April 1, 2020
Eric A. Browndorf, Esq.
In February The Small Business Bankruptcy Act was effective. As set forth in our prior article “Chapter 12 Bankruptcy for Family Farmers and Family Fishermen”, it essentially made all the benefits of a Chapter 11 restructurings available for small businesses in an expedited, streamlined process at a fraction of the cost. Under the original small business act a small business was ineligible if it had debts in excess of approximately 2.9 million dollars. As a direct consequences of the challenges presented by the Virus eligible small businesses can now have as much as 7.5 million dollars in debt.
The Virus has caused a significant and beneficial change to Chapter 13 as well. Ordinarily, a Chapter 13 creates a restructuring of debt over a 36-60 month time period, wherein the Debtor will retain equity in property and other assets in exchange for making monthly payments to creditors in their Chapter 13 Plans. Generally, the unsecured creditors receive little to no payments within this Chapter 13 process, similar to the treatment of these creditors in a Chapter 7 liquidation bankruptcy filing, with a full discharge of the debts upon completion of the 3-5 year plan.
In order to address the income issues created by the Virus, at least for a temporary matter, existing Chapter 13 Debtors that have a confirmed plan, may file to modify their plan to extend their repayment obligations for as much as 84 months. They can also apply for a 180 day mortgage forbearance, which can be repaid by agreement within this extended 24 plan month period, without being charged additional interest.
While Student loans are generally paid directly when due in chapter 13, these payments, if federal loans, have been suspended through 9/30/2020, with no interest accrual during the suspension and no negative reporting on the credit reports.
For those contemplating new Bankruptcy Filings, any income payments received under the CARES Act will not be included as attributable income to calculate the amount of disposable income available to pay any distribution to unsecured creditors.
These changes, taken together, significantly and substantially increase the strategic options available for individuals and small businesses in financial difficulty. Irrespective of the position taken by ones creditors, individuals and small businesses can retain their assets without expending hundreds of thousands of dollars on professionals or spending years litigating in the bankruptcy court.
Eric Browndorf is a Partner and Chairman of the Bankruptcy & Financial Restructuring practice group and Co-Chairman of the Small Business Advice group. Eric may be reached at 609-572-7538 or via e-mail at email@example.com.