Debt, Bankruptcy and COVID-19
By: Ruth R. Wiseman, Esq. and Melissa A. Brennan
On March 27, 2020, the President signed the Coronavirus Aid, Relief, and Economic Security Act (“CARES”) Act. The act has created numerous initiatives to help individuals and businesses navigate financial problems resulting from the Covid-19 Pandemic. The details related to many of those programs have been highlighted in numerous blogs and articles but relatively little attention has been given to how the CARES Act may impact individuals and businesses as it relates to Debt and Bankruptcy. What follows is a summary of significant takeaways from the CARES Act regarding debt and bankruptcy:
Mortgage Forbearance, Deferral or Other Alternatives
If you are able to continue making your mortgage payments, that is the best option; however, if you cannot, there are alternatives. Government-backed mortgages (including, but not limited to, FHA, VA and Fannie Mae loans), upon the borrower’s request, are entitled to forbearance for 180-360 days.
Sounds good, but beware, for any forbearance, make sure to read the fine print. With forbearance, payments will be due at the end of the forbearance period. They are not added on to the end of the term of the loan. Some lenders will require immediate payment at the end of the forbearance period of the entire amount of the forbearance, others will permit mortgage modifications or other installment payment options to satisfy the forbearance.
For non-government-backed mortgages, borrowers should contact their lender about a mortgage modification, forbearance or deferral as many are doing so even though there is no requirement to do so. A deferral or loan modification can roll in any arrears and any missed payments that are due at the end of the note. Again, read the fine print. A deferral or modification can extend the life of the mortgage for many years.
Chapter 13 or Chapter 11 bankruptcy could be a good solution to those who are unable to repay a mortgage forbearance when due.
(Update 6/3/2020: Borrowers with Fannie May and Freddie Mac mortgages now have a new payment deferral option. Beginning July 1, 2020, borrowers who have requested forbearance due to COVID-19 and have the ability to return to their normal monthly mortgage payment will be able to repay the missed mortgage payments upon the sale, refinance or maturity of the mortgage.)
The CARES Act puts a moratorium on initiating evictions from qualified housing for non-payment of rent for a period of 120 days from March 27, 2020. Properties included under this provision include properties with federally-backed mortgage loans. Many states have also enacted laws to protect tenants from evictions at this time.
It is important to note that evictions for other reasons can be commenced, although most courts are operating at limited capacity.
Also, while the landlord may not be able to evict you, you will ultimately be responsible for the rent.
The CARES Act provides a moratorium on residential foreclosures on federally backed loans for 60 days, from March 18, 2020 through May 17, 2020. Many states have instituted similar moratoriums which would cover non-federally backed loans and/or further extend the moratorium period.
All government insured student loans are deferred until September 30, 2020. No interest or penalties will accrue during this period. There will be no collection efforts made during this period, including offsets of income tax refunds or Social Security benefits. Private student loans are not subject to this grace.
Stimulus payments under the CARES Act will not be subject to seizure by the IRS or other government agencies for debts owed to the United States, including tax arrears and outstanding student loans. Many states have made similar provisions.
Stimulus Payments and Bankruptcy
Stimulus payments, including coronavirus related unemployment payments will not be included in the definition of Current Monthly Income in the Chapter 7 and Chapter 13 Means Test and are similarly excluded from the definition of Disposable Monthly Income used to fund a Chapter 13 Plan.
While the CARES Act does not specify that stimulus payments are not property of the Debtor’s bankruptcy estate, it is unlikely that a Chapter 7 or Chapter 13 Trustee would seek turnover of payments under the circumstances.
New Subchapter V Small Business Bankruptcy Under Chapter 11 Bankruptcy
The debt threshold for Chapter 11 debtors who elect to proceed as Subchapter V small business debtors, temporarily has been increased from $2,725,625.00 to $7,500,000.00. This increased threshold only applies to cases filed after the CARES Act was enacted and expires one year from that date. Small Business Subchapter V bankruptcy under chapter 11 is a recent change to bankruptcy laws and could be a simpler, faster and less expensive bankruptcy than a traditional Chapter 11 bankruptcy. One advantage is that it will be more difficult for creditors to contest the reorganization Plan.
Extension of Chapter 13 bankruptcies
Current Chapter 13 debtors who confirmed a Plan prior to the date that the CARES Act was enacted can seek an extension of the time for Plan completion for up to seven years. A request needs to be made and you need to show that you have been affected by COVID-19.
Cancellation of Debt
Technically not part of the CARES Act, but it goes hand in hand with dealing with resolving debts. It may seem like a great alternative to settle a debt, including a credit card debt, for less than the full amount. Collection agencies, credit repair entities and third-party debt buyers love to offer settlements. And at first, it sounds attractive to consumers but it is important to know that the forgiven portion of the debt will be reported to the IRS and a 1099 will be issued to you. Under many circumstances, you will be required to include the cancelled amount in your income on your state and federal income tax returns. You should check with your tax professional.
Payroll Protection Plan Loans/Other Loans
The Paycheck Protection Program (“PPP”) makes certain loans available to small business owners through the U.S. Small Business Administration (“SBA”). Although the SBA has denied applications where the applicant or its principal is in bankruptcy, the United States Bankruptcy Court for the District of New Mexico issued a ruling on May 1, 2020 stating that the SBA’s “decision to exclude bankruptcy debtors from the PPP is arbitrary and capricious…” See, Roman Catholic Church of the Archdiocese of Santa Fe vs. United States of America Small Business Administration, United States Bankruptcy Court, District of New Mexico, A.P. No. 20-1026. Upon information and belief, other lawsuits by debtors against the SBA are pending as a result of the PPP denials and we hope that other Courts will follow suit.
Other loan programs have also been authorized through the CARES Act. Even if you or your small business is in bankruptcy, you should consider applying for a PPP or other loan. Be sure to check with your attorney about any Court authorization which may be required.
It is important to note that the laws and procedures are quite fluid and subject to change. Deadlines could be extended but it is best to be proactive and take action sooner rather than later.
If you or a client are facing financial hardship, tax issues, credit card debt, medical bills or mortgage foreclosure, bankruptcy may indeed be a viable option. The attorneys at Andreozzi Bluestein LLP are highly experienced in filing individual and business bankruptcy cases, have extensive experience navigating the elimination of tax debt through Bankruptcy, and routinely help clients in actions against the IRS. Should you like to discuss any of the issues mentioned here directly with one of our attorneys, please call us today with no obligation.
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