Forbearance Agreements and Bankruptcy
By: Lisa Caplan and Anjali Khosla
To help borrowers most in need during these difficult times, federally backed mortgage loans were tasked by Congress to provide forbearance agreements to borrowers who have been impacted by COVID-19. This direction came from the CARES Act. There have also been many non-federally backed mortgage lenders who stepped up to voluntarily offer similar forbearance options. A forbearance is an agreement between the borrower and the lender that allows the borrower to pause making mortgage payments for a period of time. Pursuant to the CAREs Act, these payments can be paused for up to one year for federally backed mortgage loans. Once that period has expired, the payments that have been missed are due. Most lenders are working with borrowers to craft repayment strategies. Repayment options could include, but are not limited to, a repayment plan over time, a loan modification, or even repayment of all the missed payments in full immediately but only if this is the repayment method chosen by the borrower. Forbearance is vastly different than a deferral which would essentially place the missed payments at the back of the loan such that these amounts would not be due until the loan is either paid in full or reaches maturity.
When entering into a CARES Act forbearance agreement, the lender should take steps to ensure the borrower truly wants to enter into a forbearance agreement. A forbearance is not something borrowers necessarily fully understand. Many may contact their lender or servicer to obtain more information as to what a forbearance is, how it works or just to discover what types of assistance might be available if they are struggling financially. Lenders must take precaution to ensure borrowers are not automatically placed into a forbearance agreement simply because they contacted their lender or servicer to obtain more information about a forbearance. If the borrower is in bankruptcy, additional steps must be taken once a forbearance agreement is entered in to.
If the borrower is in bankruptcy at the time a forbearance agreement is entered into, lenders should reach out to their local counsel to discover whether it is appropriate, in the given jurisdiction, to file a Notice of Forbearance Agreement with the court. This notice is filed to ensure that the trustees and even debtor attorneys are aware of the Agreement. There are some Judges who are concerned that Lenders are placing debtors into forbearance agreements without the debtor’s knowledge/consent and are therefore setting these notices for hearing to confirm the debtor’s intent. If Lenders are unable to confirm the Debtor’s intent and thus withdraw the notice, the Court may still require a hearing to determine what is happening with the account. Also, if an extension of the forbearance agreement is entered in to, a notice should be filed with court disclosing the extension as well.
While a loan is under a forbearance agreement during a bankruptcy, lenders must take extra precaution to avoid engaging in attempts to obtain relief from the automatic stay. Motions for Relief filed while a Debtor is under a forbearance agreement are not well taken by the Debtor attorney, trustee, or Court. If a Motion for Relief was filed prior to the entry of such an agreement, the Motion should likely be withdrawn. This is especially true if the account is a federally back mortgage loan as the Consolidated Appropriations Act, 2021 has now been signed into law. This very new law appears to allow a federally backed mortgage loan to file a CARES forbearance claim which will list the missed/forborne payments. Of note, only a federally backed mortgage loan may file a forbearance claim. More on how this might impact non-federally backed mortgage loans later. Said forbearance claim will be a supplemental claim for the amount not received by the creditor during the forbearance period of a loan granted forbearance under the CARES Act. This supplemental claim will be considered timely filed if it is filed within 120 days after the expiration of the forbearance period of a loan granted forbearance under the CARES Act. The Debtor should then file a request for modification of their plan to provide for payment of the forbearance claim. If the Debtor does not make this modification request with 30 days after the date on which the creditor files the forbearance claim, the trustee, United States Trustee, bankruptcy administrative or other party in interest may request the modification. Based on this new law, it seems the Debtor might receive a Discharge of their dischargeable debts prior to their curing a mortgage arrearage caused by a forbearance. Because the Appropriations Consolidation Act is so very new, we expect there to be much discussion and likely litigation surrounding these provisions which should serve to clarify interpretations.
Non-federally backed mortgage loans that opted to allow the Debtor to forbear payments during bankruptcy are, as previously mentioned, ineligible to file a CARES forbearance claim. Thus, if the Debtor is not proactive in taking steps to set in place a strategy to cure the forborne payments once the forbearance period expires, a Motion for Relief becomes the appropriate next step. These Motions for Relief should not be filed unless and until the forbearance period has fully expired and there is no option to extend the forbearance period further. Though relief from the stay may not be the goal of the Motion for Relief filings, it should serve as a stepping board to bring about discussion as to a plan to cure the accrued post arrearage. To be clear, though a non-federally backed mortgage loan is not eligible to file a CARES forbearance claim, this does not preclude them filing an Amended Proof of Claim or Supplemental Proof of Claim for the post arrearage should the Motion for Relief result in an Agreed/Consent Order whereby all parties agree on this method to cure the accrued arrearage.
We are in very new territory these days with an ever-changing legal landscape that is open to a variety of interpretations. Your local counsel is your best source of information when it comes to the expectations of the Debtor bar, Trustees and Judges as we all work through the latest and greatest Congress has to offer.