Bankruptcy lawyers should not try to scare debtors into filing cases

By doug | Published: April 15, 2020

As the federal government gets ready to start sending stimulus payments to millions of Americans in mid-April of 2020, this office has become aware of a mini-movement among a group of bankruptcy attorneys looking to frighten debtors (i.e. their potential clients) into worrying about the payments being scooped up by debt collectors seeking so-called “garnishments.”

Specifically, the group is encouraging other lawyers to circulate a Forbes magazine article to prospective clients entitled “Stimulus Checks Are Coming Next Week. Could Private Debt Collectors Grab Them?” authored by Sarah Hansen.

For most debtors in Massachusetts and New Hampshire, the answer to Hansen’s question is “probably not.” First, as the article itself mentions, Massachusetts has enacted a temporary regulation during the virus crisis that prevents such a stimulus grab. And even in states like New Hampshire, which hasn’t yet put specific restrictions in place, such a move seems unlikely.

First, while courts are technically open for business, courthouses in New Hampshire are physically closed, and what business is being conducted is being done by telephone, Zoom, and similar technology-based connections. This forces a sort of legal triage, where local courts concentrate on new criminal cases and domestic violence situations, and “garnishments” in small claims cases go straight to the back burner.

Second, private debt collectors can’t just “serve a garnishment order” on a debtor at their own whim; in both Massachusetts and New Hampshire, these orders need to be approved by a judge first. The process (which is really an  attachment of a bank account balance, and not a garnishment or interception of the government payment itself) is antiquated and cumbersome in the best of times, which is why we don’t see nearly as many attachments around here as many do in other sections of the country.

Bottom line: if you get a $1,200.00 stimulus payment and realize most of it is going to go to pay credit card interest, etc., it may certainly worth your while to explore whether using the money to get a bankruptcy lawyer is a good idea. But there’s no need to do it out of fear that the payment will be seized.

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How does a discharge of debt under the Small Business Reorganization Act differ from an ordinary Chapter 11 discharge?

By doug | Published: April 14, 2020

With the Small Business Reorganization Act (SBRA) up and running as of February, 2020, Chapter 11 of the bankruptcy code now has two separate sections that offer corporate debtors (and a few individuals) a discharge of their debts. This is something of a new frontier in American bankruptcy law, as up to now each chapter had a single set of discharge rules, and switching between chapters (“converting a case” in bankruptcy lingo) was the only method for shopping for a more favorable discharge, where it was possible.

Discharge.

The “standard” Chapter 11 discharge is found in section 1141, inconspicuously entitled “Effect of Confirmation.” This spells out that discharge occurs upon confirmation of a Chapter 11 plan, except for flesh and blood individuals who file under Chapter 11. Their discharge occurs when they have made all the payments due under the plan.

Under the standard discharge, debts that occurred before the bankruptcy filing are wiped out, as well as certain post-petition claims involving rejected leases, recovered property, and certain taxes. The discharge is not dependent on a creditor’s claims being filed, allowed, or upon the approval by a creditor of the plan. 11 USC s. 1141 (d). Discharges for individuals are subject to the usual exceptions (student loans, etc). Individuals, but not corporations, may seek a discretionary hardship discharge if they are able to make most, but not all, of their plan payments. There is no discharge for anyone if the court find that the case is a disguised Chapter 7 liquidation. Tax bills tied to fraudulent returns are not discharge, and taxes due on late-filed returns within two years prior to the case filing aren’t either.

In comparison, the SBRA discharge provision is found at 11 USC s. 1192.  This section specifies that small business discharges are issued upon completion of plan payments, not upon confirmation of the debtor’s plan. Since SBRA plans must be at least three years in length, it follows that discharge is at least three years down the road for the small business debtor.

The SBRA discharge applies to pre-petition debts under the same terms as the standard discharge, plus any specifically allowed claim that is “provided for” in the plan (expect litigation here, on the meaning of what is provided for). 

The SBRA discharge specifically excludes priority tax debts (which is not expected to be controversial), as well as any debt on which the last payment is due after the 3-5 year length of the plan. This last section is a severe limitation which could be a deal breaker for many small firms looking to reorganize in the wake of corona virus closures.

By Doug Beaton

Attorney Douglas J. Beaton has practiced bankruptcy law in the Northeast for twenty six years, and is an active commentator on developments in bankruptcy practice and procedure. He can be contacted through this form:

 

 

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Massive mortgage bailout bill comes with some catches

By doug | Published: April 13, 2020

Homeowners who are struggling with their finances while “stay-at-home” orders are in effect and shut downs affect most businesses got some relief in late March of 2020 when the CARES Act was signed in to law. The $2 trillion dollar bailout package, designed to float the economy while the United Staes battles an unseen enemy, has a number of well publicized measures such as business loans and free money mailed to taxpayers. The new law also dangles a carrot in front of homeowners — some may get the chance to miss one or more mortgage payments without the usual repercussions.

Before anyone leaps at the chance, however, it’s important to screen through the fine print for catches that could lead to unpleasant surprises later on.

First of all, the CARES ACT is a federal law, and so extends its offers only to loans that have a federal connection. That could mean the loan is backed by a quasi-federal agency such as Fannie Mae or Freddy Mac, or the Federal Housing authority (FHA).

It is estimated that about two-thirds of first mortgages qualify due to federal backing. Home owners can check their mortgages on line in most cases. Get some basic information like your social security number, and visit the web sites of Fannie Mae or Freddy Mac to see if your loan qualifies for federal relief. You can also check with the lender if they are answering phones.

Now for the catches: first you can’t just stop paying, but have to request permission to skip payments. Up to six months of payments can be skipped on Freddie Mac or Fannie Mae loans; FHA borrowers may be able to skip as many as twelve. Once permission is granted, late fees and negative credit reporting  is avoided.

The major catch, however, is that the CARES Act authorizes a forbearance for missed payments, which is of limited value to strapped borrowers. Legally, missed payments during a forbearance become due as soon as the forbearance ends. For example, a homeowner with a $2,000.00 mortgage payment and a three month forbearance would technically owe a total of $8,000.00 in a lump sum in 90 days; the three missed payments, plus the currently due one.

Since many people aren’t going to be able to fork over such sums, a giant cloud hangs over the forbearance program. It is expected that there will be many negotiations in the coming months over what terms of repayments are offered, and at what price. But as of this writing (April 2020), none of this is spelled out in writing. Homeowners may well find themselves in a Wild West situation next year when payments are due: they may have to negotiate individually, or they may be coerced in to taking bad offers from their lenders.

What homeowners should be angling for instead of a forbearance is called a deferral (or sometimes a suspension). Under the terms of a deferral, repayment is usually postponed to the end of the loan, either by adding a ballon payment, or by extending the length of the loan by the number of months of missed payments. It works quite a lot like the loan modifications that were popular in the Great Recession. Any homeowner who can convince their lender to do a deferral instead of a forbearance has scored a major victory, and has possibly obtained some meaningful relief.

It is also worth mentioning that the CARES Act contains some modest help with foreclosure as well; so loan as a loan is federally backed, foreclosures can not be started between March 27th and May 17, 2020, and after that only if the homeowner is at least four months behind and not in forbearance or deferral.

By Doug Beaton

Attorney Douglas J. Beaton has practiced bankruptcy law in the Northeast for twenty six years, and is an active commentator on developments in bankruptcy practice and procedure. He can be contacted through this form:

 

 

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Are stimulus checks really exempt from seizure by a bankruptcy trustee?

By doug | Published: April 9, 2020

If the government were to mail out free money, who should get first dibs on it — the recipient or his creditors?

What would seem to be an inane question in normal times has become a live issue in the spring of 2020. To fight the massive economic repercussions of the corona virus shutdown, the federal government is indeed mailing free money to just about every household — in the form of stimulus checks to be mailed or sent electronically by the IRS. The default amount for a single adult is $1,200.00. Children under 17 get $500.00. American with higher incomes over $70,000.00 per year will get a reduced amount or nothing.

But what if the recipient has filed a bankruptcy case? Who gets the stimulus then?

Thankfully, the legislation that allows for the massive bailout addresses the problem — at least partially.

CARES Act stimulus payments will not count as income in bankruptcy court. The act contains specific provisions that exclude these payments from the bankruptcy definition of income. That means that the payments don’t have to be counted in the bankruptcy means test, which in turn means that no one will be excluded from filing bankruptcy — even under Chapter 7 — on account of the.

Stimulus payments are also excluded from the calculation of “projected income,” which is important to debtors in Chapter 13. Usually these debtors have to pay at least as much as their projected income calculation says in monthly plan payments to a trustee. No one’s plan payments are going to rise because of CARES Act stimulus payments.

That’s the good news. But what about assets? Leaving aside the concept of income, the CARES Act is silent about whether the payments, either anticipated or once received, are assets that need to be reported.

Here the bankruptcy concept of “property of the estate.” comes into play. Filing a bankruptcy case under any chapter creates an “estate,” just like a will does. Typically, all of a debtor’s property is turned in to “property of the estate” as soon as  case is filed under the bankruptcy code. There are a few exceptions, created by the bankruptcy code itself in section 541, such as most contributions to an IRA account, and a few more created by case law, such as a 401(k) retirement account.

Property of the estate

With the CARES Act silent on the issue, stimulus checks, although excluded from the definition of income, become property of the estate in a Chapter 13 case due to code section 1306, which specifically includes after-acquired goods in the debtor’s estate.

Does this mean debtors in bankruptcy will lose their stimulus payments anyway? Probably not. First, there appears to be no barrier to declaring the stimulus funds exempt from attachment using either federal or state wild card exemptions. Some states also provide generous state exemptions for public assistance benefits (for example in Massachusetts, MGL c. 235 s. 34(15).

Finally, as of this writing, there appears to be no will on the part of bankruptcy trustees to go after these payments in a determined way. In fact, a memo from the US Trustees Office restricts case trustees from doing so without explicit authority from the central office.

The bottom line is that stimulus payments, expected or already received, should be no barrier to a new or existing bankruptcy case under any chapter.

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How the federal stimulus law will affect Chapter 13 debtors

By doug | Published: April 7, 2020

In response to the unprecedented impact from business shutdowns ordered to battle the Covid-19 virus during the spring of 2020, Congress passed a massive $2 trillion dollar stimulus package in late March.

The new bill, which was debated for about a week on Capitol Hill, was quickly signed in to law by President Donald Trump and took effect on March 27, 2020.

The stimulus law, dubbed the CARES for Coronavirus Relief and Economic Relief Act turns on a fire hose of government money that will become available in the coming weeks to individuals and businesses. Coverage in the news media has largely focused on direct payments to every American man and woman of $1,200.00 with an additional $500 going to each child under age 17. But the package also includes some tweaks to Chapter 13 intended to assist debtors in a time of crisis.

Will the changes actually help those who have filed a Chapter 13 case? The best answer at this time is: Some yes, but some debtors, no. This is because debtors file Chapter 13 cases for different reasons, with different problems and different goals.

To see how this might play out in the real world, let’s consider three debtors to whom we give the simplistic names A, B, and C:

Debtor A is in Chapter 13 because he makes too much money to qualify for a Chapter 7 discharge — or at least he did until the virus hit. This points out an important flaw in the bankruptcy means test — it is backward looking, based on a record of past earnings, and doesn’t account for a change in circumstances.

The means test looks at the debtor’s earnings for the six months prior to a case being filed, not counting the partial month when the case was actually filed. So if debtor A files in April, his means test is based on his earnings from the start of October through the end of March. Let’s say debtor A lives in New Hampshire and earned $40,000 in those six months. Double that to get annual earnings of $80,000, which is over N.H.’s average income for one person, which is $66,565. Debtor A files Chapter 13 because he makes — or made — too much for a Chapter 7 discharge.

But say Debtor A was laid off on March 15th. Is there anything in the CARES Act to help him out bankruptcy-wise? Not specifically. While there are a few ways it might play out, this debtor is pretty much dependent on filing for relief and hoping his bankruptcy judge is lenient and understanding. Barring that, he could make a motion for a hardship discharge under 11 USC s. 1328 (b), but hardship again relies entirely on the attitude of the presiding judge. A little more extreme option would be to dismiss the case and file a 7 when his income drops, but that is a clumsy solution, involves more expenses, and probably involves waiting a few months. All in all, the CARES Act has little to offer this debtor’s bankruptcy problems.

Now consider Debtor B: he is in Chapter 13 because his house is worth about $30,000 more than his state’s homestead exemption will allow. Under the bankruptcy code’s “best interest of creditors test,” he has to pay at least $30,000 to his unsecured creditors through his Chapter 13 plan. So he’s making plan payments of $1,000 per month for 36 months (the extra money pays trustee fees, etc.).

The CARES Act potentially could help debtor B. It adds a provision that allows him to modify his plan to run for up to 84 months (i.e. seven years instead of three). That would reduce his plan payment to about $430 per month — a significant savings. Not everyone will want to be in bankruptcy for seven years (especially since you are barred from taking out new loans before the case is over). But in this case, there is indeed some practical help coming from Washington via CARES.

Now let’s look at Debtor C, who fell behind on his mortgage by $30,000 and filed for Chapter 13 the day before his house was scheduled to go to a foreclosure auction. (This is by far the most common situation, by the way). He has been making $600 monthly payments on a 60 month Chapter 13 plan (the maximum length before CARES). He drives for Uber and rides have been scarce to non-existent lately.

Debtor C could also possibly move to extend his payments to 84 months, which would drop them to $430 just like debtor B. But notice that the drop isn’t as dramatic stretching from 5 to 7 years, and also that debtor C really can’t even affordthe lower payment.

What C needs is a “moratorium” or “suspension” of payments until the virus passes and things return to normal again. But there is nothing in the CARES Act stimulus package to provide for this. It’s back to begging for mercy from the bankruptcy judge, who collectively will be making different decisions in cases like this all over the nation.

Please note that there is another big trap in the CARES Act that could torpedo the motions of both debtors B and C: the provision that in order to stretch out a plan beyond 60 months, the plan must have already been confirmed as of March 27, 2020. This is a major flaw in the law, as many cases were in the system on that date, but hadn’t been confirmed yet, often just due to the slowness of the system, no fault of the debtor. Debtors who file after CARES passage also don’t benefit.

Finally, its worth mentioning the “sunset” part of the new law: All of the changes to the bankruptcy code mentioned here expire automatically one year after passage (i. e. March, 2021), so act fast. Unless Congress passes more changes later on …..

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Companies struggling to reorganize in Chapter 11 should understand the concept of a critical vendor list

By doug | Published: April 3, 2020

With a wave off small business bankruptcies looming, more business owners and entrepreneurs are going to be looking at Chapter 11 as a possible way to continue to keep their venture operating, while shedding some of the pain from the shutdowns sparked by corona virus fears.

The recent enactment of new bankruptcy protections for small businesses will lead more such companies to consider whether Chapter 11 offers them a viable method to continue operating while shedding some of the unexpected debts incurred during the virus shutdowns.

One of the practical worries that small business owners have about the process is how they will obtain inventory going forward if they declare bankruptcy. These concerns are especially prominent in retail operations, but ultimately affect any venture selling goods at any level. Simply put, if suppliers find out a bankruptcy is looming or has been filed, what is to prevent them from just refusing to do business with the bankrupt company in the future?

It’s a legitimate worry, as the straight answer is that there is no law that protects against such refusals. But Chapter 11 debtors may be able to counter by designating a “critical vendor list,” which gives financial incentives to certain suppliers to keep the chain of goods coming, despite the bankruptcy filing.

Here’s how it works: if a debtor company going in to Chapter 11 believes that it has suppliers that it can’t afford to piss off, it can designate them as a critical vendor. Once the vendor is designated and the court approves it, the debtor firm will be able to pay off the money already owed to this supplier before the filing, using revenue taken in after the filing. The entire pre-petition debt must be paid before the debtor company’s reorganization plan is confirmed by the Court (usually several months).

From the supplier’s point of view, being designated as a critical vendor has the pleasant result of getting the outstanding debt paid off, perhaps in full if things work out well, whereas they otherwise would probably be stuck with a general unsecured claim that would be lucky to see pennies on the dollar paid out.

The mechanics of creating a critical vendor list usually involve a motion to approve a roster of critical vendors that is filed immediately after the bankruptcy petition itself (one of the so-called “first day motions” in the case).

Not surprisingly, the notion of a debtor having a bankrupt debtor determine by fiat who is a critical supplier and who isn’t has the potential to create fireworks (read: opposition and litigation) in the fledgling case. Any creditor is allowed to contest the debtor’s designation, and occasionally some do. Perhaps the most famous opposition arose in the 2004 restructuring of the KMart Corp., where unsecured creditors won a ruling from the Seventh Circuit Court of Appeals in Chicago that many thought would bring about the end of critical vendor lists entirely. That didn’t happen nationwide, although it is worth mentioning that the First Circuit court in Boston has never issued a definitive ruling on the use of the procedure in Massachusetts or New Hampshire.

Companies thinking about resorting to bankruptcy protection should consider the opportunities for negotiation with suppliers that the mere possibility of a Chapter 11 and a critical vendors list provides. Because suppliers designated on the list have a much better chance of seeing money come their way, debtors may well find themselves being courted for inclusion, and may be able to take some advantage of that. For instance, an agreement to continue the business relationship for a set time in to the future, on usual terms, or even more favorable ones, can often be negotiated.

Any business owner thinking about a bankruptcy filing should sit down before pulling the trigger and decide, at least in a preliminary fashion, who their critical suppliers are. In doing so, they should be able to prove to a judge these three factors for each supplier to be included on the list:

  1. that dealing with the creditor is virtually indispensable to the profitable operations of the debtor;
  2. that a failure to deal with this supplier risks probable harm to the debtor or eliminates an economic advantage disproportional to the amount of the supplier’s pre-petition claim; and
  3. that there is no practical or legal alternative to payment of the claim.

By Doug Beaton

Attorney Douglas J. Beaton has practiced bankruptcy law in the Northeast for twenty six years, and is an active commentator on developments in bankruptcy practice and procedure. He can be contacted through this form:

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What happens to your car payment when the world is paralyzed by the corona virus?

By doug | Published: April 2, 2020

With tens of millions of Americans sidelined, either in whole or in part, by quarantine orders due to the corona virus outbreak in the spring of 2020, a looming question for many is whether they can or should be making regular payments on the family car or truck.

So far, at least, the media hasn’t been reporting too much about car payments, focusing instead of plans to help people with their mortgages and student loans. This is in part because those loans often have a federal component, meaning Congress can legislate modifications to them. But most auto lending is a strictly private affair, making it less amenable to federal intervention.

Auto loans obviously also come with a twist: the lender retains a lien on the vehicle, and the right to whisk it away if payment becomes delinquent. Eviction bans and holds on paycheck garnishments aren’t going to help here.

But some lenders have announced a willingness to extend at least some concessions to borrowers strapped by Covid-19 and its fallout.

The Edmonds car value rating service has done a great job of collecting up-to-date information from large lenders on car payment issues. You can access their list by clicking here.

Note that many of the lenders, at least at this time, are asking borrowers to be pro-active, and to take the initiative and call them to arrange alternate plans — which may or may not be extended due to whatever factors they want to consider.

Drivers with car leases that are nearing expiration have additional concerns. Possibilities here include short – term lease extensions, or even picking up the vehicle at the customer’s home if they decide to turn it in. Again, Edmonds has a good summary of what the options are.

Drivers should keep several things in mind when negotiating with auto lenders: First, major car companies always want to sell you another car, so they may have incentive to be flexible. Second, their sales have all tanked, so they are going to be reluctant to pinch their income stream for too long. Moreover, the federal stimulus bill passed in March 2020 contained little in the way of protecting consumer’s credit ratings, so drivers are going to want to  be careful to document any concessions they are offered over the phone, and keep an eye on dents to their credit rating due to missed payments. 

 

 

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Massachusetts marijuana firms face squeeze: forced to close, but unable to get funds or get bankruptcy protection

By doug | Published: April 1, 2020

Entrepreneurs in the emerging legal market for cannabis products in Massachusetts are facing a triple whammy crisis: First, the market for recreational (sometimes called “adult-use”) marijuana products has been closed by government order due to corona virus distancing measures, plus these firms will find themselves unable to participate in federal stimulus plans, and after that the firms are also ineligible to apply for relief through the bankruptcy courts. Depending on the length of the virus crisis, the situation could spell the death knell for numerous firms trying to break in to the quirky market for legal weed in the Bay State.

On March 23, 2020 Massachusetts governor Charlie Baker ordered all non-essential businesses in Massachusetts to close through April 7th, an order that shuttered recreational use pot shops, while allowing medical marijuana sales and liquor sales to continue. 

While some of the emerging pot shops in Massachusetts are owned by national or regional firms and backed by serious venture capital, many others are truly local-run entrepreneurial ventures that may not have enough cash to support a long term shutdown. Complicating matters, the Cannibis Control Commission in Massachusetts is charged with actively supporting small minority owned enterprises when approving licenses, in partial amelioration of the disproportionate impact of the war on drugs in minority communities.

Just when some of the new pot firms are gearing up and opening in Massachusetts, they have been forcibly closed. For many, this comes after a brutal, lengthy and slow licensing process, along with being saddled with exorbitant local aid payments, and a lack of traditional financing.

On top of those problems, cannabis remains a banned substance under federal law. This means that the new licensees are not able to participate in any of the stimulus programs passed by Congress such as the $2 trillion CARES Act that was signed in to law on March 27, 2020.

The federal government’s prohibition on marijuana also prevents growers and sellers from seeking bankruptcy reorganization when the virus crisis is behind us. Bankruptcy in the United States is a federal law, with all cases being heard in the federal courts. Bankruptcy judges in states that have legalized either recreational or medical marijuana use have almost unanimously ruled that weed businesses that may be legal at the state level are not able to file for bankruptcy due to the federal ban.

Put together, the federal ban could add up to hundred of millions of dollars and thousands of layoffs in the marijuana business nationwide. Some advocates are angling for state relief payments that equal what would have been paid out by Uncle Sam, but with states like Massachusetts facing budget shortfalls in the foreseeable future, there is slim chance of that actually happening.

The bankruptcy portion of the problem, of course, could be fixed quickly by a couple of tweaks to the federal bankruptcy code. Pot entrepreneurs, however, shouldn’t hold their breath waiting for this, given the perpetual gridlock we have seen in Washington in recent years. 

By Doug Beaton

Attorney Douglas J. Beaton has practiced bankruptcy law in the Northeast for twenty six years, and is an active commentator on developments in bankruptcy practice and procedure. He can be contacted through this form:

 

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Stimulus legislation increases access to small business bankruptcy procedures; up to $7.5M in debt can be restructured

By doug | Published: March 31, 2020

In August of 2019, Congress did something that’s become a bit unusual — it passed bipartisan legislation, and saw it signed in to law by the President. The particular bill was a sweeping change to the federal bankruptcy code that was intended to open up Chapter 11 reorganizations to small businesses for the first time. 

While small businesses — and indeed individual Americans — had never been banned from Chapter 11, the expense associated with the fearsome complexities of the existing laws made Chapter 11 a difficult choice for all but the largest operations.

The new changes, dubbed the Small Business Reorganization Act of 2019, took effect six months later on February 19, 2020. The timing was prescient, as it virtually coincided with the onset of the corona virus’ arrival in the United States. 

Less than one month in operation, the S.B.R.A. has already seen its first amendment — and it is an important one.

In the original legislation, a small business was defined as any business with less than $2.7 million dollars of total debt. One criticism of the new law before it took effect was that this figure seemed arbitrarily low, excluding some firms that were certainly small, even though their total debts might be slightly higher than the announced cap.

But with the abrupt halt to the economy brought on by Covid-19 protective measures, Congress relented a bit, and on March 27, 2020 increased the debt ceiling on a streamlined Chapter 11 case to $7,500,000.00. This should help a whole raft of firms that are hurt by the slowdown qualify for a bankruptcy reorganization for the first time. 

Please note that the $7.5M ceiling is based on a firm’s total debt — secured loans like mortgages and inventory, PLUS unsecured bills like utilities and rent and taxes. 

Still, a lot more small businesses are going to qualify now that the  limit has been raised. And while it’s never a sure thing to bet on what Washington will do, there is a least the possibility that the limit could be raised further in the future, if processing the initial round of cases goes smoothly.

By Doug Beaton

Attorney Douglas J. Beaton has practiced bankruptcy law in the Northeast for twenty six years, and is an active commentator on developments in bankruptcy practice and procedure. He can be contacted through this form:

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Extension of Chapter 13 plan payments may be possible through virus stimulus package

By doug | Published: March 30, 2020

The massive $2 trillion stimulus package enacted by Congress and signed in to law by President Trump on March 27, 2020 in response to the economic havoc wreaked by the COVID-19 pandemic contains a few passages that may ease the burdens of debtors in bankruptcy.

Nicknamed the CARES Act, for “Coronavirus Aid, Relief, and Economic Security Act,” the massive package contains tweaks and tune-ups to the bankruptcy code that possibly could keep certain Chapter 13 debtors afloat on their plan payments.

Buried deep in section 1113 of the new law is a provision that lets some Chapter 13 debtors stretch out their plan payments for up to a total of 84 months, or in other words, for up to seven years. Existing law provides that Chapter 13 plans may run from a minimum of 36 months to a maximum of 60 months, so debtors on a five year plan can potentially extend for an additional 24 months, and debtors on a three year plan can more than double the length of their plans by adding 48 additional months.

The main qualification for a longer payment plan is that debtors are experiencing a “material financial hardship” as a result of the Covid-19 pandemic. Please note that debtors seeking extensions do not have to have contracted the virus — only to have suffered some sort of objective financial setback (e.g. layoff) due to it.

What’s the catch? Well, the main one is that in order to stretch out payments, debtors have to have already filed their cases AND they need to have confirmed Chapter 13 plans in place as of the date the law was signed — March 27th. 

That means that individuals seeking Chapter 13 protection now won’t be able to benefit from this clause, and are restricted to the usual 3-5 year plan length, even if they have a hardship to the virus.

It also means that debtors who have filed for Chapter 13, but whose plan has not yet been confirmed are not eligible for the stretch-out. This is a severe limitation in a district like Massachusetts, where there is a long lag time between filing a case and getting the plan confirmed, even in the best of circumstances.

What remains to be seen is if trustees and bankruptcy courts will allow “gaps” in payments — in other words a few months of $0 dollar payments followed by a resumption of the usual amount somewhere down the road. Because trustee offices are funded by a hopefully steady stream of payments, the best guess is that will not be permitted, or will be severely curtailed (perhaps to a max of three months), because applying such a tournequet to the payment stream might make the trustees more broke than the debtors.

Instead, the most likely form of relief is an estimated 30% or so reduction in the size of the plan payment for a hypothetical debtor with a 60 month plan who elects to extend payments to 84 months.

Bankruptcy lawyers and their clients should keep a close watch on Congress in the coming months — there is probably a decent probability that the “before/after March 27th” distinction could be fixed by a future bill, enabling all Chapter 13 debtors to partake in a humane break enacted in a time of crisis.

Debtors and lawyers should also be aware that the CARES Act is loaded with so-called sunset provisions, meaning the various breaks enacted invariably come with an expiration date as well as a start date. Most provisions are set to expire one year after passage, although that could be extended based on what actually happens to the economy during the latter part of 2020.

by Doug Beaton

 

 

 

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