The Coronavirus pandemic which started in 2019, but had manifested itself in the United States the early part of 2020, had not only caused a national and global health and economic crisis, but had also had an affect on the practice and laws applying to foreclosures, bankruptcy, mortgage modifications and negotiations. Because of the government mandated business lockdowns, layoffs, furloughs that were caused by the effort to slow the spread of the virus, there was an effort to cushion this economic blow by temporarily preventing and slowing foreclosures and evictions and by passing laws and issuing orders with the intention of expanding the ability to deal with these issues with improvements to the laws pertaining to bankruptcy and debt settlement.
The attempts to deal with the Coronavirus pandemic governmentally and through social behavior affected virtually all aspects of our national economy and therefore new or modified laws and/or practices to deal with a potential wave of financial hardship resulted in changes to debt relief laws and practices in the following areas: foreclosures, evictions, bankruptcy, mortgage modifications and negotiations.
The Coronavirus Aid, Relief and Economic Security (“CARES”) Act which was passed in by the United States Congress in the early part of the 2020 Coronavirus pandemic and signed into law by the President, on March 27, 2020, included not only emergency assistance to families and businesses affected by the pandemic but also some substantive changes to the Bankruptcy Laws, as follows:
CHAPTER 11 and COVID-19 – The CARES Act, passed by Congress and signed by the President at the end of March 2020, included changes to the U.S. Bankruptcy Code which were intended to help deal with the Covid-19 pandemic. One of the major changes was the temporary expansion of the use of Subchapter 5 of Chapter 11 of the Bankruptcy Code, which was already part of the Small Business Reorganization Act of 2019, by vastly raising the debt cap to $7.5 million, thereby expanding the applicability of a statue which was passed to make the reorganization of small businesses more expeditious, efficient and affordable. The most innovative change in subchapter 5 was having a businessman, rather than attorneys from the United States Trustee’s Office, operate as the trustee over the Subchapter 5 Chapter 11 cases. The oversight of the case by a trustee with business experience, as opposed to an attorney from or appointed by the United States Trustees Office, would potentially shift the expertise and and interests of the trustee in a direction which focuses on the businesses’ financial health, as opposed to a more traditional Chapter 11 trustee’s focus on strict technical compliance with administrative requirements.The other improvements under Subchapter 5 are a streamlined and shorted process of getting Chapter 11 Plan approval by dispensing with the requirement for a disclosure statement and allowing for a shortened and less complex Chapter 11 plan and approval process.
CHAPTER 7 and COVID-19 – The Cares Act tried to allow easier access to Chapter 7 relief by not including in the income counted in applying the ‘means test” for Chapter 7 eligibility the extra federal assistance to the unemployment insurance (which was and extra $600. per week in addition to unemployment insurance and went down to an extra $300. per week).
CHAPTER 13 and COVID-19 – The Cares Act has allowed a confirmed chapter 13 plan can be extended by up to 2 years based on Covid-19 related hardships. Effectively the extension of a chapter 13 plan from 5years (60 months) to up to 7 years (84 months) allows a debtor’s payments to be effectively lowered on a monthly basis and greater flexibility during periods of Increased financial hardship for the debtor.
Moratoriums imposes by the New York State governor , the state Court system and FHA have essentially temporarily shut down the ability of lenders to foreclose. In addition the New York State Courts were closed till May 4, 2020 and even when they reopened, the Courts initially refused to file any foreclosure action documents. Presently, the Courts require a hearing to determine that a defendant is not facing Covid-19 related hardships before allowing a foreclosure action to continue to go forward. These moratoriums and other measures have given reprieve to borrowers unable to make mortgage payments during a period of national crisis and have given these households an opportunity to recover. However, the remedy of a moratorium on all foreclosures has been a broad one and by including foreclosures that were not caused by Covid-19, the moratorium has created a backlog of problematic mortgage situations where lenders during more normal times would have moved forward with foreclosure process. This mandated pause in the legal process has given an opportunity for borrowers to try to either reinstate, modify or otherwise resolve their mortgage arrears issues. Where a resolution is not forthcoming, the foreclosure moratorium and economic downturn will effectively give foreclosure defendants new litigation options to gain time, catch momentum and settlement opportunities.
Lenders have been more willing to give modifications during a period for national crisis and economic hardship. Generally lenders have easily given forbearances during the pandemic. Most have not committed themselves to forgiving the debt, rather at the end of the forbearance they would determine how and over what time are the borrower can reinstate and have offered borrowers needing to defer payments to apply for a modification. The Cares Act has allowed debtors affected by Covid-19 to withdraw funds from most retirement plans without a penalty. The result is that a client needing to modify a mortgage can improve their chances of obtaining a modification with a down payment.
The Cares Act has allowed debtors affected by Covid-19 to withdraw funds from most retirement plans without a penalty. The result is that a client needing to resolve a particular debt can obtain an aggressive reduction of debt with a lump sum settlement or with a potentially large down payment. Covid-19 has made some creditors more flexible to aggressive settlement proposals in that there is more of an eagerness to resolve debts in exchange for such lump sum settlements. The Cares Act has also improved credit rating requirements so that a person affected by Covid-19 who falls behind with payments and gets into an agreement to catch up with arrears caused by Covid-19 will not have their credit negatively affected; instead the creditor will report them as current. Finally if a debt was caused and/or affected by Covid certain mortgage lenders have offered forbearances, federal student loans have offered deferrals of payments and certain other lenders have offered other concessions. However these possible approaches Covid-19 related concessions by creditors vary greatly and need to be negotiated in a manner where there is a clear path forward for the borrower.
As with foreclosures, evictions in New York State have been stopped and held back with a series of moratoriums designed to allow persons to stay in their homes during the Coronavirus pandemic.
The Coronavirus has changed many aspects of people’s lives and has therefore changed some of the laws governing debt relief. Our office was open throughout the entire Pandemic because parts of our business were considered to be “essential”. Nonetheless, the larger questions regarding debt relief and Covid-19 are whether the government will further initiate more changes to bankruptcy, foreclosure, landlord-tenant and other laws in order to meet the expected growing economic hardships facing our society as the pandemic has lasted longer and has caused greater financial disruption than was initially expected. Our office has kept update on the changes of laws, rules and policies due to Covid-19 and can help you deal with financial hardship during this challenging time and potentially caused or exacerbated by the economic hardships caused by the pandemic and the consequent economic downturn.