COVID-19: How the CARES Act Will Impact Chapter 7 and Chapter 13 Consumer Bankruptcies | K&L Gates LLP

On March 27, 2020, the President promulgated the historic Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), a $ 2.2 trillion stimulus package designed to mitigate the widespread economic effects of the novel coronavirus (“COVID-19[FEMININE”)Laloicomprendplusieursmodificationstemporairesdeschapitres7et13duUSBankruptcyCode[1] This alert details these changes as follows:

Certain federal payments excluded from the definition of “income”

For cases falling under Chapters 7 and 13, the CARES Act amends the definition of “current monthly income” in 11 USC § 101 (10A) (B) (ii) to expressly exclude payments made under the Federal Act relating to the national emergency declared by the President under the National Emergencies Act in relation to COVID-19. Likewise, the law provides that any payment made to individuals under the federal COVID-19 pandemic law does not constitute “disposable income” required to be engaged in a Chapter 13 debtor plan in accordance with 11 USC § 1325 (b) (2). The amended definition of “disposable income” will benefit both current Chapter 13 debtors who did not have confirmed plans as of the effective date of the CARES Act, as well as future Chapter 13 debtors.

Plan Period Amendments and Extensions for Chapter 13 Debtors with Confirmed Plans

The CARES Act also allows Chapter 13 debtors whose plans were confirmed as of the enactment date of the CARES Act to request changes to their plan due to difficulties related to COVID-19. Specifically, the statute adds subsection (d) (1) to 11 USC § 1329 to allow a debtor to amend a confirmed plan, after notice and a hearing, if that debtor experiences “significant financial hardship” due, ” directly or indirectly ”, to the COVID-19 pandemic. Under the Act, a plan can also be amended to extend the term of the plan for up to seven years after the due date of the first payment under the original confirmed plan.[2] A bankruptcy court may approve such an amendment at the request of a debtor. Until the amendment expires one year from March 27, 2020, Chapter 13 debtors whose plans have been confirmed prior to the promulgation date may seek to amend their plans in accordance with this provision.

The Act does not define the scope of “indirect” harm resulting from the COVID-19 pandemic nor the type of evidence that will be required of a debtor to demonstrate indirect harm. In addition, it is not clear which bankruptcy courts will consider “significant financial hardship” sufficient to warrant a plan amendment. Given the uncertain and unprecedented times, it is likely that many debtors with confirmed plans will meet the criteria of “significant financial hardship” arising directly or indirectly from COVID-19, but it remains to be seen to what extent the courts of the United States. bankruptcies interpret this requirement.

Impact of the provisions of the CARES law on chapter 13 creditors

At this point, it is still unclear what kinds of plan changes Chapter 13 debtors will come up with under § 1329 (d) (1), what kinds of changes the courts will ultimately allow, and to what extent the types of changes will ultimately be allowed. consumer loans can be impacted. It is foreseeable that Chapter 13 creditors will have to work with debtors and trustees to memorize and seek court approval for a large volume of payment deferrals and they will need to do so on an expedited basis.

The law specifically provides that 11 USC §§ 1322 (b) and 1322 (c) apply to any modification under § 1329 (d) (1). Under Article 1322 (b) (2), a plan cannot modify the rights of holders of debts secured only by real estate which is the principal residence of the debtor. However, § 1322 (c) (1) allows a debtor to remedy deficiencies regarding the liens on his principal residence, notwithstanding §1322 (b) (2). It is unclear how the courts will deal with the interaction between these two paragraphs and a proposed deferral, but it is entirely possible that the courts will allow a deferral of outstanding payments in conjunction with a post-petition arrears repayment plan on an extended duration of the plan. On the other hand, if a debtor pays their current mortgage directly to the creditor outside of the plan, the new § 1329 (d) (1) may not apply. Apparently, the debtor could modify the plan to provide for ongoing payments to be made through the trustee or to propose that post-petition arrears be paid through the plan. Otherwise, the debtor seems to have to work directly with the creditor to obtain a loan modification or other relief (for example, to obtain a forbearance or an adjournment). Ultimately, the changes proposed by debtors and those authorized by the courts are likely to involve factual considerations that will need to be considered on a case-by-case basis.

We expect the plan amendment provision permitted by the CARES Act to require debtors to include deferred payment requests on various types of consumer debt, such as mortgages, auto loans, credit cards. and student loans. While payments may be deferred, there currently does not appear to be any reason why a Chapter 13 creditor would be relieved of their obligation to file timely mortgage payment modification notices in accordance with Bankruptcy Rule 3002.1 in the event of future changes in payments, since the rule does not provide any exceptions for forbearance agreements or similar types of deferred payment agreements.

What is clear is that the impact of COVID-19 on consumer bankruptcies is expected to be widespread, despite the benefits granted to consumers under the CARES Act. K&L Gates advises clients on the parameters of the CARES Act and will continue to monitor developments in COVID-19 with respect to consumer bankruptcies and other matters.

Addendum

(b) BANKRUPTCY RELIEF.—

(1) IN GENERAL.—

(A) MONTHLY CURRENT INCOME EXCLUSION. — Section 101 (10A) (B) (ii) of Title 11, United States Code, is amended—

(i) in subparagraph (III), by striking out “; and ”and inserting a semicolon;
(ii) in subparagraph (IV), by deleting the period at the end and inserting “; and”;
(iii) by adding at the end:

“(V) Payments made under the Federal Law Relating to the National Emergency Declared by the President under the National Emergencies Act (50 USC 1601 et seq.) With respect to coronavirus disease 2019 (COVID -19). “

(B) CONFIRMATION OF PLAN. — Section 1325 (b) (2) of Title 11, United States Code, is amended by inserting “Payments Made Under Federal National Emergency Law declared by the President under the National Emergencies Act (50 USC 1601 et seq.) with respect to coronavirus disease 2019 (COVID-19) ”, after“ other than ”.

(C) MODIFICATION OF PLAN AFTER CONFIRMATION. — Section 1329 of Title 11, United States Code, is amended by adding the following at the end:

“(D) (1) Subject to subsection (3), for a plan confirmed before the date of promulgation of this paragraph, the plan may be amended at the request of the debtor if:

“(A) the debtor is experiencing or has experienced significant financial hardship due, directly or indirectly, to the 2019 coronavirus disease (COVID-19) pandemic; and
“(B) the modification is approved after notice and hearing.

“(2) A plan amended under subsection (1) may not provide for payments over a period that expires more than 7 years after the due date of the first payment under the original confirmed plan.

“(3) Sections 1322 (a), 1322 (b), 1323 (c) and the requirements of section 1325 (a) apply to any amendment under subsection (1).”.

(D) APPLICABILITY.—

(i) The modifications made by sub-paragraphs (A) and (B) apply to any matter brought before, on or after the date of enactment of this law.
(ii) The modification made by subparagraph (C) will apply to any case for which a plan has been confirmed under Section 1325 of Title 11, United States Code, before the date of promulgation of this law.

(2) SUNSET.—

(A) IN GENERAL.—

(i) MONTHLY CURRENT INCOME EXCLUSION. — Section 101 (10A) (B) (ii) of Title 11, United States Code, is amended—

(I) in subparagraph (III), by deleting the semicolon at the end and inserting “; and”;
(II) in subparagraph (IV), by striking out “; and »by inserting a period; and
(III) by deleting paragraph (V).

(ii) CONFIRMATION OF PLAN. — Section 1325 (b) (2) of Title 11, United States Code, is amended by striking out “payments made under federal law relating to a national emergency declared by the President under the National Emergencies Act (50 USC 1601 et seq.) with respect to coronavirus disease 2019 (COVID-19) ”.

(iii) MODIFICATION OF PLAN AFTER CONFIRMATION. — Section 1329 of Title 11, United States Code, is amended by deleting paragraph (d).

(B) EFFECTIVE DATE. — The changes made by subsection (A) will take effect on the date that falls 1 year after the date of enactment of this law.


NOTES

[1] An extract of the bankruptcy specific changes is included as an addendum at the end of this alert.

[2] The modification must also comply with the requirements of 11 USC §§ 1322 (a), 1322 (b), 1323 (c) and 1325 (a).

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