The Impact of the CARES Act on Your Forbearance Agreements & Bankruptcy Filings

The Coronavirus Economic Stabilization Act of 2020 (CARES Act) provides for a borrower to obtain a forbearance on a federally backed mortgage loan. The CARES Act requires debtors to request a forbearance agreement from their lender or servicer.  However, how the forbearance agreement is handled in the bankruptcy court or the chapter 13 trustee’s office often differs from jurisdiction to jurisdiction. 

In a chapter 13 bankruptcy, the mortgage is either paid inside the plan by the trustee as a conduit mortgage payment, or the debtor (mortgagor) pays the mortgage directly outside of the plan.  

In cases where the debtor pays the mortgage directly, the debtor and lender can enter into a forbearance agreement directly.  

However, in cases where the chapter 13 trustee pays the conduit mortgage payments, the procedure to effectively forbear those payments can differ by jurisdiction.   In the Southern District of Ohio, the Chapter 13 Trustee’s Office will not accept the filing of a Notice of Forbearance to forbear plan payments on the mortgage.  Thus, the trustee will continue to treat the conduit mortgage as if there was no forbearance agreement.  

In order to incorporate the terms of the forbearance agreement in an unconfirmed plan, the proposed plan must include a special provision in the plan that instructs the chapter 13 trustee on how to treat the conduit payments during the forbearance period and how the payments that are subject to the forbearance will be cured during the plan. 

In a confirmed plan, the debtor must file a Motion to Modify the plan that will include a provision in the plan that instructs the chapter 13 trustee on how to treat the conduit payments during the forbearance period and how the payments that are subject to the forbearance will be cured during the plan.  It is also possible for the lender to enter into an agreed order with the debtor which contains the terms similar to the provision terms required in the unconfirmed/confirmed plan to instruct the trustee accordingly.

For more comprehensive information and insights, watch our COVID-19 Loan Forbearance – What Lenders Need to Know webinar.

This blog is not a solicitation for business and it is not intended to constitute legal advice on specific matters, create an attorney-client relationship or be legally binding in any way.