Dubiln Packard

Todd Murphy

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COVID Will Force Small Businesses To Resort To Bankruptcy.

Deep Recession and Lack of Resources: COVID will force Small Businesses to resort to bankruptcy.

The United States economy is likely to remain in a deep recession that economists say may linger for more than a year or more and small businesses will be hit hard. COVID will force Small Businesses to resort to bankruptcy.

COVID effects on Small Businesses

Retail businesses were already in a death-spiral before COVID hit with consumer buying moving to online e-commerce. Local businesses, no matter how much we might like to support them just can’t offer the convenience, section and price that online stores can offer.

Restaurants were also in trouble with soaring rents, terrible working conditions, and a move to take-out with GrubHub, DoorDash and Uber Eats. Margins on restaurants can’t handle the 30% “vig” these delivery services take out of each sale and restaurants can’t afford not to be in the delivery game.

What Businesses Are Effected and Why?

In a survey by the SMB (Small and Medium Business) Group of more than 500 businesses it found the COVID-19 impact varies by type of business, with these three categories most affected: personal service, hospitality and retail. The smaller the company, the harder the hit, with companies with fewer than 20 employees most affected.

Why? Because a small business with fewer than 20 employees typically lacks cash flow and capital. Those companies were the first to reduce hours for employees or lay off employees. Those businesses were also the first to stop hiring subcontractors.

“Those businesses had a challenge, and will experience the most extreme negative impact,” said Laurie McCabe, SMB’s cofounder and partner. “They had to learn how to serve customers in the new stay-at-home environment.”
McCabe said that continuing to operate has been impossible for small businesses which provide hands-on services, such as hair salons and spas, home improvement and repair contractors, and for many dental and medical offices.

Don’t Expect Consumers to Go Right Back To Buying

The White-House wants us to believe that immediately upon lifting stay-at-home orders, consumers will go right back to buying and employees will go right back to their old jobs with not even a hick-up. That just isn’t going to happen when the government can’t get its act together on testing and a vaccine may still be be many months away. People just won’t feel safe going to stores and restaurants.

Small businesses have rent to pay – often to another small business that can’t afford to wait.

Revenues of Small Businesses Will Be Reduced Weighing on Their Ability too Pay Rent and Debt Payments.

If a restaurant is forced to keep distance between customers then its revenue is going to be cut in half or more. With reduced revenues comes reduced ability to pay rent and loan payments.

Rents must be reduced.

Retail real estate values simply cannot stay where they are today. If a retail tenant is paying $5000 a month rent but it’s daily shopping volume is reduced by social distancing rules, how can the retail shop afford to pay the same rent it paid before COVID. If the landlord chooses to enforce the current lease and evicts the store (and putting it out of business) what new business is going to come in at the old rent? And the same for restaurants.

If landlords and tenants can’t come to terms in amending leases, the small business is going to seek the help of the bankruptcy court.

Loans Must Be Worked Out

The same goes for loan payments. How can a retail store or restaurant pay monthly loan payments if its revenues are lower every month? Loans will have to be amended to suit the new business environment and if a bank and a business can’t agree on work-out terms, the business is going to seek the help of bankruptcy courts.

Small Businesses Will Struggle Before They Die

Small businesses are going to struggle before they finally decide to seek help in bankruptcy. They are going to use credit cards, raid the sales tax trust account and cut costs.

It is inevitable that these short-term strategies will backfire making it worse for owners. COVID will force Small Businesses to resort to bankruptcy.

Help Is Here In The Form of The Small Business Recovery Act (SBRA)

Coincidentally, help is available with a new set of laws in bankruptcy designed specifically to help small businesses. The Small Business Recovery Act (SBRA) because law at the end of February 2020 which simplifies chapter 11 bankruptcy for small business. There are some very important changes that can help a small business change the terms of a second mortgage that may have been taken against the primary residence, cram down SBA or other commercial loans and more.

Bankruptcy Takes Planning – Don’t Wait Until The End

A small business shouldn’t wait until it is under the gun to look into bankruptcy. Bankruptcy for a small business often takes some pre-bankruptcy planning.

Don’t wait. Contact a bankruptcy lawyer licensed in your State now even if bankruptcy is far in the future.

For more articles related to COVID resources see our CoronaVirus Resource page. Restaurants see our COVID Restaurant page

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Coronavirus government relief package doesn’t work for restaurants

Chefs and restaurant owners believe the coronavirus government relief package doesn’t work for restaurants. Restaurants have been the hardest hit by the coronavirus pandemic.

Celebrity chef and food advocate Tom Colicchio, owner of the restaurant and hospitality group Crafted Hospitality, was one of many restaurateurs who made the difficult decision to close his kitchens and lay off over 400 of employees due to the novel coronavirus, COVID-19.

Now, he’s helping to lead the charge to provide desperately needed aid through the Independent Restaurant Coalition to food service workers, small business owners and their communities.

“We started it about three or four weeks ago when we realized the enormity of the problem that we were facing and we knew there was a stimulus package that was going to help small businesses,” Colicchio said on ABC News’ “Pandemic: What You Need to Know.”

“We found groups in Chicago that were working on the same issue. We found groups throughout the South and we put all these coalitions together and very quickly we hired a lobbying team, a [communications] team, and we are having direct conversations with members of Congress to let them know the issues that we have in the restaurant industry,” Colicchio said. “And also — to let [Congress] know that the — CARES Act — doesn’t really work for the restaurant industry right now.”

He said he’s also trying to get the message to Congress that the Coronavirus Aid, Relief, and Economic Security Act (CARES) Act “doesn’t really work for the restaurant industry right now.”

The CARES Act provides the single largest economic relief package in U.S. history, and will include direct payments for qualifying individuals as well as loans and loan forgiveness for small businesses.

I couldn’t agree more with Chef Colicchio. Loans through the SBA are designed to keep people on the pay-roll temporarily but if your restaurant is closed, why not just let the employee file for unemployment. The SBA loans are promised to be forgiven but only if at least 80% of the funds are used to pay employees. What about rent, insurance, and so many other monthly expenses over and above wages?

Many restaurants are closed now and may never re-open. Others may re-open but look very different from how they looked in January. The restaurant business model is in need of a big change and this might just be the time to make that change.

For more information and links to other articles – go to our Restaurant COVID Relief page

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Making Chapter 13 Plan Payments

Chapter 13 Plan Payments Are Due

It’s the first of the month immediately following the day your chapter 13 case was filed and it’s time to start making chapter 13 plan payments. Your chapter 13 plan payments are due to the trustee AND your monthly mortgage payment is due to your mortgage servicer. It is very important to make both the mortgage payment and the chapter 13 plan payments on time every month for the life of your chapter 13 bankruptcy case.

If for some reason, and it happens from time-to-time, you are unable to make either or both payments this month, please call me to discuss before you make any decisions. There are certain things to consider if you find yourself in a situation where you have a temporary loss of, or reduction in, income or if you had an unexpected expense recently.

Missing payments can have serious long-term effects on your chapter 13 plan so please avoid this if at all possible. Again, call me to discuss if this comes up for you.

The difference between missing payments before your case is confirmed and after your case is confirmed.

When your case is first filed, the chapter 13 plan that we submit is a “proposed” plan and will be reviewed by your creditors and the trustee before it is accepted and confirmed. During that process, there may be some back and forth between we as your lawyers and the trustee and creditors before the plan is in its final form for confirmation. This back and forth is usually done at confirmation hearings in court. There may be a number of confirmation hearings before the case is confirmed which can take place over a period of three to six months or sometimes more.

Before the case is confirmed and a few days prior to each confirmation hearing, the trustee checks to see that you are up-to-date on your chapter 13 plan payments. If you have not made one or more payments as of the day of the confirmation hearing, the trustee will move to dismiss your case right then and there. There is no separate motion – the case will just be dismissed. This differs significantly from the procedure for a missed payment after confirmation.

What Happens If You Have To Miss A Chapter 13 Plan Payment or a Mortgage Payment Once Your Case is Confirmed?

A missed payment to either the mortgage company or the chapter 13 trustee can have significant negative impacts. If a trustee payment is missed, the trustee may file a motion to dismiss the case. If a mortgage payment is missed, the lender’s counsel may file a motion to lift the automatic stay (which prevents the lender from proceeding with foreclosure) and could lead to a sheriff sale of your home,

In both cases, a formal written response must be filed by us on your behalf and a court appearance is required (lawyers only). The matter is usually resolved at the court appearance where an arrangement is agreed to by the trustee or lender to catch up on payments. Such an arrangement can take many forms but always involves you coming up with some lump sum of money to bring the default current. Adding missed payments to the remaining chapter 13 plan payments is sometimes possible at the discretion of the trustee or lender (or both) and sometimes requires updated documentation on your income and expenses.

Resolution of missed payments often, if not always, includes a 30-day default clause which gives the trustee or lender a great deal of power the next time you miss a payment.

Also, you will be required to pay attorney fees for the lender’s counsel as well as fees to us to file the written response and appear in court on your behalf so this tends to be an expensive event.

Links to Chapter 13 Trustee Websites

Below are links to the bankruptcy trustee website. Each website contains instructions and information for setting up and making monthly trustee payments as well as other important information.

Newark – Marie-Ann Greenberg

Trenton – Albert Russo

Camden – Isabel Balboa

Making Chapter 13 Plan Payments and Mortgage Payments is the Single Most Important Thing During the Chapter 13 Bankruptcy Case.

Both the trustee and the mortgage lender monitor your payments every month and are quick to take action if payments are missed. Sometimes the trustee or counsel for the lender will reach out to me before filing a formal motion, and sometimes they will not. Sometimes, they will overlook one missed payment and sometimes, they will not.

The best strategy for you, of course, is to avoid missing payments but sometimes, we know, it just isn’t possible.

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How to Get a Mortgage Forbearance in Chapter 13 Bankruptcy

Updated information on how to get a mortgage forbearance in Chapter 13 bankruptcy if you are suffering financial hardship due to COVID-19

By now you have heard about mortgage lenders offering a forbearance if you are having a financial hardship due to COVID-19 related loss or reduction of income. But, what can you do if you need a mortgage forbearance in chapter 13 bankruptcy?

Maybe you already tried calling your mortgage lender and haven’t had any luck. At first, there was a severe lack of information on whether or not a person in active bankruptcy could take advantage of this relief. This week, services and lenders clarified their position on getting a forbearance even if you are in active chapter 13 bankruptcy.

This relief is only for mortgage loans that are backed by the Federal Government Fannie Mae or Freddie Mac. This covers about 90% of home loans in existence today. However, there are some loans that are not backed by the Federal Government.

What If My Loan is Not Backed By Fannie or Freddie?

Many lenders are honoring this relief program even if your loan is not backed by Fannie or Freddie so try anyway.

How to Find Out if Your Loan is Backed by the Federal Government.

Go to Fannie Mae’s website or Freddie Mac’s website to look up your loan.

What Is Forbearance?

The first question most people have is: what is a forbearance. A forbearance is a temporary suspension of the requirement to make monthly mortgage payments. Under the CARES Act passed last week, a 180-day forbearance is available if you are having a financial hardship due to COVID-19 related loss of income. And, that 180-day forbearance can be extended one time for another 180 days if your financial hardship continues so long as you apply for the extension prior to the end of the first 180 days.

Mortgage loan servicers have set up applications on their websites to apply for the forbearance. The process is simple and streamlined without the need for documentation.

How to apply for the forbearance.

  • Don’t call your servicer. Call volumes are high and hold times are unbearably long.
  • Go to the website of your loan servicer. Servicers have set up applications on their websites streamlining the process.
  • In your application, state that you are having a financial hardship due to COVID-19 related loss of or reduction of income.
  • No documentation is required to apply for a forbearance (but documentation is required to determine the re-payment agreement).
  • Your servicer may ask you for an authorization from your bankruptcy attorney to allow them to speak directly with you which is normal but most are waiving that requirement temporarily. If you need an authorization, contact me and we will send you one.

How Do I Pay Back The Missed Payments?

During the 180-day period, lenders are required to reach an agreement with you on how to pay back the suspended mortgage payments.

How Do I Reach An Agreement To Repay the Suspended Payments?

Servicers are required to enter into a re-payment agreement with you prior to the end of the forbearance period (which may be extended for another 180 days if your financial hardship persists). Your servicer will contact you with a re-payment agreement.

Typical re-payment agreements might look something like:

  • Defer the missed payments to the end of the loan in either a balloon payment or by adding months to the loan term.
  • Enter into a loan modification agreement.
  • Payback the missed payments over some number of months by adding additional monies to your regular payment.
  • Add the suspended amount to a chapter 13 plan by formatting amending the chapter 13 plan.

Do I have to do anything formal with the Bankruptcy Court?

No, your servicer will file a notice with the Bankruptcy Court notifying the court of the suspended payments. When the re-payment agreement is executed, your servicer will again notify the Bankruptcy Court of the re-payment terms.

What Do I Do If I Can’t Make My Chapter 13 Plan Payments to the Bankruptcy Trustee?

Unfortunately, as of right now, there is no simple answer to this question. Typically, when chapter 13 plan payments are missed, a trustee files a motion to dismiss you entire bankruptcy case. This requires a formal written response by your attorney and a court appearance. Usually, missed chapter 13 plan payments are resolved by making a lump sum payment to catch up all or a portion of the missed payments and sometimes a the remaining portion of the missed payments may be added to the remainder of the chapter 13 plan at the trustee’s discretion.

After talking to trustees this past week, the trustees in New Jersey are informally not taking action to dismiss a case if chapter plan payments are missed. However, at some point in the future, any payments that are missed will have to be made up.

What Next?

If you are in need of a Mortgage Forbearance in Chapter 13 Bankruptcy, follow these steps and good luck.

For More Information on any COVID-19 related relief, see our special coronavirus resource page

For more information on relief programs and other important updates about the coronavirus COVOID-19, go to our Coronavirus Resource page.

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Beneficial Changes in the Bankruptcy Code under the CARES Act

Small Businesses and Consumers will benefit from the changes in the bankruptcy code under the CARES Act

A number of changes in the bankruptcy code will benefit Businesses and consumers under the CARES Act making it easier and more beneficial for some to avoid or reorganize debts. See the SBA website here.

How the changes in the bankruptcy code under the CARES Act will benefit consumers.

The CARES Act amends certain provisions under Chapters 7 and 13 of the U.S. Bankruptcy Code to help consumers who will be or have been financially harmed by the COVID-19 pandemic.

The key changes that consumers should be aware of are as follows:

  • Chapter 13 filers with existing confirmed plans who have suffered a “material financial hardship” due to COVID-19 will be allowed to seek plan modifications, including extending their payments for up to seven years after their first plan payment was due, thereby reducing their monthly payment obligation.
  • Payments received from the federal government will not be included in the definition of “income” when determining eligibility.
  • Payments will not be included in the calculation of “disposable income” for confirmation. This change is designed to permit consumers to receive the full benefit of stimulus payments.

The key changes that small businesses should be aware of are as follows:

The CARES Act amends the Small Business Reorganization Act of 2019 (the “SBRA”), which became effective February 19, 2020, to temporarily increase the debt threshold under the new Subchapter V of Chapter 11 of the Bankruptcy Code from $2,725,625 of debt to $7,500,000.

The SBRA is designed to enable small businesses to reorganize their financial affairs in a more efficient and cost-effective manner while also maintaining more control over their businesses. For small businesses, Chapter 11 reorganization has not been a viable option due to the length and high cost of the process.

Some of the key features of the SBRA are as follows:

  • Businesses or individuals with at least 50% of their debts being commercial debt totaling not more than $7.5 million are eligible.
  • The bankruptcy process will be quicker with shortened timelines. For example: the deadline for filing a plan is just 90 days shortened from 120 days.
  • Filers are not required to pay quarterly U.S. Trustee’s fees (often costly)
  • Creditors committees will not be appointed minimizing disputes and distractions.
  • A standing trustee will be appointed who will: (i) help to formulate a plan; (ii) report fraud or misconduct, and (iii) monitor plan distributions.
  • Unlike a trustee that might be appointed in a Chapter 11 case, a SBRA trustee does not take part in operating business. The trustee’s goal is to help resolve issues with creditors and move the case along.
  • Only the small business filing bankruptcy can file a plan of reorganization. This eliminates risk of competing plans filed by creditors.
  • A disclosure statement is not required, unless the Court orders otherwise.
  • The plan may be confirmed even if all impaired classes vote to reject the plan.
  • Payments of administrative expense claims may be stretched out over the term of the plan.
  • Equity holders may be able to keep their equity interests in the business without the need to contribute new value because there is no “absolute priority rule”. This means that business owners can keep their interests in the company even if unsecured creditors will not be paid in full under the plan.

See other important updates and resources on our Coronavirus Resource Page here.

For full text of the CARES Act go here.