DS News

38 FINDING A PATH TO RESOLUTION Some borrowers exiting forbearance are turning to Chapter 13 bankruptcy to save their homes. Unfortunately, forbearance doesn't play well with bankruptcy. e CARES Act, enacted on March 27, 2020, provided a quick, simple, and truly brilliant solution that prevented an onslaught of foreclosures that would have otherwise surely resulted from the sudden and severe economic collapse caused by COVID-19. Interestingly, this solution was a direct result of Congress reaching out to mortgage industry leaders, specifically seeking a better mousetrap than the slow and arduous waterfall of loss mitigation programs that earmarked the solutions to the 2008 Great Recession. e result was the federally related mortgage loan forbearance program (Sections 4022 and 4023 of the CARES Act, codified as 15 U.S.C. §§ 9056 and 9057). Under the program, a mere verbal claim that the borrower had been adversely affected by COVID-19 triggered the right to up to two six-month forbearance periods. While in the forbearance, borrowers were protected from late charges and adverse credit reporting. Almost 15% of all mortgage borrowers took advantage of the forbearance program, and the vast majority have resolved their problems during the forbearance period. It has been a great success. Today, less than 3% of borrowers remain in forbearance. ose statistically few borrowers who exited the forbearance in default have been provided amazing options. For many, the defaulted payments were deferred to the end of the loan. Others were given highly favorable loan modifications. Still others were given time to sell their highly appreciated homes. Indeed, the combination of the right to forbearance and these generous loss mitigation programs obviated the need for borrowers to file bankruptcy and resulted in the lowest number of bankruptcy filings in decades. However, despite the industry's best efforts, not every borrower can be helped. An increasing percentage of the remaining forbearances are ending with borrowers in default, and with no viable loss mitigation option. Many of those borrowers are now filing a Chapter 13 bankruptcy to save their homes. In essence, bankruptcy is a type of loss mitigation of last resort. Unfortunately, Chapter 13 bankruptcy does not play well with forbearance. Generally, in Chapter 13, a debtor pays the debtor's pre-petition arrearages through a Chapter 13 plan of up to 60 months and maintains regular post-petition payments from the date of filing forward. e pre- petition arrearages are determined by a proof of claim filed by a servicer within 70 days of the petition date. If all of the pre-petition arrearages are paid through the plan, and if all the regular post-petition payments are made, the debtor is current at the end of the Chapter 13 plan. Congress recognized that layering forbearance on top of a Chapter 13 case was problematic. Chapter 13 requires regular payments, and yet forbearance allows the By: Alan S. Wolf Legal Industry Update

• Cover