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Business owners who took out loans under the Paycheck Protection Program thought converting them to grants would be easy. It’s not.
Treasury Secretary Steven Mnuchin has repeatedly tightened the terms of the lending program to dissuade large companies from taking money.
Treasury Secretary Steven Mnuchin has repeatedly tightened the terms of the lending program to dissuade large companies from taking money.Credit...Alex Brandon/Associated Press
Alan RappeportEmily Flitter
By Alan Rappeport and Emily Flitter
May 6, 2020
WASHINGTON — The embattled small business lending program at the center of the Trump administration’s economic rescue is running into a new set of challenges, one that threatens to saddle borrowers with huge debt loads, as banks begin the tricky task of proving the loans they extended actually met the government’s strict and shifting terms.
With thousands of businesses preparing to ask for their eight-week loans to be forgiven, banks and borrowers are just now beginning to realize how complicated the program may turn out to be. Along with lawmakers, they are pushing the Treasury Department, which is overseeing the loan fund, to make forgiveness requirements easier to meet.
It is the latest complication for a program that has come under fire for allowing big companies to borrow funds from a finite pool of money aimed at keeping small businesses afloat. More than $500 billion in loans have been approved since the beginning of April, and Treasury Secretary Steven Mnuchin has repeatedly tightened the terms of the Paycheck Protection Program to try and dissuade large companies from taking money. Mr. Mnuchin has said Treasury would review any company that took more than $2 million in loans and would hold firms “criminally liable” if they did not meet the program’s terms.
The Consumer Bankers Association warned on Wednesday that loan forgiveness is the “next shoe to drop” for the program, and the Independent Community Bankers of America raised alarm that struggling borrowers have been misled.
“Virtually every small business borrower believes that this will be forgiven,” said Paul Merski, a lobbyist for the Independent Community Bankers of America. “They took it out assuming that it would be a grant but it’s not — you have to abide by very complex rules and regulations on how this is spent.”
One of the biggest stumbling blocks is a requirement that businesses allocate 75 percent of the loan money to cover payroll costs, with only 25 percent allowed for rent, utilities and other overhead. That has become more difficult as the economic crisis from the virus drags on and as some businesses face a prolonged period of depressed sales, even once they reopen.
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Some businesses are facing smaller payroll expenses because workers have opted to accept more generous unemployment insurance benefits, while only a handful of states have so far allowed businesses to reopen.
The I.C.B.A., which represents smaller banks, asked the Treasury and the Small Business Administration on Wednesday to require only half of the loans made through the aid program to be spent on payrolls and allow the loans to be split evenly between paying workers and covering rent, which remains a substantial expense for many businesses.
“Now that over $500 billion of these loans have been approved, we’re really focused on the forgiveness phase, and the forgiveness phase could be 10 times more complex than the initial program,” Mr. Merski said.
Mr. Mnuchin indicated last week that while he believed he had the authority to change the payroll requirement rules he was not inclined to do so given that the intent of the program was to maintain ties between businesses and workers while much of the economy was shut down.
“The objective here is to put people back to work,” Mr. Mnuchin said, adding that he did not want to encourage businesses to choose overhead costs over workers.
But that is not how things have unfolded for small businesses. Many laid off their workers to wait out the economic shutdown, intending to rehire as many as possible after it ended.
Douglas Geller, the co-founder of Wittmore, a clothing boutique for men with three locations in Los Angeles, laid off his six employees after closing on March 17. California is allowing some retailers to open on Friday for curbside pickup only, so Mr. Geller may hire one or two of them back, but only if Wittmore’s business seems viable under the state’s new restrictions.
Mr. Geller managed to get a small business loan just a week ago, but he now thinks the money arrived too early, since the rules of the program are forcing him to spend it in the next eight weeks, even though he cannot fully reopen his stores yet. He is counting on the Treasury Department to make changes to the forgiveness terms.
“We’re not alone,” he said. “I’m friends with other retailers, from the department store level down to mom-and-pop small businesses, everyone has these similar concerns: Forgiveness and the pace of reopening.”
Trade groups have been warning Treasury officials for weeks about the coming conflict over forgiveness.
“Since the program first launched, A.B.A. has been urging the S.B.A. and Treasury to provide clear forgiveness guidance as soon as possible,” said James Ballentine, a lobbyist for the American Bankers Association.
The S.B.A. said on Tuesday that 5,411 lenders had approved $181 billion in loans since the second round of the program was initiated last week. The program, which began on April 3, has experienced high demand but has suffered from technical glitches that stalled loan processing and poor optics as big, publicly traded companies reported receiving millions of dollars while smaller businesses have been shut out. Backlash over those disclosures prompted Treasury to rewrite rules on the fly.
The Treasury Department issued new guidance on April 23 urging big companies with the ability to access other financing to rethink whether they really needed the money. Mr. Mnuchin has given those borrowers until May 14 to return the funds, no questions asked.
“Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business,” Treasury said.
Some borrowers believe that in changing the rules after the fact, Treasury has gone against the letter of the law, which waived requirements for businesses to seek funds elsewhere before applying for loans through S.B.A.
This week, Zumasys, a small technology company in California, and two of its subsidiaries, filed a lawsuit against the Treasury Department, Mr. Mnuchin, the S.B.A. and Jovita Carranza, the S.B.A. administrator, claiming that the latest guidance was unlawful. The company, which has fewer than 50 employees, received a $521,500 loan that it used for payroll costs and now it fears that it might have to repay that money. According to the complaint, Zumasys had access to other credit sources but the small business loan was the only option available that would have provided funds that did not need to be repaid.
“This guidance, which essentially imposes new requirements upon PPP borrowers, is not in accordance with the law and damages companies to the extent it jeopardizes their eligibility for PPP loans and calls into question the good faith behind their certifications,” said Mona Hanna, a lawyer at Michelman & Robinson, LLP, who is representing Zumasys and its subsidiaries.
The uncertainty is emerging as lawmakers and the Trump administration begin debating another economic relief bill. While the initial rounds of funding anticipated businesses needing just short-term bridge loans, the economic devastation from the virus shows no signs of abating, suggesting more help is likely needed.
“I think it was the intent to have a short-term boost to small businesses to get them through a short-term problem,” said Ann Marie Mehlum, a former associate administrator of the Small Business Administration’s Office of Capital Access. “I think the problem isn’t as short term as what everyone expected two months ago.”
The next legislation, which will take shape later this month, could include another round of funding for the small business loans but would likely come with changes to the program to reflect the more protracted collapse in business activity.
ImageSenator Marco Rubio of Florida. He said the paycheck program's biggest problem was too little funding.
Senator Marco Rubio of Florida. He said the paycheck program's biggest problem was too little funding. Credit...Gabriella Demczuk for The New York Times
Speaking on the Senate floor this week, Republican Senator Marco Rubio of Florida said that the biggest problem with the Paycheck Protection Program has been that it was underfunded.
“The demand is greater than the supply,” said Mr. Rubio, who last week suggested that Treasury could use its regulatory authority to give borrowers more flexibility in how they use their loans.
Mr. Mnuchin and Ms. Carranza held a briefing on Wednesday with members of the Senate Small Business Committee, whose top lawmakers helped create the new small business program.
“We recognize that when we crafted the program, eight weeks, we thought, would be enough — we now know that our economy is not going to be up and running within that eight-week period in most of the country,” said Senator Ben Cardin, a Maryland Democrat and one of the lead negotiators behind the program’s formation.
On Tuesday, more than 20 bipartisan senators urged Mr. Mnuchin and Ms. Carranza to change the loan forgiveness criteria to allow small businesses, and particularly restaurants, to use the program, saying just 50 percent of the loan should be devoted to payroll, with the rest paying for other overhead.
“If they are unable to cover these expenses, they will have to decide between keeping their doors open, at personal financial risk, or closing shop and laying off employees,” the senators wrote.
Emily Cochrane contributed reporting.
By: Howard Schneider | Reuters May 5, 2020
From: stltoday.com
WASHINGTON — Overall U.S. bankruptcy filings fell in April compared to the year before, a possible sign the massive Federal Reserve and government response to the coronavirus pandemic may have helped stave off economic damage, or at least provided enough hope to families and firms to try to wait it out.
In a potential warning sign, however, filings of the Chapter 11 bankruptcies used by companies to restructure their debts jumped 26% to 560 last month, from 444 in April, 2019, according to data compiled by Epiq Systems and provided by the American Bankruptcy Institute.
The 2,270 Chapter 11 filings through April is the largest four-month total since 2013.
Overall, bankruptcy filings by households and companies fell sharply to 38,428 from 71,303 a year ago, a decline of 46%.
ABI's executive director, Amy Quackenboss, said in a statement that the steps taken by the federal government beginning in March "have likely staved off bankruptcy filings to date."
Those measures included loans to help small businesses stay afloat, one-off emergency payments to families, and unemployment benefits expanded to be both more generous and available for the first time to groups of people like self-employed entrepreneurs and contractors.
Banks have been encouraged by the Fed to give strapped customers leeway with loan payments, landlords urged to do the same by local governments, and many utility firms have suspended disconnections for overdue bills during the crisis — all steps that may help keep family and business finances intact for now.
Like recent economic data, however, the true picture may only emerge over time, as social distancing rules are eased, firms see whether customers return, and laid-off workers have a more accurate sense of whether they will be asked back to their old jobs.
The small business loans, for example, are designed to cover about two months of payroll, though it remains uncertain whether business will be back to normal by then for thousands of restaurants, hotels and others in the hardest-hit sectors.
From: The Philadelphia Tribune By: Amy HaimerlMay 4, 2020https://www.phillytrib.com/news/health/coronavirus/when-does-a-small-business-file-for-bankruptcy-and-more-questions/article_4513950c-b99f-5677-a5a8-6b57526f0b17.html
If you’re facing serious financial problems, you may be considering filing for bankruptcy. In many cases, bankruptcies were an apt solution for people who have been struggling financially. While filing bankruptcy is often the last resort for debtors, it’s also possible that they may not realize what alternatives there are. Indeed, there are less drastic courses for bankrupt debtors to get rid of their debts than to file for bankruptcy.
Stop Harassment
It really depends on what your main motivation is for filing a bankruptcy petition. If you’re just after bankruptcy protection in the automatic stay to stop debt collection harassment, you can get some relief from over-zealous creditors or collection agencies by exploring the provisions of the Fair Debt Collection Practices Act.
Reorganization outside Bankruptcy Court
If you feel that, as a debtor, you have enough income and property you can liquidate to use for debt payments, you can then arrange a repayment plan with your creditors that will allow you to pay off debts in installments and perhaps even negotiate to pare down your debt amount to something more manageable. This alternative might actually be more appealing to a creditor who will likely not be able to collect if you file bankruptcy under Chapter 7 (liquidation), which will likely render all or most of your assets exempt. If you can convince your creditors that you do have the means to pay over a certain period of time or a reasonably smaller amount, this is an easier course than going through the bankruptcy process.
Help from a Credit Counselor
If you wish not to face your creditors or debt collectors by yourself, you can approach a credit or debt counseling agency. Credit counselors can help debtors fix their finances without engaging in bankruptcy proceedings. In any case, if you do end up deciding to declare bankruptcy, you would still need their services since you’d be required to finish a credit counseling course before filing. You can check out Oregon’s list of agencies that have been approved by the US Trustee. Not all agencies that advertise credit or debt counseling services are legitimate. Make sure you do your due diligence.
How can a credit or debt counseling agency help you? It can develop a debt management plan similar to the repayment plan you would have to create in a Chapter 13 bankruptcy case. The main advantage of taking this course is that you get to avoid having a personal bankruptcy in your credit report, which means that your credit score won’t take the hit it would if you filed for bankruptcy. Going this route, of course, means that you won’t enjoy the protection that a bankruptcy filing provides. This means that you’ll likely have to fully pay back the amount of money you owe, and you won’t be accorded the same flexibility that Chapter 13 filers get when they miss a payment.
Judgment Proof
If you’re at a point in life where you have no means at all to pay your debts, your creditors cannot collect even if they get a judgment against you. The law ensures that you are allowed to meet the basic necessities of life so your creditors can’t take away what little you have to live on. You probably won’t be jailed for an unpaid debt, unless it involves taxes or child support. As soon as you do get enough income or assets from which your creditors can collect, any judgment against you will be enforced and you have to start paying.
Looking for Debt Solutions? Consult an Oregon Bankruptcy Attorney Today!
If your owed debts have become overwhelming to the point that you’re considering bankruptcy, the best step to take is to talk to a bankruptcy lawyer. People who want to get out of debt can have their cases reviewed by bankruptcy lawyers so they can be advised on the most fitting debt settlement solution. Bankruptcy filings entail time, effort, and money. While the bankruptcy discharge and protection are distinct benefits, they also come with stigma and a mark on your credit record.
Find out whether declaring bankruptcy or an alternative solution is the right move for you. Call us at Northwest Debt Relief Law Firm to speak with one of our experienced Oregon bankruptcy attorneys.
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The post Bankruptcy Alternative appeared first on Vancouver Bankruptcy Attorney | Northwest Debt Relief Law Firm.
Every part of the country has been affected by the coronavirus. Like restaurants, arenas and other locations where people assemble for business or pleasure, most courts have been closed. If you are in the midst of a bankruptcy proceeding, your case might be delayed, handled telephonically or be otherwise disrupted due to the pandemic. Furthermore, Read More
Subchapter V, which is not a new chapter of the Bankruptcy Code, but a subchapter within Chapter 11 of the Bankruptcy Code, holds the possibility of improving the likelihood of reorganization for a viable small business debtor by reducing the time, the expense and eliminating certain legal impediments to confirmation of a Chapter 11 plan reorganizing a debtor. 1. The purpose of this new section of the Bankruptcy Code is to allow business debtors and certain individuals engaged in business with debts below $ 7,500,000 to reorganize their obligations under Chapter 11 without the need for obtaining the consent of a class of “impaired” creditors as required under basic 2. Subchapter V is for the small business debtor who must be an entity engaged in commercial or business activity with aggregate non-contingent liquidated secured and unsecured debts of $7,500,000 or less, excluding debt owed to affiliates or insiders. 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 $2,725,625.00.3. Non-contingent debt refers to a debt that is owed at present without any contingent acts needing to occur first.4. Contingent debt is one in which there is a 'triggering event' or some condition precedent for the debt to exist.5. 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.6. Creditor committee requirement has been eliminated (only formed for cause in Subchapter V cases)7. 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. -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)8. 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). 9. 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)10. 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 plan11. 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]-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.12. 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). 13. Requirements to file Subchapter V. To be eligible for relief under Subchapter V, a debtor (whether an entity or an individual) must be engaged in business and one-half or more of the debt must have arisen from business, as opposed to personal, activities. Finally, single asset real estate debtors are ineligible for relief under Subchapter VPlan 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.14. 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.15. Disposable Income. Subchapter V defines “disposable income” as income received by a debtor and that is not reasonably necessary to: (1) maintain and support the debtor or a dependent; (2) satisfy domestic support obligations that first become payable after the bankruptcy case is filed; or (3) continue, preserve, or operate the business.16. 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. 17. Modification of Loans Secured by the Principal Residence Under existing law, loans secured by a debtor’s principal residence may not be modified under a bankruptcy plan. Under Subchapter V if the proceeds of a business loan were used to finance a debtor’s business, the loan may be modified. However, the claim of a secured creditor who loaned money to a debtor to acquire the debtor’s residence, may not be modified18. Discharge. If the Bankruptcy Court confirms a consensual plan, a debtor is entitled to a discharge upon confirmation. If the Bankruptcy Court confirms a nonconsensual plan, a debtor receives a discharge after completing all payments due within the first three years of the plan, unless otherwise ordered. If all such payments are made, the debtor would be relieved of liability except for future payments due under the plan.
JHS
COVID-19 – HELP FOR HOMEOWNERS AND RENTERS
CORONAVIRUS ASSISTANCE INFORMATION
July 11, 2019 – the following is information from the Federal Housing Finance Agency. FHFA is closely monitoring the coronavirus national emergency’s effect on the housing finance market and continues to update policies and guidance to ensure its regulated entities – Fannie Mae, Freddie Mac (the Enterprises), and the Federal Home Loan Banks (FHLBanks) – are fulfilling their mission of providing market liquidity during this difficult time.
I will post new information as I find more resources to assist homeowners and renters adversely impacted by COVID-19.
Help for Homeowners:
If your ability to pay your mortgage is impacted, and your loan is owned by Fannie Mae or Freddie Mac (use the “loan lookup” tools: https://www.knowyouroptions.com/loanlookup for Fannie Mae or https://ww3.freddiemac.com/loanlookup/ for Freddie Mac to find out), you may be eligible to delay making your monthly mortgage payments for a temporary period, during which:
- You won’t incur late fees.
- Foreclosure and other legal proceedings will be suspended.
Help For Renters
If you are a renter and live in a rental unit financed by Fannie Mae or Freddie Mac, you have access to their respective Disaster Response Networks. These networks offer support from HUD-approved housing counselors, such as a personalized recovery assessment and action plan, financial coaching and budgeting, and ongoing check-ins. Contact your property manager to see if you are eligible. Fannie Mae’s renter hotline number is 1-877-542-9723 and Freddie Mac’s renter hotline number is 1-800-404-3097.
Additional resources: Consumers can also visit consumerfinance.gov/coronavirus for up-to-date information and resources to protect and manage their finances.
Beware of Scams
During times of crisis, there is an increased risk of scams and fraud. Protect yourself by asking questions, reading the materials provided to you, and avoiding any solicitations requiring up-front cash payments. If you think you may have been a victim of a scam and your concerns with Fannie Mae, Freddie Mac, or a Federal Home Loan Bank involve fraud, please contact the FHFA Office of Inspector General (FHFA OIG) at 800-793-7724 or visit the FHFA OIG’s website
MUSINGS FROM DIANE:
This is a very scary time for everyone, especially those who live paycheck to paycheck. One hiccup and they are behind on their rent or mortgage and facing eviction. Throw in COVID-19 and the nightmare begins. Afraid to go to work (assuming you can)? You are not alone. The government is trying to find ways to help everyone who needs it, but they are not equipped to deal with the millions who need assistance. Existing programs are overwhelmed and at the point of breaking. New programs are in the works, but it will take months (or years) before they are ready to offer the assistance that is really needed now (remember the mortgage workout programs that were developed years after the mortgage crisis). There is no easy answer to this nightmare. Everyone has to do their best and use their common sense. Don’t fall for scams (there are and will be thousands. of not hundreds of thousands). Don’t be afraid to ask for help. Don’t take advice from those who have a reason to lie to you (like a politician who offers medical advice – he only wants to be reelected). Be smart.
The post COVID-19 – Help for Homeowners and Renters appeared first on Diane L. Drain - Phoenix Arizona Bankruptcy & Foreclosure Attorney.
April 29, 2020
From: JD Supra
By: Kathleen Muthig; Haynsworth Sinkler Boyd, P.A.
As the COVID-19 pandemic marches on, more homeowners than ever are seeking assistance from their lenders.
The American Bankruptcy Institute reported on April 24, 2020 that over 3.4 million homeowners have entered into COVID-19 related mortgage forbearance plans. This is a significant increase since April 3, 2020, when just over one million homeowners were utilizing COVID-19 related mortgage forbearance plans. Undoubtedly, COVID-19 and the resulting Coronavirus Aid, Relief and Economic Security (CARES) Act have changed the landscape of consumer bankruptcy cases, especially with regard to the treatment of mortgage debt. Below are 10 changes that Creditors should be aware of in Chapter 13 and Chapter 7 cases.
1. COVID-19 relief payments are excluded from definition of “income.”
Payments made under federal law related to COVID-19 are excluded from the disposable income requirement of confirmation in the Bankruptcy Code and the income calculation for eligibility under Chapter 7.
2. Chapter 13 plans may exceed five years.
If the Debtor is experiencing hardship due to COVID-19, then a Chapter 13 Plan confirmed before March 27, 2020, may be modified to extend the repayment period up to seven years after the first payment was due under the Chapter 13 Plan after confirmation. Under the Bankruptcy Code, Chapter 13 Plans are limited to a length of five years. If a plan is modified from five years to seven years, and a Creditor’s arrearage is paid over those seven years, the Creditor will receive less monthly arrearage payments in the modified plan than under the original confirmed plan.
3. Second Moratoriums.
Some Chapter 13 Trustees have agreed to consent to second moratoriums and longer time periods in order to bring cases current, even without the existence of a qualifying hardship under the CARES Act provisions.
4. Practical changes to Bankruptcy Court procedures.
U.S. Bankruptcy Court for the District of South Carolina Judges Duncan and Waites entered an Operating Order 20-08 setting forth procedures in light of COVID-19. The Order includes a requirement for Debtors to make all mortgage payments to the Trustee on claims secured by a first priority security interest in the Debtor’s principal residence. Chapter 13 Plans in which mortgage payments are paid to the Trustee, instead of directly to the Debtor, are called “Conduit Plans.”
5. Payment deferments due to COVID-19 in conduit plans.
Chapter 13 Creditors will need to work with the Chapter 13 Trustees and the Debtors to agree upon and seek Court approval for modifications to the Plan due to COVID-19. Creditors should be mindful to file a timely Notice of Payment Change if the loan payments due are modified under Bankruptcy Rule 3002.1.
6. Payment deferments due to COVID-19 in plans where Debtor is paying mortgage payments directly to the Creditor.
Chapter 13 Creditors will need to work directly with Debtors to agree upon a loan modification, forbearance, or deferment. Again, Creditors must file a timely Notice of Payment Change pursuant to Rule 3002.1.
7. CARES Act foreclosure relief for federally-backed loans.
A servicer of a federally-backed loan may not initiate any foreclosure process, move for a foreclosure judgment, order a sale, or execute a foreclosure-related eviction or foreclosure sale for sixty days from March 18, 2020. Note that this stay is separate from any state-mandated stay of foreclosures, like the one currently in place that prohibits foreclosures until May 1, 2020, in South Carolina.
8. CARES Act forbearances.
Borrowers with federally-backed mortgage loans can request a forbearance from mortgage payments for up to 180 days if they have been affected by COVID-19. The Act also provides for separate forbearance rights for owners of multi-family property (five or more units) and provides protection for tenants from eviction if the owner applies for a forbearance.
9. CARES Act eviction relief.
A Landlord of a “covered dwelling” may not file an action for eviction or charge additional fees for nonpayment of rent during a 120-day period beginning on March 27, 2020. A covered dwelling is one where the building is secured by a federally-backed mortgage loan or one that participates in certain federal housing programs. Note that this stay is separate from any state-mandated stay of evictions, like the one currently in place that prohibits evictions until May 1, 2020, in South Carolina.
10. CARES Act student loan relief.
For covered student loans, the CARES Act suspends payments and waives interest from March 13, 2020, through September 30, 2020. Many Chapter 13 Plans provide for the Debtor making student loan payments outside the Plan, so the CARES Act relief is vital to Chapter 13 Debtors, because a moratorium or deferment in the Plan would not affect those payments owed outside of the Plan.
When Does a Small Business File for Bankruptcy? And 8 More Questions
The coronavirus is expected to permanently shut millions of small businesses in the next several months. Here are issues for owners to consider.
Jerry Stetina, chief operating officer of A to Z Total Heating and Cooling outside Detroit. The firm filed for bankruptcy protection under a new law for small businesses.
Jerry Stetina, chief operating officer of A to Z Total Heating and Cooling outside Detroit. The firm filed for bankruptcy protection under a new law for small businesses.Credit...Sylvia Jarrus for
The New York Times
By Amy Haimerl
May 1, 2020, 5:00 a.m. ET
All the forecasts point in the same direction: A wave of small-business bankruptcies is coming.
More than 40 percent of the nation’s 30 million small businesses could close permanently in the next six months because of the coronavirus pandemic, according to a poll by the U.S. Chamber of Commerce.
“It’s a crisis that will impact our economy for generations,” said Amanda Ballantyne, executive director of Main Street Alliance, an advocacy group for small business. “We’re going to lose so much of the small-business sector.”
Commercial bankruptcies in the first quarter of 2020 ticked up 4 percent from a year earlier, according to data from the American Bankruptcy Institute. But many of those filings were made before the pandemic, when the economy was healthy. Right now, some owners are waiting to find out if they will receive federal stimulus aid before deciding whether to file for bankruptcy protection.
Many of them may just disappear. But for others, a bankruptcy law that took effect in February, the Small Business Restructuring Act, could help them survive the pandemic.
Before that law, if a struggling small business wanted to restructure its debt, its only option was Chapter 11, which is the commercial bankruptcy code. It allows a company to negotiate with creditors for better terms — a process known as debt restructuring — and in some cases dismiss debt. The goal is for the company to get a fresh start.
But the Chapter 11 process is long and expensive, and a recent report by the Brookings Institution found that it is better suited to large firms. The new rules, known as Subchapter 5 because they are part of Chapter 11, give firms with less than $2.73 million in debt the power of reorganization with a few key simplifications. Two main changes: A judge can enforce a restructuring plan even if creditors don’t like it, and the owner can continue running the business.
Congress recognized that this tool could be a lifeline to small businesses trying to get through an economic shutdown. So as part of the federal stimulus program, it expanded eligibility to firms with up to $7.5 million in debt. That change means Subchapter 5 could help up to 70 percent of all businesses that might file for bankruptcy, Brookings estimated.
“A number of small businesses who are prone to just giving up could be saved,” said Bob Keach, who leads the bankruptcy practice at Bernstein, Shur, Sawyer & Nelson, a law firm in Maine.
A to Z Total Heating and Cooling in suburban Detroit was one of the first companies in the country to file for bankruptcy protection under the new rules. The family-owned firm has been operating for nearly four decades, but business really took off in the past few years. The company struggled to manage the growth.
Its primary problem? Labor. The company’s two dozen employees weren’t enough to keep up with demand, and Jerry Stetina, A to Z’s chief operating officer, said it couldn’t find additional workers. That meant the firm got bogged down paying overtime on top of the typical $35 hourly wage — and tapped out cash reserves.
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“I know it sounds really crazy, but the process of growing put us in the situation we’re in,” he said.
Then a mild winter hit Michigan this year, and fewer customers called for new furnaces or repairs. What little work the employees did have was shut down by the coronavirus. But they didn’t want to give up: Mr. Stetina could see a strong summer season; A to Z just needed a bridge to get there.
“People will live without heat, but they won’t live without air-conditioning,” he said. “Our phones are ringing now with questions about A.C. start-ups to get ready for summer.” When A to Z exits bankruptcy, the company plans to hire a controller to better handle its finances.
ImageA to Z said it had needed a bridge to get to what it expected to be a busy summer season.
A to Z said it had needed a bridge to get to what it expected to be a busy summer season.Credit...Sylvia Jarrus for The New York Times
Here are some of the main questions to consider if you are thinking about a bankruptcy filing for your small business.
How do I know when to call it quits?
Business owners must search their hearts and assess their balance sheets.
“The first question to ask is: ‘Do the owners want to keep this going?’” said Kimberly Ross Clayson, whose firm, Clayson, Schneider & Miller in Detroit, advises small-business clients.
If your heart isn’t in it, call a lawyer to help you wind down operations. But if you still think your business can become viable, a Chapter 11 bankruptcy might be the right call.
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Initially, Mr. Stetina of A to Z was scared to call a lawyer. He knew the stigma around bankruptcy and was worried what clients might think even though A to Z planned to restructure, not discharge, debt. Once he did call, he said, he wished he had done it earlier.
“A lot of big businesses have been doing it for years, and it’s some of the reason that they are in business still,” Mr. Stetina said.
How do I know if restructuring would help?
Write a business plan for a post-pandemic business world. How will your business operate? Where will revenue come from? What new expenses — for marketing, infrastructure and more — will you incur to help your business pivot? If you can write a business plan that shows a positive balance sheet after bankruptcy, restructuring might work.
“Chapter 11 bankruptcy is designed to fix people’s balance sheets,” Mr. Keach, the Maine lawyer, said. “It allows you to restructure some debt, eliminate other debt. It doesn’t generate revenue for you.”
Should I take out a loan or file for bankruptcy?
Every business owner’s situation is different. But a general rule is: If you can’t identify enough future revenue to pay off the debt, borrowing may make matters worse. Some business owners no longer have any personal resources to draw on and may not receive federal stimulus funding.
“Don’t borrow blindly and say, ‘It will all work out,’” said Ms. Clayson, who is a federal trustee for Subchapter 5 claims. “If you are thinking a credit card is how you will open your doors and bridge yourself to the next stage, then you really need to be thinking about how viable your business is.”
If you find yourself considering nonbank lenders with high interest rates, it’s time to call a lawyer, she said.
Do I have to file for bankruptcy to close my business?
No. If you can pay off your creditors or negotiate a deal with them, you don’t need to file for bankruptcy protection. But you will want a lawyer to draft agreements.
Also: Don’t forget about withholding taxes. When times are tight, many small-business owners who manage their own payroll dip into that pot of money they set aside at each pay period and use it for other expenses.
“If you have unpaid withholding taxes, the business owner becomes personally liable,” Ms. Clayson said.
Should I file for Chapter 7 or Chapter 11?
Think of Chapter 7 as a funeral and Chapter 11 as a do-over.
Chapter 7 is used for both individual and business bankruptcies when the goal is to wipe out debt. The debt can go away, but you may also lose your assets.
If you wanted to restructure your business debt, you would consider a Chapter 11 bankruptcy and, more specifically, Subchapter 5 for small businesses. But you can always try to negotiate with creditors outside of a formal bankruptcy.
“The only reason you need to use Chapter 11 at all is to deal with recalcitrant creditors,” Mr. Keach said. “If creditors won’t negotiate with you, bankruptcy allows you to cram down a plan of restructuring.”
There are other forms of bankruptcy filing: One, Chapter 13, is used for personal reorganizations, when you want to try to keep your assets and renegotiate the terms of your debt. Another, Chapter 12, oversees businesses in farming and fishing.
Will I lose everything in bankruptcy?
It depends on what personal guarantees you made. Most small-business owners put up their home or some other asset as collateral for start-up loans. In fact, the Small Business Administration requires that as part of its non-Covid-related lending.
If you used your house as collateral, it’s possible you would be forced to sell it as part of a Chapter 7 settlement. Under Chapter 11, you may have more luck.
Must I file both personal bankruptcy and business bankruptcy?
Possibly, but not necessarily. It depends on whether you are closing the business or trying to restructure, and what liabilities you have.
If you are trying to restructure, the goal is for your lawyer to negotiate with your creditors and create a plan that lets you avoid a personal bankruptcy. But if the creditors don’t like the deal, they could come after you for any debts you personally guaranteed. In that case, you might be forced to file for personal bankruptcy.
How does the new Subchapter 5 work?
Here is the main thing to know: Like all bankruptcies, it has a magic power called the “automatic stay.” Filing for bankruptcy stops creditors from collecting from you.
“It buys you time,” Mr. Keach said.
And time is everything. For example, take a restaurant that was having its best year before the pandemic, but then its revenue disappeared. A Subchapter 5 bankruptcy could help the company by halting creditor collections and allowing owners to renegotiate terms.
“What it might allow is, with a couple of exceptions, a built-in moratorium on rent,” Mr. Keach said. “You could propose a plan where you could literally not pay anything toward old debt for four to six months as long as your projections show that you have positive projected income after that.”
In exchange, business owners will need to use their net operating income — what’s left after the usual expenses like rent, payroll, cost of goods — to pay creditors for the next three to five years.
Can I ever open another business?
Yes. Securing funding may be more challenging, but it’s not impossible.
“My favorite clients have always been those who are already on to their next idea,” Ms. Clayson said. “This is the American way. You can start over. This isn’t a black mark.”
Published: April 28, 2020
From: Overton County News
The Trump Administration has put a timely halt on the ability of the government to garnish Social Security benefits to pay for defaulted student loans for an indefinite period during the COVID crisis, reports Association of Mature American Citizens [AMAC].
Seniors are the fastest growing segment of the population with outstanding student loan debt. Research conducted by Consumer Financial Protection Bureau [CFPB] shows that, “In 2018, Americans over the age of 50 owed more than $260 billion in student debt, up from $36 billion in 2004, according to the Federal Reserve. Nearly 40% of borrowers aged 65 and older are in default.”
Bob Carlstrom, president of AMAC Action initiative, said, “Forty-five percent of unmarried Social Security recipients and 21% of married couples rely on their benefits for at least 90% of their income. Garnishing that fixed income for student loan debt can have a particularly devastating impact on their lives.”
In a statement issued Wednesday, March 25, Carlstrom expressed AMAC’s appreciation for the decision to suspend the garnishment of Social Security benefits.
“We commend the administration and the Secretary of Education for suspending the ability of the federal government to garnish the Social Security income of beneficiaries for payment of student debt during this challenging time,” Carlstrom stated. “The Secretary has indeed responded to the concerns and pleas of many members – and non-members – of AMAC. This action is a good first step on this issue.”
Social Security benefits are off limits to nearly all creditors, but not the federal government, which can garnish Social Security benefits for certain debts, including federal student loan debt cosigned by retirees.
According to the Federal Reserve, Americans over 50 hold $260 billion in student loan debt. Benefits can be garnished for court-ordered child support or alimony, or for debts owed to the government. For many seniors, however, their monthly Social Security check is both a critical part of, and indeed the safety net, of their income and financial situation.
“We believe Social Security benefits should be protected permanently from student loan default garnishment by any party, including the federal government,” Carlstrom said.
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