The COVID-19 pandemic, with its related public concerns for health safety and governmental actions, has had a profound effect on businesses and the ability of many business owners to keep up with paying their bills. Unfortunately, the pandemic crisis is likely to lead to many businesses and individuals filing for bankruptcy relief.
If you or your business are struggling financially due to COVID-19-related events, you should consider consulting with a bankruptcy attorney. A bankruptcy attorney can help you determine whether bankruptcy will provide the relief you need, and if so, what type of bankruptcy relief is best in your unique situation.
Options for Bankruptcy Relief During COVID-19
The United States Bankruptcy Code offers several different avenues for extinguishing your debts and retaining exempt assets. Exempt assets are protected by either state or federal law from claims of creditors in bankruptcy. One of the most significant advantages for debtors who file bankruptcy is the immediate application of the “automatic stay” provision.
The automatic stay prohibits creditors from taking any further action to collect on an outstanding debt without the bankruptcy court’s approval. The automatic stay gives debtors some time to manage their affairs while preserving the debtor’s assets and ensuring all creditors are treated fairly. The types of bankruptcy available are explained below:
Chapter 7 Bankruptcy
A Chapter 7 bankruptcy is what most people think of when they talk about bankruptcy; a liquidation of non-exempt assets. In a chapter 7case, the Chapter 7 Trustee will sell non-exempt assets for distribution to creditors. Although debtors in chapter 7 generally do not have any assets to pay creditors. Nevertheless, individual debtors in Chapter 7 will receive a discharge of debts (the debts are pardoned/forgiven) subject to certain types of debt being carved out of the discharge thereby requiring the Debtor to pay the carved-out debts. Debtors who have a large amount of medical or credit card debt can be good candidates for Chapter 7. Normally, a debtor can be discharged in a chapter 7 case in about three to five months.
Chapter 13 Bankruptcy
A Chapter 13 bankruptcy is designed to help debtors with a regular income pay their debts over a 3-5 year period. In chapter 13, the debtor will create a plan to repay all, or part, of their debts in installments. Usually, debtors who are far behind on their house payments and car payments can benefit from using chapter 13 because a Chapter 13 case, unlike a Chapter 7 case, provides for the repayment of past due amounts on your home and your vehicle. The debtor may choose to sell assets towards paying down debts, but a sale of assets is not required. Instead, the debtor will work with the creditors and establish a repayment plan approved by the court. Once the debtor completes payments under the plan, any remaining unpaid debts are usually discharged.
Chapter 11 Bankruptcy
Chapter 11 allows a business to continue to operate while under the protection and oversight of the bankruptcy court and a committee composed of the debtor’s seven largest creditors. In a chapter 11, the debtor and the creditors negotiate a repayment plan, called a plan of reorganization. The plan can be confirmed if it satisfies the criteria for a chapter 11 plan under the Bankruptcy Code. Once confirmed, the debtor must fulfill the obligations under the plan.
How COVID-19 Has Impacted Bankruptcy Laws
Bankruptcy courts have had to modify some of the traditional ways that the bankruptcy rules apply and the ways that bankruptcy courts conduct their business.
Virtual Attorney Meetings and Document Exchanges
Many bankruptcy courts have begun allowing debtors and their attorneys to handle much of their interactions and information exchanges virtually rather than through a traditional in-person meeting in an attorney’s office. An original signature may be accepted electronically rather than with pen on paper.
Meeting of Creditors
When a debtor files bankruptcy, the debtor will have to attend what is called the “meeting of creditors” under Section 341 of the Bankruptcy Code. For all cases filed through July 10, 2020, these meetings will be conducted by telephone or teleconference. Your bankruptcy attorney will be able to advise you on what the court where you file will require. You can also check the website for that court.
Changes Made by the CARES Act
To help debtors and the bankruptcy courts during the COVID-19 pandemic, Congress made some temporary changes to the bankruptcy process. These changes expire on March 27, 2021, unless extended by another act of Congress. Under the federal Coronavirus Aid, Relief, and Economic Security (CARES) Act, stimulus checks and other payments under federal law that are related to the coronavirus will not affect a debtor’s eligibility to file for bankruptcy relief under chapter 7 or chapter 13. Those payments will not count as current monthly income under Chapter 7, and they will not be deemed disposable income for those debtors seeking to file under Chapter 13.
For debtors who are already performing under a Chapter 13 repayment plan, the CARES Act permits them to extend the length of their plan out to seven years. To do so the debtor must show a material financial hardship resulting from COVID-19 at a hearing before the bankruptcy court.
Bankruptcy Law Protections for Business Owners
Small businesses may utilize a streamlined chapter 11 process which saves time and expense. The streamlined process eliminates the creditor committee requirement in Chapter 11 and allows a bankruptcy trustee to monitor the debtor’s payments. It allows the debtor to submit a reorganization plan during the first 90 days of the case. The judge can approve it if it is fair and equitable and reasonably likely to succeed. Once approved, the debtor must keep up with plan payments during the life of the plan.
The CARES Act increased the eligibility requirements for this streamlined chapter 11, enabling larger businesses to take advantage of it. Through March 26, 2021, a business can use this less-expensive reorganization process if the business has up to $7.5 million in noncontingent liquidated secured and unsecured debt. After that date, the debt ceiling will revert to the standard amount of $2,725,625, unless Congress extends the relief.
Speak with an Experienced Bankruptcy Attorney at KPPB LAW for More Information
If COVID-19 has you struggling financially, don’t delay. Talk with a skilled bankruptcy attorney at KPPB LAW. They may be able to help you avoid bankruptcy by entering into negotiations with your creditors to restructure your debt and work out a forbearance arrangement. If bankruptcy appears to be the best way to resolve your financial difficulties, a KPPB LAW bankruptcy attorney can help you prepare for it and guide you each step of the way. Contact them today for a consultation about your situation.