Stimulus Package Contains Some Bankruptcy Reform
It’s often strange the kind of things that get thrown into bills that become laws. But hidden in all the media hype about the COVID-related stimulus package is some help for those who are filing for bankruptcy, particularly those filing for Chapter 13 bankruptcy.
Chapter 13 Review
The help comes in the form of an early discharge. To review, in Chapter 13 bankruptcy, the debtor will pay some (not all) of their unsecured debts through a payment plan. Assuming the payments are made timely, at the end of the payments, all of the debt—whether it was debt included in the payments or not—is discharged.
When it comes to secured property, like mortgages, the debtor can opt to pay back the payments that have been missed through the plan, while at the same time making the normal mortgage payments. At the end, the debtor is caught up and current on the mortgage.
The new COVID stimulus bill changes this a little by allowing the debtor to get relief a little bit earlier. A debtor can now get the discharge if there are no more than 3 months worth of mortgage payments in default on or before March 13, 2020 – even if the debtor had to stop paying the plan payments. The cause of the default (that is, the inability to make the Chapter 13 payments to the trustee) must be directly or indirectly related to COVID-19.
This provision appears to only apply to “residential mortgages,” but it’s unclear if that means the property has to be a homestead.
The other benefit is the ability to get a full discharge if the debtor is in a Chapter 13 plan and also obtains a loan modification or forbearance. This provision does not appear to be restricted to residential mortgages, or homesteads.
Language is Confusing
There are some questions about the bill, which are likely to cause a lot of litigation down the road. For example, some sentences in the law use the term “residential mortgage,” while others use the phrase “principal residence,” two terms that have different meanings.
It is also confusing as to COVID-19’s role. In one provision, the failure to make the payments to the trustee under the plan has to be related, directly or indirectly, to COVID-19. But in the second provision about obtaining a loan modification, there does not seem to be any reference to any causal relationship to COVID.
Lastly, many of these provisions are couched in terms of the word “may,” as in the debt “may” get an early discharge. Does that mean that courts have to abide by the law—or that courts have the option of providing this relief? We simply don’t know that, but at least this legislation is a start to giving people some relief.