As we all try to develop our own sense of normal in the post COVID-19 world, one thing some people who have filed Chapter 13 bankruptcy have to deal with now is the reality that their monthly income may have changed drastically over the last three months. The change may have been so drastic that they have not been able to make their monthly Chapter 13 plan payment for the past three months, even in jurisdictions, like Maryland, that prefer the Wage Order as the functional mandatory mechanism of collection of monthly plan payments. This issue also includes debtors who may have plan step-up payments starting at this time or other issues that change the net monthly income, which in most cases was calculated months or years ago.
Here in Maryland, when a drastic income change confronts a Debtor, plan modification is the typical response of the debtor who is still unable to qualify for Chapter 7 or who, for some other reason (i.e. mortgage arrearage) cannot convert to Chapter 7. These plan modifications have always been somewhat restricted by the 60 month plan term limitation and have tended to involve some payment moratorium built into the proposed modified plan payment schedule. However, that landscape, at least for cases filed before enactment of the CARES Act, may have changed.
The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, became law on March 27, 2020, and provided a variety of relief packages to individuals and businesses facing the economic hardship brought on by novel coronavirus (“COVID-19”). Among several temporary changes the CARES Act makes to the Bankruptcy Code, a Chapter 13 plan may now extend as far as seven (7) years from the date of the first required payment, usually 30 days after filing the petition. As a consequence, a debtor who “is experiencing or has experienced a material financial hardship due, directly or indirectly, to the coronavirus disease 2019 (COVID-19) pandemic,” may have approved, after notice and hearing, a plan modification that does not exceed seven years. On its face that sounds great, but looks may be deceiving.
The language cited above, which is found at section 1329(d) of the Bankruptcy Code, does require the debtor to seek the modification and appears to require some nominal nexus to a financial impact due to COVID-19. The nexus requirement does not appear at this time to be a very difficult requirement to satisfy, but it is important to keep in mind that the CARES Act fails to define several key terms. Nonetheless, this extended Chapter 13 plan term may be very attractive to Chapter 13 debtors whose income has been negatively impacted by the pandemic and who are in a Chapter 13 primarily to cure some amount of mortgage arrearage. Hence, the shield aspect of the CARES Act.
Now for the potential sword. In many modification scenarios before the CARES Act, a Chapter 13 debtor would have to cure the plan payment arrearage through a modification that combines payment moratorium and higher post-arrearage payments within the original 60 month period. The higher payment would usually address whatever the pre-petition mortgage arrearage payment shortfall would be resulting from the plan payment moratorium spread out over the remaining term of the Chapter 13 plan. The same could usually be done with any post-petition mortgage arrearage that accrued as a result of the change in income circumstance. In either case, the increase in plan payments does not necessarily equal the missed monthly plan payments.
Post CARES Act, the complexion of those Chapter 13 Plan modifications has changed. A Chapter 13 Trustee examining a modification request may not be as willing to limit modification to a 60 month plan when unsecured creditors may do better with a longer plan term. It remains to be seen what position they will take on how long the plan needs to be extended past 60 months. Also, Trustees may not be as open to post-petition mortgage arrearage being added to the plan without a concession to extending the plan past 60 months. In addition, Chapter 13 Trustees may be more interested in income changes after the economic impact of COVID-19 subsides. In summary, it remains to be seen just how Chapter 13 Trustees will view the plan length changes of the CARES Act.
As always, if you are facing financial hardships in your Chapter 13 plan brought on by COVID-19, or any other change in circumstances, make sure to reach out to your attorney as soon as possible. Waiting for the Trustee to file a motion to dismiss to alert your attorney to problems is never the best option.