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For debtors with high amounts of unpaid loans, paying off creditors using their savings is not the only option. In fact, borrowers who own valuable and nonexempt property may choose to file for a Chapter 7 bankruptcy. However, choosing this type of bankruptcy involves weighing both the financial and indirect costs on the part of the borrower.
The Indirect Cost of Filing for Bankruptcy
Also known as “liquidation bankruptcy”, Chapter 7 filers give the court full jurisdiction over all their properties–except for those that qualify for exemptions under bankruptcy laws. These properties will be handed over to a “trustee” appointed by the bankruptcy court, who will then sell the assets and use the proceeds to pay your creditor what you owed. When all assets are liquidated, a portion of the funds goes to the trustee’s commission. If you decide to file for bankruptcy, you need to accept that the bankruptcy will hurt your credit score in the next 10 years.
Debtors who are not willing to lose their properties or those that are judgment-proof (meaning they do not have enough property to pay back creditors), may consider filing for Chapter 13 bankruptcy instead. This will give them the opportunity to have their debts discharged or to modify the terms in their contracts or leases and have a court-approved alternative repayment plan for loans.
Declaring bankruptcy comes with a price, but it also offers the borrower numerous advantages. First, it eliminates dischargeable debts and gives debtors a fresh start. Moreover, the filer would not have to worry about making a plan to repay his debts. Another advantage is that the bankruptcy process is usually completed within three months, providing fast debt relief. Lastly, although some properties will be lost, you may still keep exempt assets such as family heirlooms, insurance, and divorce settlement proceeds.
The Financial Costs of Chapter 7 Bankruptcy
In bankruptcy cases, the debtor will also have to prepare for legal, court, and counseling fees on top of accepting the loss of personal possessions.
- Fees paid to the Court
When you file for this bankruptcy chapter in the United States, you have to pay court filing fees of around $300. This covers the payment for trustees who oversee and liquidate your seized properties. In some instances, an installment plan is allowed, or a fee waiver is given to a debtor who cannot afford this fee. This usually applies to a borrower whose income is below the state poverty threshold.
- Counseling Fees
Under U.S. Bankruptcy laws, a debtor is required to attend a credit counseling session within 180 days before he files for bankruptcy, and attend another one on debtor education before his debts are wiped. He must enroll in a class offered by an agency approved by the U.S. Trustee Program and personally pay for up to $50 in fees per session. Free or discounted classes may be offered if the borrower is financially incapable of paying on his own.
- The Cost of Getting Legal Advice
There is no fixed amount for bankruptcy lawyer fees, although this would usually range from $1,000 to $2,000. Out of all the fees involved when considering bankruptcy, this is usually the most expensive as your legal representative shall be with you from the time you are choosing between the types of bankruptcy to file for, until after your case was filed.
The good news is that not all bankruptcy lawyers require filers to pay their full fees upfront. For instance, the Northwest Debt Relief Law Firm, which provides legal services to the states of Oregon and Washington, offers an easy payment plan. The law office only collects pre-file bankruptcy attorneys’ fees prior to filing and will divide the remaining amount into monthly payments. Most law firms would also offer a free initial consultation, allowing debtors to compare prices.
If you believe that bankruptcy filing is your best option for a restart, you must be ready to face its costs when you file for a Chapter 7 bankruptcy. You must also understand that before getting a bankruptcy discharge notice, there are procedures you need to follow such as passing the means test (your average monthly income must be not greater than the median income in your state), meeting with a credit counselor, gathering important documents, and attending a meeting with your creditors.
Since filing bankruptcy involves different phases, it would be best to have an attorney to guide you through the process and help you protect your properties. If you are in need of bankruptcy attorney services, you may contact the Northwest Debt Relief Law Firm here to schedule a case evaluation and get you started with debt relief.
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From: Kiplinger
By: Diane Davis, Contributing Writer
May 15, 2020
From: Time By: Melissa ChanMay 15, 2020
Every cent matters to Kim Jaemin, a cab driver in virus-ravaged New York City, whose diet has been reduced to instant noodles despite working 14-hour shifts, seven days a week.
Since the coronavirus pandemic emptied the streets of passengers, the 58-year-old from South Korea has been living on about $65 a day. He buys near-expired, discounted food that he rations to last the week. Two meals of the day consist of the cheapest brand of ramen noodles he can find. “Forget about nutrition,” he says.
On May 2, of the seven total passengers he picked up, five did not tip. The other two tipped him less than $3 each. While most of his fellow cab drivers have quit—either because they fear getting sick with COVID-19, which has killed dozens of their colleagues, or because they feel it’s useless to scour a deserted city for riders—Kim says he has no choice but to work more. “I have to make every possible penny, nickel and dime,” says Kim, who lives alone in Queens and scribbles every fare and tip he gets into a notepad.
“The only way I could survive,” he adds, “I have to work every day.”
That’s the reality for hundreds of New York City’s taxicab drivers who remain on the road, searching for scarce fares as ridership hits record lows. The number of cab rides in the city fell from about 506,000 during the first week of March to roughly 28,500 during the week of May 4, according to the Metropolitan Taxicab Board of Trade (MTBOT), the city’s largest taxi group, which represents more than 5,500 yellow cab owners. The city’s Taxi & Limousine Commission (TLC) did not disclose its data, but the MTBOT, which represents about half of the entire taxi industry, says fares across its fleets have dropped about 94%.
“It’s a staggering number that we’ve never experienced before,” MTBOT spokesman Michael Woloz says. “Theaters are dark. Restaurants are closed. All of the traditional fares have disappeared.”
Outside of Grand Central Terminal at 9 a.m. on a recent Monday, cabs are lined up, but most are waiting in vain. The world-famous transportation hub is near-vacant, and silence has replaced the usual clamor of rush-hour traffic. “It’s like a movie right now,” Mohamed Eleissawy, a 63-year-old taxi driver, says of the abandoned metropolis.
Amid a drop in fares, thousands of drivers have stopped working. In the first week of March, about 3,660 taxi drivers were still on the road, according to the MTBOT’s tally. Now, the group has counted fewer than 600. Thousands have signed up to deliver meals to sick or elderly residents for $53 per route as part of a new citywide program meant to help vulnerable populations and earn drivers more cash. By repurposing their jobs, the TLC said these drivers are “helping us to ensure that no one goes hungry.” But like Jaemin, many of the city’s cab drivers are inching closer to severe hunger themselves.
A new survey by the New York Taxi Workers Alliance (NYTWA), which represents about 23,000 taxi and rideshare-app drivers, found more than 82% of drivers have run out of money to buy food or say they will soon reach that point. Out of 919 drivers surveyed, more than 700 said they were unable to pay their rent or mortgage in March and April. The Independent Drivers Guild, which represents more than 80,000 for-hire drivers in the city, said 45% of its members in late April had asked for help securing food. Nearly 70% of the guild’s drivers said they were unable to make rent or mortgage in April, with more saying they won’t be able to pay in May.
The TLC said it’s still tracking fatality figures, but Bhairavi Desai, NYTWA’s executive director, says at least 50 drivers have died from COVID-19 so far. “It’s heartbreaking,” Desai says.
Desai fears the pandemic will be a “breaking point” for many drivers already suffering financial hardships due to competition with ride-sharing apps and crushing loans they took out to buy medallions, which are permits the city requires to own a yellow cab. In 2018, at least eight professional drivers in the city died by suicide, which advocates blamed on crippling debt. The industry had been showing signs of improvement, especially after the spate of suicides grabbed the attention of local lawmakers, according to Desai and Woloz. Then the pandemic hit.
“The yellow cab is the quintessential symbol of New York City,” Desai says. “But these are men and women, who for every time we think the bottom has finally settled in, it falls out all over again.”
Now, the futures of cab drivers are more uncertain than ever. As new COVID-19 cases slowly drop in New York City, advocates are hopeful the century-old taxi industry will rebound as it did after the Sept. 11 terrorist attacks and after Superstorm Sandy in 2015. “New York City is the biggest and best,” TLC spokesman Allan Fromberg says, “and we expect the future to be bright again in time.”
Desai and Woloz say yellow cabs could even become a vital part of the city’s recovery, transporting both people and goods as some commuters avoid crowded subways. “They know how to navigate through a crisis,” Desai says. “Through every city disaster, drivers have kept working.”
But predictions among some in the workforce are grim. “The coronavirus is the last nail in the yellow cab coffin,” says 36-year-old driver Khurshid Ahmed, who owes $370,000 on his medallion loan. “I am tied to this job until my last breath,” he adds. “I am not seeing any future.”
Jacob Smith, 49, from Ghana, agrees. Standing on 5th Ave., which was devoid of pedestrians at what used to be rush hour, the yellow cab driver and father of two has little hope. “When the doors open, I’m not sure people will come back,” he says. Smith is set on changing careers as soon as someone, anywhere, will hire him. “New York is famous for the cab,” he says, “but corona will be the end.”
Almontasir Ahmed Mohamed, 33, is also weighing a career switch after driving a green cab for six years. He’s studying engineering science at a Kingsborough community college part-time and wonders when he will see his family again in his home country of Sudan. “I stopped thinking about my future,” he says. “The virus has made me confused about my plans.”
For Kim, though, the U.S. has been his home for almost 40 years, so going back to South Korea is not an option. Neither is giving up his cab, because driving is all he has known. “This is my job until I die,” he says. “There is no other job I could do.”
But as he jeopardizes his own health by getting behind the wheel, Kim says at least one passenger a day will make a racist remark, telling him to go back to his country or speak better English. “I don’t think the city respects us like doctors and nurses, the police, the subway workers,” he says. “We are essential workers, too.”
“Without the yellow cabs,” he adds, “the city cannot move.”
One of the objectives of the Bankruptcy Code is to ensure that each class of creditors is treated equally. And one of the ways that is accomplished is to allow the debtor’s estate to claw back certain pre-petition payments made to creditors. Accordingly, creditors of a debtor who files for bankruptcy are often unpleasantly surprised to learn that they may be forced to relinquish “preferential” payments they received before the bankruptcy filing. Read More ›
Tags: Chapter 7, Eastern District of Michigan
One of the objectives of the Bankruptcy Code is to ensure that each class of creditors is treated equally. And one of the ways that is accomplished is to allow the debtor’s estate to claw back certain pre-petition payments made to creditors. Accordingly, creditors of a debtor who files for bankruptcy are often unpleasantly surprised to learn that they may be forced to relinquish “preferential” payments they received before the bankruptcy filing. Read More ›
Tags: Chapter 7, Eastern District of Michigan
From: Asian JournalMay 13, 2020By: Atty. Raymond Bulaon A LOT of people who are burdened with credit card debt often don’t know where to turn for help. They see all the ads on TV, internet, etc. by so-called “debt consolidation” or “debt settlement” companies hoping that this will get them out of debt without filing for bankruptcy. More often than not, however, they end up either getting scammed or disappointed when those companies cannot deliver the big promises made. Buyer beware: Hiring a debt settlement company can actually make your debt problems worse and keep you in debt forever. I am sure this is not what you want, is it?
What a lot of people don’t realize is that when they hire a debt settlement company, it doesn’t mean that they are now legally protected from their creditors as long as they are making their monthly payments to the debt settlement company. The debt settlement company, after deducting their fees, simply saves the money in a trust account and will only be able to settle with creditors one by one as money accumulates. So, if they put you on a 3-5 year plan, that means there will be a very long wait for creditors to get their money if they even do.
Most of your creditors will not wait that long to get paid. So, what happens? They will sue you! And if they do, the debt settlement company is not going to be able to represent you because they are not lawyers. In the meantime, your debts are still growing because of the added interest, penalties and other collection costs. This is NOT the best way to consolidate your bills. While you are on their program, the creditors will also continue to report damaging information on your credit report until the debt is paid. This is not what you want, is it? Of course, the debt settlement companies will not tell you that.
In my opinion, if you wish to consolidate your bills, there is nothing better than doing it through a Chapter 13 bankruptcy. Here are the advantages: (1) You pay 0% interest on credit cards and other unsecured debts. This means all your payments go towards principal. (2) You can be totally debt-free in 3-5 years, (3) In most cases, you only pay based on what you can afford, not based on how much you owe, (4) Your monthly debt payments can be slashed by at least half in most cases, allowing you to have extra money for other expenses, and (5) All kinds of debts can be included in Chapter 13, not just credit cards. So if you have unpaid taxes, medical bills, payday loans, personal loans, student loans, late mortgage payments, etc., all of these can be included in one affordable monthly payment.
So if you are struggling every single month even just making minimum payments, you’re probably feeling frustrated because you realize that there is just no way that you can pay all your debts anytime soon. Some people get stressed out once they realized that they owe so much that it is simply not possible to ever become debt-free with the amount of debt they have accumulated given their monthly income.
Well, Chapter 13 can be a game changer for you. If you have not explored this legal option, perhaps you should.
Finally, the greatest advantage of filing Chapter 13 vs. hiring a debt settlement company is that in Chapter 13, you are 100% protected from all creditor lawsuits, judgments, liens, garnishments, etc. Once your creditors are notified of the filing, they also cannot report you as being late to the credit bureaus anymore. Your credit report will show that your debts are being paid through Chapter 13. Seven years after filing a 13, the bankruptcy will be deleted from your credit report. If you need to purchase a home or a car while in Chapter 13, this is also possible provided that you obtain court approval for the purchase. This is quite common.
From: NY PostBy: Thornton McEnery May 11, 2020
https://nypost.com/2020/05/11/nyc-taxi-rescue-plan-calls-for-medallions-to-be-250000/
From: Kinston.com
By: Bob Montgomery
Posted: May 11, 2020
Small Business Reorganizations under New Subchapter V of Chapter 11 of the Bankruptcy Code The purpose of this class will be to discuss the changes to the new Subchapter V of the bankruptcy code and its impact on small business reorganizations.On August 23, 2019, President Trump signed into law the Small Business Reorganization Act of 2019 (“SBRA”), Pub. L. No. 116-54 (2019). Congress increased the cap to $7,500,000 for the next year as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act from $2,725,625.00.SBRA became effective on February 19, 2020These provisions are not a new chapter of the bankruptcy code, but a subchapter of chapter 11 of the bankruptcy code and the existing chapter 11 sections will apply unless otherwise modified by Subchapter V. There are 3 chapters of the bankruptcy code that are used in this district and they are chapter 7, chapter 13 and chapter 11. Subchapter V is a subchapter of chapter 11 and not a new chapter of the Bankruptcy Code In the way of background, chapter 7 cases are liquidations for individuals or businesses, chapter 13 are organizations for individuals (not businesses) where the individual uses 3 to 5 years of future earnings (disposable income) to pay creditors and chapter 11 are reorganizations or liquidations for individuals or businesses.As will be discussed below Subchapter V is a blend of chapter 11 and chapter 13 and the goal of the law is to make it easier and cheaper for small businesses to reorganize!In this district, 90% of chapter 11 filings are unable to reorganize and those cases are converted to chapter 7 (closed by the Bankruptcy Trustee) or dismissed as “no asset” cases. This change in the law is an attempt by Congress to simplify the reorganization process and reduce the cost of small business chapter 11 filings. Subchapter V can be found at 11 U.S. Code sections 1182 through 1195.
- Debtor. Section 1182(1) defines a Debtor (individual or business) as a person engaged in commercial or business activities that has aggregate noncontingent liquidated secured and unsecured debts as of the date of the filing of the bankruptcy petition of not more than $7,500,000 not less than 50 percent of which arose from the commercial or business activities of the Debtor.
- Noncontingent liquidated debt, both secured and unsecured debt must not exceed $7,500,000.
- 50% or more of the debt must have arisen from commercial or business activities of the Debtor. 1182(1)(A)
- Non-contingent debt refers to a debt that is owed at present without any acts needing to occur first.
- Contingent debt is one in which there is a 'triggering event' or some condition precedent for the debt to exist.
- Subchapter V does not apply to publicly traded companies 1182(B)(ii)
II. Trustee. The United States Trustee (a government agency which is a component of the Department of Justice) shall appoint a standing trustee as a Trustee in a case filed under this chapter 1183(a)
- What are the roles of a Trustee in Subchapter V?
1. Appear and be heard at the status conference before the Bankruptcy Judge assigned to the case2. Attend plan confirmation hearing; 3. Ensure that the Debtor commences making timely payments required by a plan confirmed under this subchapter; 4. If the Debtor ceases to be a Debtor in possession, perform the duties specified in section 704(a)(8) and paragraphs (1), (2), and (6) of section 1106(a) of this title, including operating the business of the Debtor and
- Facilitate the development of a consensual plan of reorganization-this is a new role for a Trustee. Developing a consensual plan is primarily the role of Debtor’s counsel.
- If the plan is confirmed under the service of the trustee in the case shall terminate when the plan has been substantially consummated ⸹1183(c)(1)
III. Operation of the Business. The Debtor shall have the right to run its business ⸹1184.IV. Removal of the Debtor ⸹1185. On request of a party in interest, and after notice and a hearing, the court shall order that the Debtor not be a Debtor in possession for cause, including fraud, dishonesty, incompetence, or gross mismanagement of the affairs of the Debtor.V. Property of the Estate. If a plan is confirmed, property of the estate includes, includes property pursuant to section 541 of the Bankruptcy Code and (1) property that the Debtor acquires after the commencement of the case, (2) earnings from services performed by the Debtor after the date of commencement of the case but before the case is closed, dismissed, or converted to a case under chapter 7, 12, or 13 ⸹1186.
- The Debtor shall remain in possession of all property of the estate ⸹1186(b).
VI. Status Conference ⸹1188
- Not later than 60 days after the entry of the order for relief under this chapter, the court shall hold a status conference to further the expeditious and economical resolution of a case under this subchapter ⸹1188(a).
- Not later than 14 days before the date of the status conference under subsection (a), the Debtor shall file with the court and serve on the trustee and all parties in interest a report that details the efforts the Debtor has undertaken and will undertake to attain a consensual plan of reorganization. ⸹1188(c)
VII. Filing of the Plan § 1189
- Only the Debtor may file a plan under this subchapter. 1189(a)
- The Debtor shall file a plan not later than 90 days after the order for relief under this chapter, except that the court may extend the period if the need for the extension is attributable to circumstances for which the Debtor should not justly be held accountable 1189(b).
VIII. Contents of Plan § 1190(1) A plan filed under this subchapter shall include— (A) a brief history of the business operations of the Debtor; (B) a liquidation analysis; and (C) projections with respect to the ability of the Debtor to make payments under the proposed plan of reorganization; (2) Shall provide for the submission of all or such portion of the future earnings or other future income of the Debtor to the supervision and control of the Trustee as is necessary for the execution of the plan; and (3) Notwithstanding section 1123(b)(5) of this title, may modify the rights of the holder of a claim secured only by a security interest in real property that is the principal residence of the Debtor if the new value received in connection with the granting of the security interest was— (A) not used primarily to acquire the real property; and (B) used primarily in connection with the small business of the Debtor ⸹1190(3) allows a Debtor, pursuant to a confirmed chapter 11 plan, to modify a mortgage on the Debtor’s principal residence if the debt was not used to acquire the residence and used primarily with the operation of the Debtors small business-this is a major change in bankruptcy law since first mortgages on a Debtor’s principal residence cannot be modified.IX. Confirmation of Plan § 1191
- The Court on request of a Debtor shall confirm the plan if the plan does not discriminate unfairly, and is fair and equitable, with respect to each class of claims or interests that is impaired under, and has not accepted, the plan. 1191(b)
- With respect to a class of secured claims (A) the plan provides that all of the projected disposable income of the Debtor to be received in the 3-year period, or such longer period not to exceed 5 years as the court may fix, beginning on the date that the first payment is due under the plan will be applied to make payments under the plan; or (B) the value of the property to be distributed under the plan in the 3-year period, or such longer period not to exceed 5 years as the court may fix, beginning on the date on which the first distribution is due under the plan, is not less than the projected disposable income of the Debtor. 1191(c)(2)
- The Debtor will be able to make all payments under the plan 1191(3)(A)(i)
- The term “disposable income” means the income that is received by the Debtor and that is not reasonably necessary to be expended— (1) for— (A) the maintenance or support of the Debtor or a dependent of the Debtor; or (B) a domestic support obligation that first becomes payable after the date of the filing of the petition; or (2) for the payment of expenditures necessary for the continuation, preservation, or operation of the business of the Debtor. 1191(d)(1) & (2)
X. Discharge. If the plan of the Debtor is confirmed, as soon as practicable after completion by the Debtor of all payments due within the first 3 years of the plan, or such longer period not to exceed 5 years as the court may fix, the court shall grant the Debtor a discharge of all debts §1192XI. Modification of Plan § 1193 A. The Debtor may modify a plan at any time before confirmation ⸹1193(a)B. If a Plan has been confirmed under ⸹1191(a), the Debtor may modify the plan at any time after confirmation of the Plan and before substantial consummation of the Plan ⸹1193(b)XII. Payments § 1194 A. Payments and funds received by the trustee shall be retained by the Trustee until confirmation or denial of confirmation of a plan. If a plan is confirmed, the trustee shall distribute any such payment in accordance with the plan. If a plan is not confirmed, the trustee shall return any such payments to the Debtor 1194(a). B. The above payment mechanism is similar to chapter 13, where the Debtor makes monthly payments to the Trustee who in turn pays creditors. C. Prior to confirmation of a plan, the court, after notice and a hearing, may authorize the trustee to make payments to the holder of a secured claim for the purpose of providing adequate protection of an interest in property. 1194(c) D. ⸹1194(c) allows a secured creditor to make a motion before the Court for adequate protection payments if the Debtor is not making payments to the secured creditor, or the secured creditor does not have an “equity cushion”. XIII. Transactions with professionals. A person is not disqualified from employment by the Debtor solely because that person holds a claim of less than $10,000 that arose prior to commencement of the case. § 1195 A. The above provision is helpful to professional(s) who are owed money by the Debtor (less than $10,000) who do not want to waive that claim (meaning they want to be paid by the Debtor) and they want to represent the Debtor in the Subchapter V proceeding.XIV. Impaired Creditors. Subchapter V allows a Debtor to confirm a Plan without the need for obtaining the consent of a class of “impaired” creditors as is required under Chapter 11.
- An impaired creditor is a creditor who is paid or accepts less than what they are currently owed.
XV. United States Trustee Quarterly Fees have been eliminated. Other than the initial filing fee, fees are essentially eliminated, making the process much less expensive to the petitioner.XVI. Creditor committee requirement has been eliminated (only formed for cause in Subchapter V cases)XVII. Cram Down has been simplified. In Subchapter 5, if the creditors can’t agree on the petitioner’s proposed plan, an application can be made to the Bankruptcy Court Judge to order the plan approved. A. Cram Down standard-The success of the proposed plan need only be more attractive to the unsecured creditors than would a conversion to a Chapter 7 liquidation plan (creditors get $1 more under Subchapter V)XVIII. Documents needed to file under Subchapter V-the entity will require the business’ most recent balance sheet, statement of operations, cash flow statement, a federal income tax return (or a sworn statement that such a document does not exist). XIX. Plan must be submitted for approval within 90 days. However, the Bankruptcy Court may extend this deadline “if the need for the extension is attributable to circumstances for which the Debtor should not justly be held accountable.” (in the COVID-19 environment, courts are likely to grant extensions liberally)XX. Disclosure Statement not required. The Act eliminates the requirement that a disclosure statement is filed, thereby reducing costs to the Debtor and streamlining the plan confirmation process. However, the Debtor must include in the plan certain information customarily included in a disclosure statement, such as a short history of the Debtor, a liquidation analysis, and financial projections reflecting the ability of the Debtor to make the payments required by the planXXI. Trustee-under Subchapter V, a trustee is automatically appointed, but the Debtor retains control of its assets and operations. trustees have the authority to investigate the Debtor’s financial affairs. The trustee’s primary function is to facilitate a consensual plan among the Debtor and its creditors, almost like a mediator would facilitate a settlement in litigation. The trustee’s duties will include facilitating the development of a consensual reorganization plan, appearing at major hearings in the case, and ensuring that a Debtor commences making timely payments under a plan. A.Under the supervision of the Department of Justice, approximately 250 Subchapter V trustees – mostly attorneys and accountants – were selected out of over 3,000 applicants. Most Subchapter V trustees had recently received their first case assignments when the COVID-19 pandemic hit.XXII. Timing of Subchapter V Filing. Small businesses should carefully consider the timing of a Subchapter V filing: the Borrower Application Form promulgated by the U.S. Small Business Administration indicates that applicants presently subject to a bankruptcy proceeding are ineligible for the Paycheck Protection Program (PPP). XXIII. Plan Term -Consistent with current practice in Chapter 13 cases, a reorganization plan will customarily be three years in length but may be as long as five.XXIV. Impaired Class. Under Subchapter V, a plan can be confirmed without the vote of an impaired accepting class, providing that the plan does not discriminate unfairly and is deemed “fair and equitable” as to each class of claims. To meet the “fair and equitable” requirement under the Bankruptcy Code, Subchapter V requires that all of the Debtor’s projected disposable income during the length of the plan be applied to plan payments.XXV. Elimination of the Absolute Priority Rule. Subchapter V eliminates the Absolute Priority Rule, under which a Debtor cannot retain an ownership interest in its assets unless all creditor claims are paid in full or the Debtor contributes new value to fund the Plan. Under Subchapter V no “new value” contributions are required as a condition of the Debtor’s asset retention. XXVI. Single Asset Real Estate Cases (“SARE”)-if a Debtor elects to file a bankruptcy case as a SARE, then they cannot also elect Subchapter V treatment. Single asset real estate is defined by the Bankruptcy Code as a single property or project that generates substantially all of the Debtor's gross income (§ 101(51B), Bankruptcy Code). If the Debtor's only business is operating the property and the property generates substantially all of the Debtor's income, a SARE typically includes the following types of properties: Shopping centers, Office buildings, Industrial and warehouse buildings and Apartment complexes.
Subchapter V Bankruptcy Provisions can be found at:11 U.S. Code SUBCHAPTER V—SMALL BUSINESS Debtor REORGANIZATION BANKRUPTCY CODE CITES
1. § 1181. Inapplicability of other sections2. § 1182. Definitions3. § 1183. Trustee4. § 1184. Rights and powers of a Debtor in possession5. § 1185. Removal of Debtor in possession6. § 1186. Property of the estate7. § 1187. Duties and reporting requirements of Debtors8. § 1188. Status conference9. § 1189. Filing of the plan10. § 1190. Contents of plan11. § 1191. Confirmation of plan12. § 1192. Discharge13. § 1193. Modification of plan14. § 1194. Payments15. § 1195. Transactions with professionals
JHS
As the coronavirus shutdowns continue to strain companies across the U.S., many small businesses are now facing a tough decision: whether or not to file for bankruptcy.
While programs like the Paycheck Protection Program and Economic Disaster Injury Loans (via the Small Business Administration) have attempted to save employees and keep businesses alive, new data suggests that over 40% of the 30 million small businesses in the U.S. could shutter permanently in the next six months, according to a poll by the U.S. Chamber of Commerce. It's what Amanda Ballantyne, executive director of Main Street Alliance, an advocacy group for small business, said was "a crisis that will impact our economy for generations. We’re going to lose so much of the small-business sector."
Yet bankruptcy could help many of these companies survive the pandemic—especially as a new law makes it easier for small businesses to access it. In previous years, reorganizing via bankruptcy was less tenable for small businesses. Chapter 11, which is basically a reorganization of the business, has long been what attorneys like Lance Martin, a bankruptcy lawyer at Ward and Smith, classify as an "onerous and expensive and lengthy process." The original Chapter 11 is more "intended for railroads and big business and airlines and Sears," says Andrew Houston, a partner focused on bankruptcy at Moon Wright & Houston, based in North Carolina.
But in February, a new subchapter was serendipitously added to Chapter 11, under the Small Business Reorganization Act (SBRA), called Subchapter 5—which caters to small businesses whose time and resources are more limited. The new code significantly cuts down on the time and money typical bankruptcy cases take. Under the code, companies with under $2.7 million in debt can be eligible—And now, as part of the $2.2 trillion CARES Act, that threshold is raised to $7.5 million for one year to cover more businesses.
For many of those small businesses right now, bankruptcy might be a beneficial option. "It’s kind of like making a calculated retreat. You’re retrenching, you're going to figure out what’s the core of your business that was profitable," says Amy Vulpio, a bankruptcy attorney at law firm White and Williams, based in Pennsylvania.
For small businesses who may need to consider this option in the near future, Fortune asked three attorneys what you should consider.
Is bankruptcy going to help me save my business?
Lawyers say a key thing to consider when thinking about bankruptcy is which tools it can offer your business, and which it can't.
Chapter 11 bankruptcy is designed to help you restructure your business, which can help in reducing (or eliminating) debt, focusing on profitable parts of the business, selling off parts, and buying time to reconfigure operations. It won't, however, attract customers or help you generate revenue.
"It’s not going to fix problems like if they didn’t have any customers before the bankruptcy or before [COVID-19]," says Vulpio.
Part of filing for bankruptcy is creating a business plan outlining your projected income and how you'll pay your creditors back. Bankruptcy is intended to help companies that will be able to stay cash flow positive once their debts are reduced or eliminated, so that is key to consider beforehand. "You really need to do some pre-bankruptcy planning to think about, how can you generate revenue on a going-forward basis to support a plan that’s going to be feasible?" notes Martin. Especially coming out of coronavirus shutdowns, businesses need to have a clear picture of how they can snapback their business and generate enough revenue, and how reorganizing via bankruptcy could help them reach those goals.
What are the benefits of bankruptcy?
The primary benefit of bankruptcy is straightforward: through something called the ‘automatic stay,’ filing for bankruptcy stops all your creditors from coming after you.
"If you’re being foreclosed on or your landlord is trying to evict you or you’re being sued, all of that has to stop and all of the creditors have to come in and deal with you in the bankruptcy court," Martin tells Fortune. "It eliminates death by a thousand cuts if you're fighting a battle on several different fronts."
For many small businesses unable or struggling to stay open right now, like retailers, bars, and restaurants, bankruptcy might be a good way to get through some uncertainty by pausing or getting rid of some of their obligations—especially leases, Vulpio points out.
Will I have to pay back all my debts?
But, of course, you will have to present a plan on how you'll repay your creditors. A major provision in Subchapter 5 is that debtors can restructure (or eliminate) debt by using their projected disposable income (net operating income) to pay creditors back over three to five years.
"Just think about it like a payment plan with your creditors," notes Houston.
As part of a bankruptcy plan, businesses will have to propose what they project they'll have as disposable income over the next three years, and how it will be doled out to different creditors. "If you comply with a plan like that, then you can essentially eliminate your debts after a three to five year period," Martin says.
Will I still own my business after bankruptcy?
In a regular Chapter 11 reorganization, business owners would typically need to get new funding to confirm their bankruptcy plan, and they usually don't get to keep a stake in the reorganized business unless debts are repaid in full.
One notable change in Subchapter 5: small business owners can keep their equity, meaning they're still able to hold on to their business, as long as they distribute their disposable income to creditors over the next three to five years.
That's a huge plus for small business owners (who often own more of their business than a large company with many shareholders) and gives business owners a much better shot at keeping their equity interest. "That’s the whole point here, to rehabilitate," Vulpio notes.
Do my creditors have to approve my plan?
Unlike regular Chapter 11, under Subchapter 5 you don't need creditors to vote to approve your reorganization plan: "You just have to meet certain thresholds that exist regarding how you treat secured and unsecured creditors," Houston points out, and get the court to approve your plan based on that criteria. That makes the process a lot more debtor-friendly, attorneys say.
Plus, one benefit of Subchapter 5 is that businesses are provided a special Subchapter 5 trustee, which basically acts as a mediator between the debtor and creditors. "If you’re a mom-and-pop, the Subchapter 5 trustee is going to be there to hold your hand and your attorney’s hand through the process," says Martin.
How will bankruptcy affect PPP loans?
There's no promise of future loan or stimulus programs like the Paycheck Protection Program, but it is important to note that businesses that have filed for bankruptcy aren't eligible for the PPP loan under current (and changing) SBA guidelines.
If future rounds of stimulus (in whatever forms they take) do become available, bankruptcy might make it harder to access those, Vulpio suggests. Yet, she maintains: “Businesses have to make the best decision with the information they have now and try not to get hung up on what could hypothetically happen."
Meanwhile, Houston believes business owners need to think about their immediate needs: "If you’re three months behind on your rent, or you owe money to trade creditors, et cetera, the PPP proceeds aren’t going to help you very much."
For those businesses who already have a PPP loan and are considering filing for bankruptcy, things get pretty fuzzy. According to Vulpio, "Once you’ve had the funds, it appears you can then file, but all these rules are constantly changing." Current SBA guidelines indicate that if an applicant is a debtor in a bankruptcy case at the time they apply for the PPP loan or before funds are distributed, they need to notify their lender and cancel their application, but there hasn't been clear guidance about what happens after you receive funds.
What if I just want to walk away from my business?
In that case, you're looking at a Chapter 7 bankruptcy, where "you're essentially walking away from your business," says Vulpio. Individuals and businesses can use Chapter 7 to wipe out debt, but they're also liquidating the business.
Most businesses likely don't want to have to shutter when put in a difficult situation like the coronavirus crisis. But there will be businesses whose best option is to walk away—and that's where Chapter 7 comes in.
Another path is that a business can decide to turn a Chapter 11 into a Chapter 7 if they decide midway the business isn't viable to keep running. Adds Martin: "Any business owner needs to think long and hard about the viability of their business on the going-forward basis. If they're determined that, 'we were limping along before the virus or we were ready to retire' or whatever it is, and they don’t think that the business can survive or they can sell the business in this market, then Chapter 7 may be an option."
Will I need to file for personal bankruptcy too?
Plenty of small businesses use personal guarantees or collateral to back up loans. But filing for Chapter 11 for your business won't necessarily stop your creditors from coming after you.
When weighing the option of filing for bankruptcy, small business owners should consider "where their personal liability is vis a vis the business," and what kind of personal guarantees or collateral they have in loans, notes Martin. Some business owners may need to file personal bankruptcy too, in order to help restructure their own debt. In fact, Subchapter 5 and Chapter 11 are also available to individuals whose debts are mainly tied to commercial or business activities.
However, there is an opportunity under Subchapter 5 to modify certain residential mortgages for small business owners if used as collateral for business loans. But if you're filing for Chapter 7, you might have less luck.
Keep in mind...
All the experts Fortune spoke to stressed that bankruptcy should always be a last resort. Martin highly recommends working with your creditors to try to come to some agreement, deferment, or payment plan outside bankruptcy court: "That will save you time and money," he says. Plus, creditors would "much rather just get paid, and if they have to modify their loans or defer for a time, I find they’re inclined to do that."
If you're thinking about future growth, you'll need to work it into your plan—"One of the questions I hear debtors have is, 'well how do we then build something in for future growth? We want to be able to grow the business, does this tie up all the money we could possibly use for that?'" Vulpio says. She suggests having that be part of the thought process for your plan in bankruptcy proceedings.
One plus for Subchapter 5 is the process will likely be faster, but that also might put some small businesses in a time crunch to get the right documents in order. Debtors now have to file a Chapter 11 (Subchapter 5) plan within 90 days of filing for bankruptcy (it used to be 120 days). If you do need to file, it's going to go quick—so Martin suggests doing some pre-planning with your CPA beforehand.
And while the word "bankruptcy" does carry a lot of negative connotations, some attorneys note that the stigma likely won't be quite the same during coronavirus. Unlike the slew of bankruptcies that followed the 2008 financial crisis, Martin says "This situation feels different. It feels like businesses have been caught in a buzzsaw" amid government-enforced shutdowns. He adds: "I’d like to think that the capital markets and banks and investors and other businesses are going to frankly be pretty understanding that some businesses may have had no choice."