New Consumer Bankruptcy Protections Now Effective

Included in the nearly 5,600-page Consolidated Appropriation Act (CCA), Pub. L. No. 116-260 (Dec. 27, 2020), are a number of new protections for consumer bankruptcy debtors. These provisions took effect when the president signed the bill on December 27, 2020, and they will sunset one year after enactment, on December 27, 2021.

The most significant change will permit debtors to receive a discharge in a chapter 13 case despite having missed mortgage payments due to a COVID-19 hardship or because the debtor has received a loan forbearance or modification. Other amendments protect stimulus payments in a bankruptcy case, prohibit debtors from being denied a CARES Act forbearance if they have filed bankruptcy or received a discharge, permit consumers to have utility service maintained or restored after filing bankruptcy without paying a deposit, and create a procedure for filing a supplemental proof of claim for amounts forborne under a mortgage forbearance.

Availability of Chapter 13 Discharge Despite Missed Payments

CCA div. FF, tit. 10, § 1001(b) amends Bankruptcy Code § 1328 by adding a new subsection (i) that permits chapter 13 debtors to receive a discharge in two situations involving a residential mortgage where that might not have been previously available. The bankruptcy court may grant a discharge if the debtor (1) has missed three or fewer mortgage payments because of a COVID-19-related hardship or (2) has entered into a loan forbearance or modification. The oddly drafted statutory language is likely to result in differing judicial opinions about its application.

To qualify for the discharge provision under temporary § 1328(i)(1), the debtor must have defaulted on not more than three monthly payments that came due on or after March 13, 2020, on a residential mortgage that is being cured or payments maintained under § 1322(b)(5). The missed mortgage payments could have been payable either to the trustee in a conduit district or to the creditor directly. The debtor’s failure to make the mortgage payments must be caused by a “material financial hardship due, directly or indirectly, by the coronavirus disease 2019 (COVID-19) pandemic.”

Many bankruptcy courts have held that debtors can be denied a discharge if they are not current on a home mortgage even if they have otherwise completed their plan payments. These courts take the position that the ongoing postpetition payments on a mortgage are payments under the plan and § 1328(a) requires that the debtor complete all payments under the plan before a discharge may enter. See NCLC’s Consumer Bankruptcy Law and Practice § 11.6.2.1.

While other courts construe § 1328(a) differently and few appellate courts have weighed in on the issue at this point, this temporary provision will be helpful in those districts that have prevented debtors from getting a discharge in this situation. It should not affect the development of the case law on the underlying issue, as it is best viewed as a temporary provision intended to help debtors affected by the COVID-19 pandemic and not an attempt by Congress to resolve the split of authority on the discharge issue by making a permanent Code amendment.

The provision’s most significant benefit, however, may be for debtors who are in a loan forbearance or modification when a bankruptcy discharge is sought. New § 1328(i)(2) provides that a court may grant a discharge to a debtor who has missed mortgage payments if: (1) the debtor’s plan provides for the curing of a default and maintenance of payments on a residential mortgage under § 1322(b)(5) and (2) the debtor has entered into a forbearance agreement or loan modification agreement with the mortgage holder or servicer.

Many borrowers, including debtors in chapter 13 cases, have received mortgage forbearances that were mandated by the CARES Act or offered under servicers’ COVID-19 loss mitigation programs, and these forbearances may extend for a period of up to one year. New § 1328(i)(2) makes clear that debtors who have otherwise managed to keep up with their plan payments may still receive a discharge even if the plan is ending while they are months into a forbearance and have therefore been forgiven of making many months of payments. It also permits debtors to receive a discharge if they have entered into a loan deferral or other permanent loan modification agreement, typically to deal with the missed payments under a forbearance. For related information, see NCLC’s New Rights for Homeowners Exiting COVID-19 Forbearances.

While temporary § 1328(i) may have been intended to apply only after the debtor has completed all plan payments, regardless of any missed mortgage payments, the provision begins by stating that it applies “to a debtor who has not completed payments to the trustee or a creditor holding a security interest in the principal residence of the debtor.” Again, the addition of “trustee” to this phrase may have been intended simply to refer to mortgage payments that are disbursed by the trustee in conduit districts. However, given the severity of the pandemic, and the plain language of this provision generally referring to payments to the trustee (including non-mortgage plan payments), it is plausible that Congress intended that a debtor may request, and the court may grant, a discharge at any time the two conditions exist (those conditions being that the debtor has three or fewer missed mortgage payments or has received a loan forbearance or modification) even if the debtor has not completed payments under the plan. This would mean that a court may grant a discharge even if the debtor has not satisfied, for example, the best interest of creditors or disposable income tests. This interpretation is supported by the lack of any specificity or limitations in the statutory language as to when the debtor may request a discharge under temporary § 1328(i).

The granting of a discharge under temporary § 1328(i) is not mandatory, as the provision states that a “court may grant a discharge,” after notice and a hearing, if the statutory requirements are met. Hopefully bankruptcy courts will exercise this discretion to grant relief to debtors impacted by the pandemic. Importantly, by referring to a discharge under § 1328(a), temporary § 1328(i) permits the debtor to receive a full compliance discharge rather than the more limited hardship discharge under § 1328(b). See NCLC’s Consumer Bankruptcy Law and Practice § 15.4.1 for discussion of chapter 13 discharge.

Because new § 1328(i) applies only if the debtor’s plan treats the mortgage under § 1322(b)(5), and no change has been made to the scope of the discharge under § 1328(a), the missed mortgage payments (and the underlying mortgage) are not discharged under existing § 1328(a)(1) if the debtor is granted a discharge. Thus, the debtor will still need to resolve the delinquency with the mortgage holder or servicer to avoid foreclosure, most commonly by entering into a loan deferral or modification agreement.

By referring to “residential mortgage” in new § 1328(i)(1) and § 1328(i)(2), which is not defined in the Code, Congress may have intended for the provision to apply broadly, even to a mortgage that is not secured by the debtor’s principal residence. However, this is more likely an oversight as the above-noted prefatory phrase describing to whom the payments are due refers to the trustee or a “creditor holding a security interest in the principal residence of the debtor.”

Protection of Stimulus Payments from Bankruptcy Trustee

CCA div. FF, tit. 10, § 1001(a) adds a new Bankruptcy Code § 541(b)(11) to the list of exclusions from property of the bankruptcy estate. It provides that “recovery rebates made under section 6428 of the Internal Revenue Code of 1986” are not property of the estate. This means that debtors who receive the $600 stimulus payment ($1,200 for eligible married couples with an additional amount of $600 per qualifying dependent) provided under the CCA may file bankruptcy without having to use a wildcard or other exemption to protect the funds from possible recovery by the trustee. By generally referring to “recovery rebates” under the Internal Revenue Code, this covers not only the stimulus payments provided under the CCA but also the stimulus payments made under the earlier CARES Act and any future stimulus payments, provided that Congress authorizes them under this same Internal Revenue Code provision as an advanced tax refund.

The CARES Act included a temporary provision that excludes from current monthly income under Bankruptcy Code § 101(10A) and disposable income under Code § 1325(b)(2) any “[p]ayments made under Federal law relating to the national emergency declared by the President under the National Emergencies Act (50 U.S.C. 1601 et seq.) with respect to the coronavirus disease 2019 (COVID-19).” See NCLC’s Consumer Bankruptcy Law and Practice § 13.4.3.2.7. This provision, which sunsets on March 27, 2021, is not limited to stimulus payments and includes supplemental and extended unemployment compensation payments. It permits debtors in chapter 13 cases to keep these payments without being required to use them to pay unsecured creditors under their plans.

While no similar exclusion from disposable income was included in the CCA, a separate non-bankruptcy provision of the CCA, in div. N, § 272(d), may be helpful. It amends the Internal Revenue Code (adds new 26 U.S.C. § 6428A) by providing that “no applicable payment shall be subject to, execution, levy, attachment, garnishment, or other legal process, or the operation of any bankruptcy or insolvency law.” This provision was intended to protect stimulus payments from collection actions, using language similar to the protection for Social Security benefits in 42 U.S.C. § 407. By excluding stimulus payments from the “operation of any bankruptcy or insolvency law,” a debtor may argue that the payments should not be treated as disposable income under § 1325(b)(2).

In sum, for cases filed between December 27, 2020 and March 27, 2021, stimulus payments in the form of an advanced tax refund are fully protected for all purposes under these provisions of the CCA and CARES Act. In addition, other COVID-19 related payments, including unemployment compensation, are excluded from disposable income. For cases filed between March 28, 2021 and December 27, 2021, stimulus payments in the form of an advanced tax refund are not estate property under temporary Bankruptcy Code § 541(b)(11) or temporary Internal Revenue Code § 6428A. For all other COVID-19 related payments received during that period, the debtor should attempt to claim them as exempt under a wildcard or other exemption, and should argue that they are not disposable income under temporary Internal Revenue Code § 6428A.

Protection Against Discrimination

CCA div. FF, tit. 10, § 1001(c) adds a temporary subsection (d) to Bankruptcy Code § 525 as follows: “A person may not be denied relief under sections 4022 through 4024 of the CARES Act (15 U.S.C. 9056, 9057, 9058) because the person is or has been a debtor under this title.” This anti-discrimination provision clarifies that consumers cannot be denied a mortgage forbearance, protection under the foreclosure and eviction moratorium, and related relief provided under the CARES Act if they are a debtor in a pending bankruptcy case or have received a bankruptcy discharge.

Another section of the CCA dealing with business bankruptcy cases includes a provision permitting certain debtors to receive a loan under the Paycheck Protection Program. This could apply to self-employed chapter 13 debtors. However, it is not clear whether the provision will be implemented as it states that PPP loans will be available only if the SBA Administrator sends a letter to the Director of the Executive Office for United States Trustee approving PPP loans in bankruptcy.

CARES Forbearance Claim

CCA in div. FF, tit. 10, § 1001(d) amends Bankruptcy Code § 501 by adding a temporary subsection (f) that permits a mortgage servicer to file a supplemental proof of claim, referred to as a “CARES forbearance claim,” for the amount forborne under a loan forbearance granted to a debtor under the CARES Act. Because the loan forbearance must have been granted under the CARES Act, this provision applies only to servicers of federally backed mortgage loans. The servicer may file a supplemental claim even if the claims bar date has passed, though a separate temporary amendment to Code § 502(b)(9) provides that it must be filed no later than 120 days after the expiration of the forbearance.

If the missed payments under the forbearance are cured through a loan deferral or loan modification, temporary § 501(f)(2)(B) provides that the supplemental proof of claim must include the following: (1) the relevant terms of the modification or deferral; (2) a copy of the modification or deferral if it is in writing; and (3) a description of the payments to be deferred until the date on which the mortgage loan matures. However, if the debtor is curing the default with a loan deferral or modification and not through payments disbursed under the plan, there would seem to be no need for the servicer to file a supplemental claim. Local practice may determine whether such supplemental claims are filed.

CCA div. FF, tit. 10, § 1001(e) amends Code § 1329 by adding a temporary subsection (e) that permits a debtor to move to modify the plan to provide for a supplemental CARES forbearance claim. Since this right already exists under § 1329(a), the more significant aspect of this amendment is an additional provision that permits the United States trustee, the trustee, a bankruptcy administrator, and any party in interest (which would include a mortgage holder or servicer), to move to modify the debtor’s plan to deal with the supplemental claim if the debtor does not do this. Prior to this temporary amendment, only the debtor, a trustee, or the holder of an allowed unsecured claim could move to modify a plan under § 1329(a). If a mortgage holder or servicer elects to use this new provision, it must move to modify within thirty days after the supplemental claim is filed.

Advocates should monitor this issue in their cases and be prepared to file objections in situations in which a mortgage servicer has taken actions—such as filing an unnecessary supplemental claim or motion to modify the debtor’s plan—that are inconsistent with the debtor’s plan or the debtor’s intention for dealing with the mortgage. Hopefully mortgage servicers and their attorneys will not be taking these actions simply to generate attorney fees.

Continued Utility Service

CCA div. FF, tit. 10, §1001(h) amends Code § 366 by adding a temporary subsection (d) that permits debtors to have utility service maintained or restored after filing bankruptcy without paying a deposit, as long as they pay for postpetition service. Specifically, new subsection (d) provides that a utility may not alter, refuse, or discontinue service to an individual debtor who does not furnish adequate assurance of future payment that would be otherwise required under § 366(b) if the debtor (1) makes a payment to the utility for “any debt owed to the utility for service provided during the 20-day period beginning” on the petition date and (2) pays after the 20-day period for utility service provided during the pendency of the case when payment is due. See NCLC’s Consumer Bankruptcy Law and Practice § 9.8.2 for discussion of adequate assurance requirements.

The temporary provision does not address how the debtor will be informed about the amount needed to be paid for the initial postpetition twenty-day period, or when that payment must be made. It is unlikely that utility companies will change their billing practices to provide the debtor a bill for the twenty-day period. Presumably debtors will be protected under this provision by simply paying the postpetition bills when they become due. However, if there is concern that a utility might aggressively move to terminate service, the debtor may consider sending the utility a payment of an estimated amount for twenty days of service based on a typical monthly bill at the end of the twenty-day period.

While the practice in many districts is that consumer debtors do not need to pay a deposit to the utility company upon filing to satisfy the adequate assurance requirement in § 366(b), this provision will be helpful in districts where deposits are required.