As the U.S. economy continues to reopen, financial troubles for businesses and individuals are still here or looming. Many will be looking for debt relief, especially if the economy is slow to recover.
“From everything I’m hearing, in a few months this situation is going to be really bad; the word some are using is ‘tsunami,’” said Richard Cook, an attorney and owner of bankruptcy practice Cape Fear Debt Relief.
Be Proactive
Cook said that anyone struggling financially as a result of COVID-19 restrictions should take steps right away to avoid becoming overwhelmed.
“If you have a mortgage, contact your mortgage lender. Most monthly mortgage statements have the contact number,” he said, noting that many mortgages, while they are serviced by a financial institution, are actually owned by a federal agency such as Fannie Mae, Freddie Mac, the VA, FHA or USDA.
“Forbearance options are there,” Cook continued. “And contact your other creditors. Car lenders are working with borrowers, pushing out repayments. Landlords may be different, but with the courts closed, [eviction] cases won’t be heard right away. Landlords have no requirement to offer help, but if their mortgage debt is being temporarily adjusted, they might pass along that forbearance.”
Cook added that many credit card companies are offering some type of deferral.
Forbearance is available also for federal student loan borrowers. However, Cook said, the key here is understanding that the term means “temporary postponement” and it’s important to look ahead at what happens when the forbearance period ends – probably in three to six months. How should a person or business plan to dig out from all those deferred costs?
Cook recommended that people looking at a deep well of financial problems contact a bankruptcy attorney. Many, he said, offer free consultations.
“Here’s what not to do right now: Don’t cash out your retirement,” Cook said. “If you do file for bankruptcy, your retirement account is protected from creditors.”
Wilmington attorney Algernon Butler III also emphasized that point. It’s an unfortunate but well-intentioned impulse, when people or business owners see themselves or their company in financial distress, he said.
“In an effort to do what they believe is the right thing, they start withdrawing retirement funds to pay [debts].
But [retirement funds] are protected in bankruptcy. Your retirement account cannot be taken in a bankruptcy case,” Butler said. “It’s almost always a mistake to fund a failing situation with retirement funds, but we see it all too often.”
Butler is a partner with the civil law firm Butler & Butler, which has a specialization in financial reorganizations, including bankruptcy. He thinks that individuals and small corporations in the Wilmington area will experience financial hardship as a result of how the country has reacted to COVID-19.
“I feel strongly that we need to responsibly permit businesses to reopen and get people back to work,” he said. “Unfortunately, some individuals and companies may find it in their best interest to consider, as one option, a bankruptcy reorganization.
“While I don’t ever endorse bankruptcy as a first resort, I think that in emergency situations like this, where financial distress is out of someone’s control, then it’s wise to at least consider bankruptcy – the pros and cons – as something that may be in a person’s or company’s best interest to allow them to get back to being productive as soon as possible.”
Bankruptcy Chapters
Butler added that bankruptcy offers some “very powerful” relief but it also involves some serious responsibilities.
“It can be complex and dangerous to navigate without a bankruptcy specialist,” he said. “Every situation, every set of facts is different.”
There are different types of bankruptcy processes, each with its own set of regulations and each detailed in a separate chapter of the bankruptcy code. Chapter 11, used most often by businesses, is designed to help an organization discharge its debts and get back on its feet.
“One of biggest things business owners misunderstand about bankruptcy is they think it means they will have to shut down,” said Laurie Biggs, an attorney with New Bern-based firm Stubbs Perdue, which represents clients in Eastern North Carolina, including Wilmington. “It’s not a going-out-of-business sale. Chapter 11 is designed to help them restructure their debt and stay in business.”
Even individuals who have complex financial situations sometimes must file under Chapter 11, she added.
In Chapter 11, the debtor must meet some minimum payment requirements, Biggs continued. “You propose a plan based on what you can pay. My goal is always to help that business owner repay as much as they can, the way they can afford.”
Chapter 7 bankruptcy, on the other hand, often means total liquidation of a business, but can be a good way for an individual with few assets to pay off debts. It is a viable option for someone who does not own real estate or investments – which would be taken to pay off debt – but perhaps has a mountain of unsecured debt, such as credit card balances or medical bills.
“Chapter 7s generally discharge debt within six months,” Butler said. “You are in and out relatively quickly.”
And then there is Chapter 13, which is the option chosen by most individuals, he said.
“Chapter 13 is reorganization: If [people] need up to five years to repay or catch up with certain debts or taxes, and need a payment plan,” Butler explained. “It’s a really simple, streamlined, economical personal reorganization.”
Recent Changes to Regulations
The federal CARES Act, enacted in late March, made a change to Chapter 13, Butler explained.
“Any individuals who are currently in a Chapter 13 reorganization, which normally offers a repayment plan of up to five years, may extend their plan to up to seven years if they need to because of financial distress caused by the COVID crisis,” he said. “They can go back to bankruptcy court and ask for their plan to be extended. It gives them more flexibility to repay their debts.”
There has also been a significant recent change to Chapter 11 regulations that Butler said could really help a small business.
“Under the [2019] Small Business Reorganization Act there was a new type of Chapter 11 reorganization enacted in February of this year,” he said, mentioning that this provision was contained in Subchapter V of the chapter. Not only is the Subchapter V bankruptcy process usually less expensive, but “It is much easier for the corporate owners who must take their company into bankruptcy, and it’s less expensive for owners to retain their equity in the corporation after a plan is confirmed.”
Biggs said that Subchapter V removes many parts of Chapter 11 that don’t work well for small businesses.
In addition to making the process quicker and cheaper, she added, “it removes some provisions that require all creditors to agree to the plan. Normally, in a regular Chapter 11 case, when you file a plan, all your creditors get to vote on it. If they don’t agree, you have to go to court.
“In a Subchapter V, creditors either accept the plan or reject it, but they don’t get to vote. It doesn’t allow creditors to hold up the process through objections to the plan. [With Subchapter V, a small business] is avoiding big-corporation issues.”
In March, Congress made a further small-business friendly change. Originally, Subchapter V reorganizations could be used by businesses whose debts did not exceed $2.75 million. But that debt limit was raised to $7.5 million for one year, making more small businesses eligible for this streamlined, less expensive process.
Special focus: Taking Care of Business
