We are in the world’s worst economic flood in 90 years. We are only in the early stages. By the time the flood ends, there will be many painful impacts, including a massive swelling of personal and business bankruptcies. Those first waves began in April. By October, the tsunami will arrive. It will then be a year before the flood recedes. It will be at least an additional year before the economy has mostly dried-out.
There are a few silver linings in these economic storm clouds. First, bankruptcy law was made for this, literally. Lawmakers learned many lessons from the Great Depression. One lesson: design a bankruptcy code that helps all parties recover quickly, and as much as financially possible. This gives a fresh start to not just the debtor, but to all parties and the broader economy. Second, a few very recent—and flat-out lucky—changes to bankruptcy law broadened the range of tools for all bankruptcy filers, and especially for small businesses.
The COVID-19 era requires new strategies and techniques to get the most benefit from bankruptcy. Best practices in 2019 are no longer the best practices for today’s reality. What worked last year won’t work this year.
The following is a list of new facts and considerations for bankruptcy in the COVID-19 era. Some will work in favor of filers, others in favor of creditors.
The Bankruptcy Court is flooded with cases. There are proposals to expand court staffing, but nothing has been implemented yet, and it will take time to do so once it starts. Overloaded dockets favor parties who want to buy time, which is to say, most filers, but not all. This disfavors parties that desire speed; namely, filers who want a quick discharge, as well as creditors, who always want their money fast. No clear winner.
Creditors are also flooded with cases. Creditors—credit card companies and mortgage servicers, for example—designed their systems for the volume of bankruptcies in 2019. In 2020 those systems are swamped. A creditor that misses a deadline or can’t do full research because of overload will lose out. This favors filers.
Courts will conduct hearings and conferences remotely for some period of time. This leads to a very different dynamic. Just one example, creditors almost never attended trustee meetings in person. But now, they can attend remotely (no need to drive downtown and find parking), so there will be increased creditor participation. This favors creditors.
Bankruptcy judges are exercising their power; delaying deadlines and making other adjustments to case administration, including modifying repayment plans, to reflect the business realities of the unique economic situation. This favors filers.
Lower Asset Values
Real estate values have fallen by unprecedented amounts in some sectors. Resale values of business equipment and fixtures have fallen. Even home, car, and personal property values have fallen. One party benefits from lower asset values. It is usually the filer who benefits. Business filers will be able to dramatically reduce their liabilities. Businesses with significant real estate assets might even benefit massively. Only occasionally, will lower values benefit a creditor. Regardless of who benefits, in every single case the current value of assets will be very fact-specific, and intensely-contested. This heavily favors filers.
The repayment plan is the central focus for both Chapter 11 and Chapter 13 cases. In the most uncertain economy in living memory, incomes will be uncertain for individuals and businesses operating in bankruptcy. Filers may have a more difficult time getting their payment plans approved. Filers and creditors must factor income uncertainty into all of their calculations. This disfavors filers, but creditors don’t benefit, either.
Bankruptcy Code Considerations
In March 2020, Congress passed the CARES Act in response to COVID-19. The headline program was the stimulus checks for individuals. For businesses, the Paycheck Protection Program and reinstating Net Operating Loss tax refunds for businesses both could dramatically boost liquidity when it is most needed. CARES also made several significant adjustments to the Bankruptcy Code.
Easier Chapter 11
The small business Chapter 11-V debt ceiling was raised from $2.7M to $7.5M by CARES. This vastly expands the number of small businesses that qualify for 11-V until March 2021. Firms will benefit from the faster, cheaper, and easier Chapter 11-V process. They will be able to reorganize their business and keep it intact. A huge win for small business filers.
Federal stimulus payments made under the CARES Act will not be counted as income for Chapter 7 and 13 filers. A clear win for filers.
Modifications and Extensions
The CARES Act also made it easier for Chapter 13 filers to modify their preexisting repayment plans if they experienced a COVID-19 setback during the plan period. Furthermore, it allows the court to modify the repayment plan by adding two years on top of the standard three to five years. A huge win for filers.
Contact Us for Help
Business Bankruptcy Solutions helps Coloradoans lower their debts, renegotiate contracts and save their businesses. Call (720) 674-7311 or email now to schedule a free consultation. We will discuss the problems facing both your business and personal finances, and the tools we can use to achieve your goals. We draw upon decades of legal and business experience to provide you with actionable solutions. With BBS on board, we’ll help you weather this storm.