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Mortgage Payments Forborne Under the CARES Act? A Supplemental Proof of Claim May Be Needed if Your Borrower is in Bankruptcy

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Over the last year, mortgage servicers have granted forbearances for certain loans pursuant to provisions enacted in the Coronavirus Aid, Relief, and Economic Security (CARES) Act. When the affected borrower is in bankruptcy, servicers should be aware of another important step: filing a supplemental proof of claim in the borrower’s bankruptcy case.

Servicers should not delay in filing these supplemental proofs of claims. To be timely, the supplemental proof of claim must be filed before 120 days after the forbearance period ends. Furthermore, the provisions of the Bankruptcy Code that allow for these supplemental proofs of claim are currently scheduled to sunset on December 27, 2021.

Supplemental Proofs of Claim May Be Needed for Certain Borrowers in Bankruptcy

The CARES Act was enacted on March 27, 2020. Sections 4022 and 4023 of the CARES Act, codified as 15 U.S.C. §§ 9056 and 9057 respectively, provide for borrowers to request forbearance of their “Federally backed mortgage loans” and “Federally backed multifamily mortgage loans.”

Nine months after the CARES Act became law, the Consolidated Appropriations Act, 2021 (CAA) introduced a new type of creditor’s claim for bankruptcy cases: the “CARES forbearance claim.” The CARES forbearance claim is a supplemental claim for the amount not received by a mortgage servicer while a Federally backed mortgage loan or Federally backed multifamily mortgage loan was in forbearance under Section 4022 or 4023 of the CARES Act.

The CAA allows for supplemental proofs of claim to be filed for CARES forbearance claims. There are several requirements for these supplemental proofs of claim, including:

  • The servicer of the affected mortgage loan (or the holder of the loan if the holder services the loan itself) must file the supplemental proof of claim.
  • The affected mortgage loan obligation must be provided for in a chapter 13 bankruptcy plan, and that plan must provide for the cure of defaults and maintenance of payments while the bankruptcy case is pending.
  • If the debtor and the servicer have modified or deferred the affected mortgage loan obligation by agreement in order to cure the forborne mortgage payments, the supplemental proof of claim must include specific information about the forborne payments and copies of any written forbearance agreement.

A national form has been created for these supplemental proofs of claim.

Do Not Forget the Accompanying Plan Modification

After a creditor has filed its supplemental proof of claim for its CARES forbearance claim, what is next? Plan modification.

The CAA added a basis for modifying a chapter 13 bankruptcy plan to provide for a CARES forbearance claim. For the first 30 days after the filing of the supplemental proof of claim, only the debtor may request to modify the bankruptcy plan to provide for the CARES forbearance claim. If the debtor does not request a plan modification within the first 30 days after the supplemental proof of claim is filed, other interested parties may seek a plan modification to provide for the CARES forbearance claim.

This Relief is Available for a Limited Time Only

Like the other amendments to the Bankruptcy Code enacted under the CAA, CARES forbearance claims, the supplemental proof of claim process for those claims, and the related basis for plan modification are all available for a limited time only. These provisions will no longer be available after they sunset. The sunset date is currently December 27, 2021.