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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.
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.
May 5, 2020
Written By: Smith Debnam Narron Drake Saintsing & Myers, LLP
JD Supra
A recent case from the Bankruptcy Court for the District of South Carolina holds that filing a case “addressing residual business debt” is sufficient to meet the requirement of “engage[ment] in commercial or business activities” under the new Subchapter V of the Bankruptcy Code. The case represents a broad view of who can qualify as a small business debtor under Subchapter V that will no doubt have a significant impact as the Nation begins to recover from the fallout of the Covid-19 pandemic. In re Charles Christopher Wright, Case No. 20-01035-HB (Bankr. D.S.C. April 27, 2020).
The Debtor in Wright is an individual who was involved in two previous Chapter 11 businesses in which he held a significant ownership interest. As a result of those cases, he retained personal liability for significant business debts. Both entities had ceased to do business prior to the filing of the case. The Debtor listed business debt of more than $395,816.29 and consumer debt of $220,882.42. Thus, the Debtor met the requirement under Subchapter V that more than 50% of the total debt be business or commercial debt. The only issue before the Court was whether the Debtor met the requirement of being “engaged in commercial or business activities.”
The Court analyzed the plain meaning of the statute and considered the definition of “debtor” from the Code and treatises interpreting that definition. Finding that “current” debt is nowhere to be found in Subchapter V, the Court held that the business activity requirement had been met and allowed the case to proceed under Subchapter V.
This broad view expressed by the Court in Wright will certainly have an impact on small business cases in the future. Most analysts expect that fallout from the economic slowdown associated with the global pandemic will certainly include a dramatic increase in both personal and business bankruptcy cases. These no doubt will include many businesses and individuals who will take advantage of the recent changes to the Bankruptcy Code and elect to proceed as a small business debtor under Subchapter V.
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, 2020
These 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.
I. 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.
A. Noncontingent liquidated debt, both secured and unsecured debt must not exceed $7,500,000.
B. 50% or more of the debt must have arisen from commercial or business activities of the Debtor. 1182(1)(A)
C. Non-contingent debt refers to a debt that is owed at present without any acts needing to occur first.
D. Contingent debt is one in which there is a 'triggering event' or some condition precedent for the debt to exist.
E. 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)
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 case
2. 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
B. 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.
C. 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.
A. The Debtor shall remain in possession of all property of the estate ⸹1186(b).
VI. Status Conference ⸹1188
A. 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).
B. 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
A. Only the Debtor may file a plan under this subchapter. 1189(a)
B. 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
A. 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)
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)
C. The Debtor will be able to make all payments under the plan 1191(3)(A)(i)
D. 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 §1192
XI. 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.
A. 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 plan
XXI. 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.
XXVII. Bankruptcy Code Provisions-other sections of the bankruptcy code will apply to Subchapter V cases unless otherwise modified, amended or made inapplicable by Subchapter V
A. For example when a Subchapter V bankruptcy case is filed, all litigation pending against the Debtor is stayed pursuant to section 362 of the Bankruptcy Code.
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 sections
2. § 1182. Definitions
3. § 1183. Trustee
4. § 1184. Rights and powers of a Debtor in possession
5. § 1185. Removal of Debtor in possession
6. § 1186. Property of the estate
7. § 1187. Duties and reporting requirements of Debtors
8. § 1188. Status conference
9. § 1189. Filing of the plan
10. § 1190. Contents of plan
11. § 1191. Confirmation of plan
12. § 1192. Discharge
13. § 1193. Modification of plan
14. § 1194. Payments
15. § 1195. Transactions with professionals
JHS
By: Kelly Anne Smith Forbes StaffAdvisor Contributor Group May 5, 2020
The long-term financial consequences of the coronavirus pandemic are just beginning to unfold.
America is facing a recession, with higher unemployment numbers and swifter economic destruction than during the financial crisis and Great Recession that began in 2007. This time around, more than 30 million Americans have filed for unemployment due to the coronavirus, and that number is expected to go even higher.
Then combine that with credit card balances reaching a $930 billion high, along with $9.56 trillion in mortgage balances at the end of 2019, according to the New York Fed's Center for Microeconomic Data. It’s anything but surprising to learn that bankruptcy courts are gearing up for a tidal wave of filings in the near future.
Because bankruptcy stays on your credit report for seven or more years after filing, it’s not a decision to be made lightly. In fact, research shows most people struggle financially for two years or more before filing and there are less drastic options consumers should consider before filing for bankruptcy. Here are four steps to consider.
1. Consider Consolidating Your Balances If you’re having a hard time keeping track of your debt payments, you could consider consolidating your debt.
Under debt consolidation, a consumer usually takes out another form of credit, whether it be a personal loan, home equity loan or 401(k) loan, and uses it to pay off multiple debt balances. Debt consolidation is beneficial because you’re essentially rolling various sources of debt into one loan with one payment. You also may qualify for a lower interest rate, compared to credit card and other debt. But keep in mind that you’ll need a strong credit score and a source of income to qualify for a debt consolidation loan—so if you’ve recently lost your job, you likely won’t qualify unless you can provide another source of income.
Debt consolidation can take the chaos out of having to pay multiple creditors each month, but it will only work if you’re able to keep up with your monthly payment. If you stop making payments on your debt consolidation loan, you’ll be right back where you started. Only consider this option if you know for a fact you can make the monthly payments.
If you do take out a loan from your retirement account, be aware that the CARES Act does make it easier to borrow from these accounts, but not every retirement plan servicer allows these loans. Participants can borrow up to 100% of their vested account balance, or $100,000 (whichever is less). The CARES Act also gives people an extra year to pay back their 401(k) loans.
Traditional personal finance advice almost always advises against borrowing from a 401(k)—in part because retirement savings, such as a 401(k) retirement account, are protected from bankruptcy proceedings. But in unprecedented times, like a global pandemic, it could be a viable option for some. Keep in mind that an advantage of a 401(k) loan is that you pay back interest to yourself, whereas with a credit card or personal loan, you’ll pay interest back to the creditor.
2. Prioritize Your BillsIf you’ve only recently started to spiral out of control with debt, there might still be an opportunity to recover. Leslie Tayne, a debt attorney in New York, says taking a step back and prioritizing your bills could be a good start to getting back on track.
“Keep a close eye on spending behavior and only spend on the absolute essentials that you and your family need,” Tayne says. “Prioritize your rent or mortgage, groceries, necessary clothing, and transportation when paying bills. Pay the most important bills first, meaning your rent or mortgage before your credit card.”
No one knows when the economy will fully bounce back from the COVID-19 crisis—some experts say it could be years. But economists are hopeful that employment numbers could start to tick back up in the near future, once stay-at-home orders start to lift and businesses reopen. Until then, paying as much as you can toward your most important bills is key. Only paying the minimum on credit card debt will cost you money in interest, but it can help keep you in good financial standing for the time being.
If you’re completely out of work and can’t afford your credit card or mortgage bills, many servicers are offering temporary hardship assistance for struggling customers. Call your creditors—or go online via their website or app—and ask what assistance they can offer you. Although you may still accrue interest during forbearance periods, this option could tide you over long enough to come up with a strategy for how you might next attack your debt.
3. Try Credit CounselingCredit counseling offers a handful of services, including help with getting on a debt management plan. Debt management plans are a form of debt relief where a company works on your behalf to reduce your monthly payment, lower your interest rate and get you onto an affordable payment schedule.
It’s important to take notice of any fees a credit counseling agency may charge you to use their service. According to the National Foundation for Credit Counseling (NFCC), any agency should be forthcoming about its fees. Any fees an agency does charge should be reasonable ($50 or less for setup fees and around $25 for monthly fees). Additionally, consumers should do their due diligence in asking how their payments will be used, when they will be disbursed to creditors, how deposits will be protected and if the agency will work with all of your creditors, not just a select few of them.
The NFCC, for example, is a nonprofit organization that staffs member agencies around the country and can help consumers get started with a financial action plan.
4. Negotiate the DebtIf you’ve reached the point where you’ve exhausted forbearance options on your debt, you might stop paying it entirely. Once an account is past due, the creditor will eventually sell it to a collections agency that will then be responsible for collecting the debt.
Many consumers aren’t aware that they can actually settle their debt with collectors, meaning they come to an agreement to pay less than the actual amount owed. Although collectors are known for calling debtors incessantly, consumers should take the opportunity to ask about any settlement options that may be available. Let the collections agency make the first offer—it could be less than the maximum amount you’re actually able to pay, which will save you money.
If you still don’t have money you can throw at the debt after negotiating, ask about going on a payment plan.
What to Know If You End Up Filing for BankruptcyIf you’ve considered all other options, and none will give you enough financial relief, then filing for bankruptcy could be a viable last resort. If you do go this route, you should have a clear understanding of how the process works and how it will affect your credit.
Here are a few things to know about bankruptcy:
- There are two types of consumer bankruptcy filings. These two filings are called Chapter 7 and Chapter 13 bankruptcy. In a Chapter 7, your assets—excluding certain exempt assets such as your 401(k) or pension, household goods and low value car—are liquidated to pay off debts. Chapter 13 bankruptcy allows consumers to keep more of their assets, including a home, if they successfully complete a court-ordered plan to repay their debt.
- Not all debt can be discharged in bankruptcy. Most debt can be discharged or paid off in bankruptcy, including credit card debt, medical bills, civil judgments and past-due rent and utility payments. But it’s important to know not all debt can be erased in bankruptcy. Debts like child support, alimony, court fees, recent tax debts and most student loans cannot be discharged through Chapter 7 bankruptcy, according to Experian.
- Bankruptcy will stay on your credit report for up to 10 years. The length of time that bankruptcy will stay on your credit report depends on the type you file. Completed Chapter 13 bankruptcies stay on a credit report for seven years; Chapter 7 filings stay on a credit report for 10 years. As time progresses, the impacts of negative marks on your credit report become less severe.
“The consequences that result from filing can affect your financial future for several years,” Tayne says. “As a result, exploring other debt-relief options first should be your first step to avoid the consequences attached to bankruptcy. Other options available can help you resolve debt without the headache that can come with filing for bankruptcy.”
Bottom LineOften, there are steps consumers can take to prevent bankruptcy that they aren’t even aware of. These steps, which include negotiating your debt, can prevent you from having to liquidate your assets in a bankruptcy filing or live with a bankruptcy note on your credit report for 10 years. Filing for bankruptcy usually should be the last step consumers take to get back on track with their personal finances.
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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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
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