modified under paragraph (1) may not provide for payments over a period that expires more than 7 years after the time that the first payment under the original confirmed plan was due.
(3) Sections 1322(a), 1322(b), 1323(c), and the requirements of section 1325(a) shall apply to any modification under paragraph (1).”
116 P.L. 136, 2020 Enacted H.R. 748, 116 Enacted H.R. 748, 134 Stat. 281, 116 P.L. 136, 2020 Enacted H.R. 748, 116 Enacted H.R. 748, 134 Stat. 281, 11 U.S.C. § 1329.
Section 4022 of the CARES Act also provides an opportunity for borrowers with a federally-backed mortgage to seek a forbearance of their mortgage payments for up to six months, with the possibility of another six-month extension of the forbearance. If borrowers seek such a forbearance and attest to their financial hardship due to COVID-19, the mortgage loan servicer is required to allow the forbearance without accruing interest or fees. Following the forbearance period, the deferred payments become due in one lump sum. This creates a feasibility issue for debtors who are already on tight budgets and likely will not be able to pay all amounts due in one lump sum payment. This poses a threat to the survivability of a debtor’s bankruptcy overall.
The CARES Act offers temporary reprieve for Chapter 13 debtors, but just as COVID-19 has made our lives incredibly uncertain, so too has it made bankruptcy plans and the feasibility of plan payments uncertain. The effects of the virus on a bankrupt debtor and creditors may be long term and possibly disastrous.