HOW IS BANKRUPTCY AND MORTGAGE SERVICING EFFECTED BY THE CARES ACT?

This legislation was signed into law on March 27, 2020, entitled The Coronavirus Aid, Relief, and Economic Security Act (CARES Act). This  places short-term obligations and restrictions on lenders and servicers of federally backed loans. The key is to know whether or not your loan is a Federally backed mortgage loan or not.  As part of these limitations due to Coronavirus Disease 2019 (COVID-19), lenders and servicers are temporarily subject to moratoriums on foreclosures, mandatory forbearance obligations, and revised credit reporting obligations.

There are some major was that the CARES ACT effects borrowers who are debtors in Bankruptcy.

The CARES Act makes three significant revisions to the Bankruptcy Code:

  • Increasing the cap for small business debtors seeking relief pursuant to the Small Business Reorganization Act under Subchapter 5 of the Bankruptcy Code from approximately $2.7 million to $7.5 million.
  • Removing COVID-19-related relief payments from calculations of (a) a debtor’s income for determining eligibility for Chapter 7 and Chapter 13 relief and (b) a debtor’s disposable income for a Chapter 13 Plan.
  • Permitting a Chapter 13 debtor with a confirmed Plan to modify the Plan based on “material financial hardship” resulting “directly or indirectly” from the COVID-19 pandemic, including extending payments under the Plan up to seven years after the debtor’s initial Plan payment was due.

Lenders and servicers dealing with consumer borrowers subject to the Bankruptcy Code, in addition to the Automatic Stay applicable under Section 362 of the Bankruptcy Code during pending bankruptcy proceedings, should be aware of the following provisions of the CARES Act: (i) the moratorium on foreclosures and foreclosure-related evictions for federally-backed mortgages; (ii) the mandate for short-term forbearance accommodations for federally-backed mortgages; (iii) the suspension of GAAP requirements to permit loan modifications without designating a loan as a “troubled debt restructuring”; and (iv) revisions to Fair Credit Reporting Act (FCRA) obligations

For borrowers that have already received a discharge of their personal liability but retained real property subject to a security interest, lenders and servicers should recognize that the CARES Act extends to payment obligations generally, not just those that constitute personal liabilities. Post-discharge borrowers may, therefore, still request an accommodation, and lenders and servicers should follow the same protocol in granting accommodations and forbearances, as they would for borrowers still obligated under a promissory note.

Because of all these complicated changes and the variables in any given situation retaining an experienced mortgage foreclosure defense and bankruptcy attorney is critical.

 Lenders and servicers must be very cautious prior filing any pleadings suggesting a default under a confirmed Plan or sending any pre-foreclosure notices until the expiration of the current foreclosure moratorium. Any such filings or sending any such notices during the pendency of the moratorium period could be construed by a Bankruptcy Court as “initiating a foreclosure process,” which, in turn, could subject the lender or servicer to the risk of potential sanctions to the extent the Bankruptcy Court retains jurisdiction over any dispute. In addition for any property believed to be abandoned or vacant, lenders and servicers should confirm that status before proceeding with any foreclosure activity.