Blogs

June 17, 2020
bloomberglaw.com

Retailers hit by the economic downturn are considering bankruptcy protections. Perkins Coie LLP attorneys say the CARES Act offers small businesses access to the streamlined Subchapter 5 process and recent rulings from bankruptcy courts provide cash flow relief for certain retailers operating under Chapter 11 through deferral of rent obligations, at least for now.

JCPenney’s bankruptcy filing on May 15 is one of the latest in a string of high-profile retailers, including Neiman Marcus, seeking bankruptcy protection in the wake of the Covid-19 public health emergency. Many other retailers may soon follow suit given the virus’ economic consequences and the industry issues many retailers have long faced.

Fashion, cosmetics, and personal care retailers may be particularly hard hit as they often rely on in-store experiences for sales. Experiences like spritzing fragrances, testing creams, running hands over fabrics are gone in the age of stay-at-home orders, a stagnating economy, record unemployment, and nearly nonexistent foot traffic

However, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and recent bankruptcy rulings may provide retailers, including small businesses, with much needed relief, albeit in certain temporary ways.

Filing for Bankruptcy as Sales FallNeiman Marcus and JCPenney may be the tip of the iceberg as many retailers face plummeting sales. According to the Commerce Department, April retail sales fell by 16.4% year-on-year, far worse than predicted. Clothing stores were particularly hard hit, with sales falling 89% from a year ago.

Bankruptcy can provide relief in challenging times for businesses facing new economic realities. Chapters 7 and 11 are the primary bankruptcy avenues for businesses. While Chapter 7 involves liquidation, businesses may reorganize or sell their assets as going concerns under Chapter 11.

Most often when a retailer commences a Chapter 7 case, it ceases sales and other operations. Often, liquidation results in the business’ termination. An appointed trustee takes control of remaining operations and all assets, which may include accounts receivable and litigation claims. All proceeds not distributed to secured creditors are used first to pay the costs of the bankruptcy process, then to pay other debts, and lastly sometimes to make distributions to equity holders.

Thinking they can keep their doors open, most household-name businesses and others commence Chapter 11, which can keep customers shopping while the business creates and implements a “plan” to pay off its debts and often restructure its operations.
Benefits of the CARES Act for Small BusinessesThe CARES Act has modified previously existing bankruptcy options to create further potential benefits for small businesses filing under Chapter 11.

Effective March 27, 2020, the CARES Act temporarily modified the Small Business Reorganization Act of 2019 (SBRA) to provide certain businesses a faster, less expensive, and more tailored approach to Chapter 11. Previously, the SBRA had crafted a streamlined Chapter 11 process referred to by its legislative location, “Subchapter 5.” However, the benefits of this process were limited to debtors with total secured and unsecured debt up to $2,725,625.

The CARES Act temporarily increased the debt limit for Subchapter 5 to $7.5 million. The result is that substantially more small businesses will qualify for reorganization under Subchapter 5’s new debt cap, allowing these businesses to seek to reorganize in the streamlined fashion that was once only available to companies under the pre-CARES Act cap.

Some benefits of reorganization under Subchapter 5 include:

• Streamlined reorganization plan submission and confirmation process when contrasted with other Chapter 11 cases.
• Exemption from quarterly trustee fees.
• Creditors’ committees are not appointed, and consequently there is less administrative cost.
• No absolute priority rule, and instead unsecured creditors receive a pro rata share of the business’s income over a three- to five-year period, benefitting existing equity holders.

These changes alone can measurably reduce the time, expense, and reputational impact of small company Chapter 11 reorganization efforts. But the CARES Act changes are expected to be available for a limited time. The temporary increase to Subchapter 5’s debt limit lasts only for one year from the enactment of the CARES Act, March 27, 2021. The debt limit will then return to $2,725,625, unless the nearly tripled debt limit is extended.
Recent Bankruptcy Rulings Support Struggling Businesses During Covid-19Once in Chapter 11 bankruptcy, even if not under the streamlined Subchapter 5 processes, several recent bankruptcy courts have assisted retailers facing severe cash flow pressure during the Covid-19 crisis.

Paying rent is one such pressure. Under the Bankruptcy Code, businesses are generally required to remain “current” on rent in their commercial leases from the date of the bankruptcy case going forward, subject to a possible grace period for the first 60 days of the case.

Yet the bankruptcy court in In Re Pier 1 Imports Inc., relieved the debtors of their obligation to pay rent on a current basis, extending the grace period beyond the 60 days.

The court reasoned that the pandemic made it impossible for the debtors to generate sufficient revenue to pay rent on a current basis, even after reducing costs. Landlords were entitled to accrue administrative expenses for unpaid rent, not to current payment of rent.

The court noted it has not yet decided “whether the government-mandated closures” might excuse performance “due to impossibility, impracticability, or frustration of purpose.” Not surprisingly, the landlords have appealed.

Elsewhere, at least two other bankruptcy courts have granted similar relief. In Re Modell’s Sporting Goods Inc., No. 20-14179 (VFP) (Bankr. D.N.J., March 27, 2020); In re CraftWorks Parent LLC, No. 20-10475 (BLS), Docket No. 217 (Bankr. D. Del. March 30, 2020).

Other retail debtors dependent on in-person customers have likewise asked for similar rent relief. It is expected that the trend of debtors requesting, and courts likely granting, such relief will continue.
 

A Moratorium on Evictions Ends, Leaving Thousands of Tenants Fearful
Eviction cases are expected to soar in New York City as housing courts reopen and landlords seek to recoup income lost during the pandemic.

A moratorium on evictions that New York State imposed during the coronavirus pandemic expired over the weekend, raising fears that tens of thousands of residents struggling in the worst economic collapse since the Great Depression will be called into housing courts, which reopened on Monday.

Housing rights groups estimate that in the coming days, 50,000 to 60,000 cases could be filed in New York City’s housing courts. In addition, thousands of cases that were already in progress but were paused in March can now resume.

The number of eviction cases expected to be filed reflects the typical caseload in a three-month period, which was the length of the moratorium. But it does not take into account the fallout from the more than one million city residents who have lost their jobs or were furloughed in recent months and whose federal stimulus payments of an extra $600 per week will soon run out, housing advocates say.

A second order issued by the state that shields tenants directly affected by the pandemic expires in late August and could produce an even bigger wave of eviction cases.

“All levels of government have to realize that they cannot let tens of thousands of people end up in homeless shelters,” said Edward Josephson, the director of litigation and housing at Legal Services NYC. “It’s the most dire thing that we have ever seen.”

But many landlords say they, too, are facing financial calamity, with the loss of rental income leaving them unable to pay their own bills, including mortgages, and invest in building upkeep.

“It is clear that the economic impacts of the Covid-19 pandemic are nowhere near an end,” said Jay Martin, the executive director of the Community Housing Improvement Program, or CHIP, which represents about 4,000 property owners. “There are thousands of tenants and building owners who need help now.”

As housing courts nationwide begin to reopen and federal stimulus checks are about to end, eviction cases are expected to soar. A recent report by Amherst, an analytics and data real estate firm, found that up to 28 million renters are at risk of eviction.

In the days leading up to the first moratorium deadline, dozens of members of the New York State Legislature, as well as many housing groups, urged Gov. Andrew M. Cuomo to extend universal protection to all tenants, even in cases not directly caused by the pandemic.

They also expressed concern that housing courts would reopen physically on Monday, placing tenants and others at risk of contracting and spreading the virus.

But the state’s chief administrative judge, Lawrence K. Marks, decided against that, citing public health concerns. But case filings can be sent online or through the mail, and hearings will be held virtually.

Susanna Blankley, the coalition coordinator for the Right to Counsel NYC Coalition, said it was “unconscionable” for housing courts to restart at all.

“In what world is it good to evict people in the middle of a pandemic?” Ms. Blankley said. “Who are you opening for? It has to be for the landlords.”

Even though the courthouses were closed on Monday, people protested the virtual reopening outside the Brooklyn location, holding signs that read, “EVICTION FREE NYC.”

The past three months have been extremely difficult not only for tenants, but also for smaller landlords.

About 25 percent of renters have not paid rent in May, April and June, according to a survey by CHIP. About 20 percent of the landlords represented by the group said they were concerned about losing their properties.

Lincoln Eccles, who owns a 14-unit apartment building in Crown Heights, Brooklyn, said the closing of housing courts in March delayed two cases he had against separate tenants who have not paid rent in years. Together, the tenants owe tens of thousands of dollars in rent, he said.

He said he collected full rent payments from only nine of his 14 units this month; some of the tenants have not paid because of the pandemic, he said.

“If it’s a choice between me being solvent or the tenant staying in place, I have no choice but being solvent,” said Mr. Eccles, who said he was operating in the red this year.

Bankruptcy is the legal process pertaining to people who cannot afford to pay their remaining debts in order to get a chance to a fresh start. The Bankruptcy laws offer unburdens overwhelmed debtors who are unable to pay their outstanding balances and, at the same time, help the creditors get paid from whatever kind of assets the debtor has no need for. Bankruptcies are often used as a last resort but it is not a sure way to solve all your financial problems. It will cover only certain debts that are eliminated when you file for bankruptcy.
What is a Discharge?
A discharge enables the debtor to be free of debt and prevents the creditors from taking collecting actions against the debtor. In simpler terms, the debts are wiped out and the debtor no longer needs to pay those that are discharged.
However, while most debts can be discharged, not all kinds of debts are removed when you declare bankruptcy. 
What are the Debts that can be Discharged?
 In a bankruptcy, “Common Categories of Dischargeable Debts,” states that the debt must meet the qualifications and timing requirements. It works by filing for bankruptcy in the bankruptcy court before and after the case described as follows:

• Pre-filing debt – is a pre-petition debt obligation that you have before you file for bankruptcy. When the case ends, the court will wipe out or discharge the debts included and qualified in the pre-petition debt such as credit card balances, medical debt, and personal loans.
• Post-filing debt – are the debts and bills you need to present to the court that you incurred after submitting the pre-petition debt. In all kinds of bankruptcy cases. You are still obligated to pay for the balances the you incur even if the case isn’t over.

Among all the debts obtained, only those debts that you have before filing bankruptcy will be discharged. As for the subsequent debts, you still need to repay those. Take note that if you either fail to follow the bankruptcy process or your debt doesn’t qualify for a discharge, then these can be barriers for you to have your debts wiped out.
Common Categories of Dischargeable Debt
Under the Bankruptcy Code, there are 19 categories of debt that are not capable of being discharged. Everything else not included can be wiped out. However, you need to be mindful that misconduct or fraud in connection to the debts are grounds to make them non-dischargeable:

• Charges of credit cards (including overdue and late fees)
• Collection agency accounts
• Medical bills
• Personal loans
• Utility bills
• Dishonored checks (except if fraudulent)
• Student loans (in cases where it is proven that you endured undue hardship)
• Repossession deficiency balances
• Auto accident claims (except DUI related cases)
• Business debts
• Rent debts (including past rents that are due)
• Civil court judgments
• Tax penalties and unpaid taxes 
• Attorney fees (except those pertaining to child support and alimony cases)
• Revolving charge accounts 
• Social security overpayments
• Veterans assistance loans and overpayments 

Non-Dischargeable Debts in Bankruptcy Chapter 7
There are different types of Bankruptcy, some debts are nondischargeable in Chapter 7 but can be wiped out in Chapter 13. These types of debts in Chapter 7 are automatically deemed as nondischargeable without needing a hearing in court: 

• Unscheduled debts (all kinds of debts that are not in the bankruptcy petition), with the exception that the creditor had actual knowledge or notice about such filing
• Certain taxes
• Spousal or child support debts or alimony
• Debts owed to former spouse or child if they arose out of a divorce or separation
• Fines, penalties and debts to government agencies
• Student loans (if not exempted)
• Personal injury debts caused by the debtor driving a motor vehicle while under the influence of alcohol
• Certain tax-advantaged retirement plans debts
• Certain condominium debts or cooperative housing fees (such as homeowners association fees)
• Attorney fees in child custody and support cases
• Court fines and penalties, including criminal restitution

Debts not Dischargeable if the Creditor Objects
Not all debts are automatically wiped out. The creditors must ask the bankruptcy court first to know whether or not such debts can be discharged. If the creditors do not raise any objection or issue or if they do but the court doesn’t allow it, these debts are discharged.

• Credit card purchases for luxury goods
• Cash advances
• Debts obtained by fraud or false pretenses
• Debts incurred due to willful and malicious injury

Planning to file for a Chapter 7 Bankruptcy?
While declaring bankruptcy and bankruptcy filing may be done by any person without a bankruptcy lawyer, you will be responsible for fully understanding everything related to the law. We at Allmand Law are experienced in the field of bankruptcy cases. If you want to know how to file for bankruptcy but you are not sure of what bankruptcy form to avail or maybe you’re worried about potential liabilities, our bankruptcy attorneys can help you. We may be able to answer such questions for you including bankruptcy exemptions, debt settlement, insolvencies, mortgage payments, debt management and many more. Call us now for free legal advice.
The post Understanding Dischargeable Debts in Chapter 7 Bankruptcy appeared first on Allmand Law Firm, PLLC.

Bankruptcy is the legal process pertaining to people who cannot afford to pay their remaining debts in order to get a chance to a fresh start. The Bankruptcy laws offer unburdens overwhelmed debtors who are unable to pay their outstanding balances and, at the same time, help the creditors get paid from whatever kind of assets the debtor has no need for. Bankruptcies are often used as a last resort but it is not a sure way to solve all your financial problems. It will cover only certain debts that are eliminated when you file for bankruptcy.
What is a Discharge?
A discharge enables the debtor to be free of debt and prevents the creditors from taking collecting actions against the debtor. In simpler terms, the debts are wiped out and the debtor no longer needs to pay those that are discharged.
However, while most debts can be discharged, not all kinds of debts are removed when you declare bankruptcy. 
What are the Debts that can be Discharged?
 In a bankruptcy, “Common Categories of Dischargeable Debts,” states that the debt must meet the qualifications and timing requirements. It works by filing for bankruptcy in the bankruptcy court before and after the case described as follows:

• Pre-filing debt – is a pre-petition debt obligation that you have before you file for bankruptcy. When the case ends, the court will wipe out or discharge the debts included and qualified in the pre-petition debt such as credit card balances, medical debt, and personal loans.
• Post-filing debt – are the debts and bills you need to present to the court that you incurred after submitting the pre-petition debt. In all kinds of bankruptcy cases. You are still obligated to pay for the balances the you incur even if the case isn’t over.

Among all the debts obtained, only those debts that you have before filing bankruptcy will be discharged. As for the subsequent debts, you still need to repay those. Take note that if you either fail to follow the bankruptcy process or your debt doesn’t qualify for a discharge, then these can be barriers for you to have your debts wiped out.
Common Categories of Dischargeable Debt
Under the Bankruptcy Code, there are 19 categories of debt that are not capable of being discharged. Everything else not included can be wiped out. However, you need to be mindful that misconduct or fraud in connection to the debts are grounds to make them non-dischargeable:

• Charges of credit cards (including overdue and late fees)
• Collection agency accounts
• Medical bills
• Personal loans
• Utility bills
• Dishonored checks (except if fraudulent)
• Student loans (in cases where it is proven that you endured undue hardship)
• Repossession deficiency balances
• Auto accident claims (except DUI related cases)
• Business debts
• Rent debts (including past rents that are due)
• Civil court judgments
• Tax penalties and unpaid taxes 
• Attorney fees (except those pertaining to child support and alimony cases)
• Revolving charge accounts 
• Social security overpayments
• Veterans assistance loans and overpayments 

Non-Dischargeable Debts in Bankruptcy Chapter 7
There are different types of Bankruptcy, some debts are nondischargeable in Chapter 7 but can be wiped out in Chapter 13. These types of debts in Chapter 7 are automatically deemed as nondischargeable without needing a hearing in court: 

• Unscheduled debts (all kinds of debts that are not in the bankruptcy petition), with the exception that the creditor had actual knowledge or notice about such filing
• Certain taxes
• Spousal or child support debts or alimony
• Debts owed to former spouse or child if they arose out of a divorce or separation
• Fines, penalties and debts to government agencies
• Student loans (if not exempted)
• Personal injury debts caused by the debtor driving a motor vehicle while under the influence of alcohol
• Certain tax-advantaged retirement plans debts
• Certain condominium debts or cooperative housing fees (such as homeowners association fees)
• Attorney fees in child custody and support cases
• Court fines and penalties, including criminal restitution

Debts not Dischargeable if the Creditor Objects
Not all debts are automatically wiped out. The creditors must ask the bankruptcy court first to know whether or not such debts can be discharged. If the creditors do not raise any objection or issue or if they do but the court doesn’t allow it, these debts are discharged.

• Credit card purchases for luxury goods
• Cash advances
• Debts obtained by fraud or false pretenses
• Debts incurred due to willful and malicious injury

Planning to file for a Chapter 7 Bankruptcy?
While declaring bankruptcy and bankruptcy filing may be done by any person without a bankruptcy lawyer, you will be responsible for fully understanding everything related to the law. We at Allmand Law are experienced in the field of bankruptcy cases. If you want to know how to file for bankruptcy but you are not sure of what bankruptcy form to avail or maybe you’re worried about potential liabilities, our bankruptcy attorneys can help you. We may be able to answer such questions for you including bankruptcy exemptions, debt settlement, insolvencies, mortgage payments, debt management and many more. Call us now for free legal advice.
The post Understanding Dischargeable Debts in Chapter 7 Bankruptcy appeared first on Allmand Law Firm, PLLC.