What Is the Consolidated Appropriations Act?
There have been two acts related to the COVID-19 pandemic that were enacted in 2020. The first, called the CARES Act, was enacted in March of 2020, and it is still in effect, although many of the provisions will sunset. The idea behind the CARES Act was to give various types of relief to people who were adversely affected by the pandemic. Of course, the pandemic has continued, and so at the end of 2020 Congress enacted the Consolidated Appropriations Act, which the president signed into law on December 27, 2020.
The Consolidated Appropriations Act is a massive statute, about 6,000 pages in length, containing anything and everything that any member of Congress thought should be tossed in. The act is a stew of legislation. One small section of the Consolidated Appropriations Act deals with bankruptcy, though there are sections that deal with things completely unrelated to bankruptcy, such as the Chinese mistreatment of the Uighurs. It’s called the Consolidated Appropriations Act because it contains many appropriations for various programs, some of which are associated with the COVID-19 pandemic. The act is an example of one of the two things Otto von Bismarck said citizens should never see: the making of sausage and the making of legislation. The Consolidated Appropriations Act—with everything tossed in, even the kitchen sink—is probably similar to what Bismarck had in mind.
How Does the Consolidated Appropriations Act Affect Chapter 13 Discharges?
In order to understand how the Consolidated Appropriations Act affects Chapter 13 discharges, we need to take a couple of steps back and first look at Chapter 13 itself. Chapter 13 bankruptcy is not available to businesses; only individual debtors and legally married couples can file, using the same schedules as in a Chapter 7 or a Chapter 11.
As part of the filing, the debtor includes a plan for making payments to the creditors. This plan does not have to be as elaborate as a Chapter 11 reorganization, but there are certain similarities. At the completion of the plan, any debts that have not been paid in full will be discharged, with the exceptions of student loans, and debts determined by the Court to be nondischargeable. Thus, the student loans were not paid in full through the plan, the unpaid portion will not be discharged.
One of the benefits of Chapter 13 for individuals is that there are some debts considered dischargeable that would not be dischargeable in a Chapter 7 or a Chapter 11. For example, one kind of debt that can only be discharged in a Chapter 13 is a debt owed to a spouse or a former spouse that was incurred as part of a separation agreement or a divorce decree, and that is not a domestic support obligation. Prepetition child support and alimony debts are never dischargeable, and must be in full through the plan.
Another thing that is dischargeable in a completed Chapter 13 case, but not in a Chapter 7, is a debt that’s the result of doing willful and malicious harm to a property. You can pay a portion of that debt through the plan at the same percentage as say credit card debt, and then have the unpaid portion discharged at the completion of the plan. For this reason, Chapter 13 has been called a “super discharge” of debt. At one point, it even included debts incurred through fraud, but that’s been done away with.
There are two basic types of Chapter 13 discharges.
One type of Chapter 13 discharge is granted under Section 1328(a), and has the shorter list of non-dischargeable debts previously mentioned.
The other type of Chapter 13 discharge is called the hardship discharge under Section 1328(b). This is reserved for those debtors who’ve been making payments in their plan for a while but find it impossible to continue due to circumstances beyond their control. The debtor also has to have satisfied what’s called the Chapter 7 Liquidation requirement for Chapter 13, meaning the debtor has already repaid the unsecured creditors at least as much as they would have gotten in a Chapter 7 liquidation. Finally, the circumstances are such that modifying the plan is not practicable.
In the hardship discharge scenario, the list of nondischargeable debts is the same as in Chapter 7, which means debtors do not get that Chapter 13 “super discharge.”
This sets the stage for a provision that was added in the Consolidated Appropriations Act regarding the discharge available in Section 1328. The new provision provides what is essentially a hardship discharge, but is granted under Section 1328(a). All those debts that are dischargeable in a normally completed Chapter 13 plan are now dischargeable in this “super hardship discharge” for debtors who have not completed all of their payments under the plan, to the trustee or to a creditor holding a security interest in the debtor’s principal residence. On top of that, the requirements seem to be a lot lighter than under the normal hardship discharge. There has to be a notice of hearing, and the debtor must request that the judge grants this Section 1328(a) hardship discharge under Section 1328(i), which was temporarily added to the Code by the Consolidated Appropriations Act.
Even if the debtor hasn’t paid the prepetition arrearage through the plan, they can still get this hardship discharge under Section 1328(a) if they meet one of two conditions.
The first condition is that they have not defaulted on more than three monthly payments due on a residential mortgage after March 13, 2020, and the reason for missing these payments was directly or indirectly due to financial hardship that arose because of the COVID-19 pandemic. This is not a particularly big hurdle.
The second condition has two parts. The first provision is that the plan provides for the curing of a default on the mortgage. In other words, prior to filing the bankruptcy, the debtor had a mortgage arrearage and is using the Chapter 13 plan to cure that arrearage. The provision does not require the debtor to have completed this requirement. The second provision is that the debtor has entered into a forbearance agreement or a loan modification agreement with the particular holder or servicer associated with the arrearage. The debtor does not have to have entered into that forbearance agreement or loan modification agreement during the pendency of the Chapter 13 plan; the debtor might have entered one of these forbearance agreements or loan modification agreements prior to filing the bankruptcy.
This temporary hardship discharge is only going to be in effect until December 27, 2021, because this particular provision in the Consolidated Appropriations Act sunsets one year after the act went into effect. (Some of that act’s provisions have a two-year sunset window.)
For a debtor in a Chapter 13, this discharge could be a big deal. In fact, a debtor could still conceivably file a Chapter 13 right now, stay in the plan for a little bit, satisfy one of these two conditions, and use the temporary Section 1328(i) to get a hardship discharge under Section 1328(a) after a short time in the plan. After all, the appropriation doesn’t say that the debtor has to have already filed the Chapter 13 at the time that this act went into effect.
The one important caveat is that the hardship discharge is only granted after notice of hearing. This means that the judge has a certain amount of discretion to grant this type of discharge. Therefore, the debtor better have a sympathetic fact pattern to succeed.
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