The Effect of the Coronavirus Health Crisis on Chapter 13
When a debtor files for Chapter 13 bankruptcy protection, he is entering into a repayment plan that typically lasts from three to five years. Once the Plan is over, provided that all Plan requirements were met, or the debtor was excused from meeting them, then the debtor is discharged from any unpaid liabilities (except for unpaid balances on student loans).
Due to the Coronavirus health crisis, a lot of Chapter 13 debtors are either being laid off, or are having their work hours reduced. Either way, such debtors may no longer be able to meet their Plan obligations. They can no longer afford their Plan payments, at least for the duration of the crisis. Their Plan payments must be either suspended or reduced until they get back to their pre-crisis employment status.
In such a situation, we are advising our clients not to worry. In Chapter 13 bankruptcy, once a debtor returns back to work, anything bad resulting from missed Plan payments resulting from the health crisis can be fixed, in the vast majority of cases very easily.
As a result of the health crisis, the U.S. Government enacted the “Coronavirus Aid, Relief and Economic Security Act” (CARES Act). Among other things, this Act added a provision to the Bankruptcy Code that allows debtors to modify their Chapter 13 Plans to rectify issues arising as a result of the health crisis.
The CARES Act covers Plans that were confirmed prior to March 27, 2020. It allows debtors to modify their Plan during the one year period between March 27, 2020 and March 26, 2021, after which a “sunset” provision kicks in and the CARES Act will cease to exist. Those debtors whose Plans were confirmed after March 27, 2020 can still modify their Plans under different provisions of the Bankruptcy Code, with one major difference. Plans modified under the CARES Act can be extended by up to 84 months from confirmation. Plans which cannot be modified under the CARES Act (because they were confirmed after March 27, 2020) cannot be extended beyond 60 months from confirmation.
In order to be able to modify a Plan under the CARES Act, the debtor must explain the circumstances supporting the allegation that he is experiencing a financial hardship, directly or indirectly, because of the Coronavirus health crisis. Such a debtor can stretch out his Plan by up to 84 months FROM THE DATE OF CONFIRMATION to make up for missing Plan payments resulting from the health crisis. So in theory, the debtor in a 60 month Plan could miss 2 months of Plan payments, but add on up to 24 more months to the Plan to make up the shortfall.
Stretching out a Plan by 24 months may not be beneficial to the debtor in most cases. The Plan should be stretched out by the minimum required to correct the shortfall, as otherwise the increased Plan length could be detrimental to the debtor. For example, the debtor could lower the monthly vehicle payment that is being paid though the Plan by stretching out the length of the payment, but the debtor could end up paying significantly more interest on the vehicle because even though he would be paying the same interest rate, he would be paying it for much longer.
It is too early to tell, but the increased Plan length is most likely going to be beneficial for debtors who fell behind on their mortgage payments. While foreclosures will be temporarily suspended due to the health crisis, mortgage arrearages as a result of the crisis will not be forgiven and will have to be dealt with. Such mortgage payments and arrearages can be rolled into the Plan, and the “post-petition” arrearages can be caught up over the remaining life of the Plan. Extending out the Plan up to 84 months would help to keep these “cure” payments affordable.
Plans that were confirmed after March 27, 2020 CANNOT be extended out to 84 months. It they were confirmed at less than 60 months, they can be extended out to 60 months, but not beyond. I view this a fundamental flaw with the CARES Act. What of the debtor whose Plan confirmed AFTER March 27, 2020 and subsequently became infected with the Coronavirus and can no longer work and will therefore miss Plan payments ? He can still modify, but he cannot extend his Plan out to 84 months. The CARES Act seems to discriminate in this regard. Such issues will have to be dealt with as they arise, but I can assure my clients that we should still be able to fix these issues.
Finally, a very common question is whether the debtor can keep the “stimulus” tax credit, or whether it is disposable income that must be submitted into the Plan. The answer is that debtors can keep any stimulus money they receive as a result of the health crisis. Congress specifically excluded any monies received as a result of the CARES Act from disposable income as defined in the Bankruptcy Code.
We will shortly be filing our first modification under the CARES Act. We expect great leeway from the Courts. Our clients can rest assured that when this is all over, we will be able to save their Plans and help them get back on their feet. Hard times are NEVER forever.