The Covid 19 pandemic is all over the news and rightly so. The human health toll is profound. On everyone’s mind, as well, is the economic toll. In light of the President’s emergency order through April, we’re looking at least at two months of lost economic opportunity. For the vast majority of small businesses that is a staggering loss. And to compound this, those lost opportunities are not recoverable. Conferences, vacations, sporting events, school events, work trips, etc. are gone and are unlikely to be to be rescheduled. All of the attendant business – direct and tangential – will have to wait to the next events.
Local, state and federal governments are trying to help but seem unlikely to address the full economic loss. For instance, a nominal benefit to replace two weeks of salary for an event which could last months is a nice thought, but of limited utility. Similarly, the moratorium on evictions and foreclosures is not going to last indefinitely, and does not address the landlords’ own mortgage issues. Further, it is arguable that the cities, counties, and governor don’t have authority to suspend the law generally, and the evictions laws specifically. If the legislature gets involved and creates a stay pending this pandemic, that would be a different story. Also, banks and financial institutions are required to address non-performing loans which means foreclosures and evictions will increase as well. These institutions have many legislators’ collective ears and any new law would likely be of short duration.
While the government is likely to be of limited help, there are multiple laws currently on the books which can help you navigate through these financial difficulties. Before proceeding to these legal options, it is prudent to try a private work out arrangement with your creditors. Having legal counsel assist you with this is invaluable as there are many debt consolidation/credit counseling entities that prey on the economically vulnerable — charging substantial fees and offering limited to no relief. With that cautionary advise, creditors will often entertain private workouts. Creditors are motivated by the avoidance of bad press of taking a hard position during this period of crisis. If the economy improves and the work out terms can be met there is a happy ending to this saga. Certain lenders are already agreeing to forbear payment for a certain time but these payments will have to be made at the end of the payment term.
For those occasions when the work out terms are short lived or impractical, bankruptcy may be an alternative. However disturbing the idea of bankruptcy might initially seem, in fact, bankruptcy laws are there to help those who are unable to pay their bills. In fact, it can buy time to recover. There are several types of bankruptcies for all types of filers.
A Chapter 7 is the most common bankruptcy and is known as a liquidation. It is a fairly quick process that is completed normally within 3 or 4 months. Cases filed during this pandemic, however, are likely to take longer as the interview process cannot proceed until groups can convene again. Filing the bankruptcy petition immediately stops all collection efforts and provides a spell from collections calls, threats of lawsuits, and actual lawsuits. It will temporarily stop a foreclosure and eviction but the halt will likely be lifted within one or two months. This is typically helpful where the debtor has alternative housing lined up but needs some time. For those who want to keep their house, Chapter 13 is probably the better alternative.
Chapter 13 are a consumer reorganization and not a liquidation. This means that the filer pays back some or all of his or her debt over a three – five year period depending upon his or her ability to repay. These are most commonly used by people who earn too much to file a Chapter 7 or need to cure arrears on their home mortgage. This chapter would probably be the most applicable in the pandemic situation where the homeowner has 3 or 4 months of arrears and is facing foreclosure. As an example, if the creditor owed $8000 of mortgage payments, curing of this debt could be done over 3 years but would require that all mortgage payments be made in addition to the curing payments. The cure payment would be $222 per month under this example.
Obviously, if the economic fall-out is longer and more difficult, the amount to cure can get high. If it gets too high, then the Chapter 13 will fail as being unfeasible. It is important that homeowners try to work out with the lender early a forebearance before missing too many payments. Once the lender refuses any further forebearance, further missed payments will result in a default. The bank will at that point start the foreclosure process by serving the borrower with a Notice of Default which gets recorded at the county recorder. 90 days later the lender will record, serve and post a Notice of Trustee Sale within 21 days. The absolute latest to file a Chapter 13 to protect the home is prior to the actual trustee’s sale.
Chapter 11 are reorganizations which seek to pay at least as much back over time as the liquidation value of the company or person. Thus, if the company’s assets were $100,000, but had $1,000,000 in debt, it would have to pay over time $100,000 minimum to unsecured creditors. Typically, most people think of large corporations as being the users of Chapter 11. However, this is inaccurate as Chapter 11 is suitable for many other debtors, individuals and business entities alike. For instance, consumers with large or complicated estates and assets can be better served by filing for Chapter 11. Small businesses with solid revenue can get relief through Chapter 11. Single asset LLCs can get streamlined treatment through the Chapter 11 process.
Verve Law Group’s attorneys have filed hundreds of petitions and are available to help with bankruptcy planning.