Mortgage and Tax Foreclosure Over Payment Reclaimed by Homeowner

Mortgage and Tax Foreclosure Over Payment Reclaimed by Homeowner

Most homeowners know that if you find yourself in financial trouble and behind on your mortgage payments, you could face foreclosure from the lending company. But, did you know that you could also be foreclosed on if you don’t pay your property taxes?

Different states have different rules for foreclosure, which affects when the process can start, what happens while it proceeds and what can be done to end foreclosure. There are also rules and regulations that affect any over payments that can potentially be reclaimed by the homeowner.

Below, we dive deeper into these topics to shed more light on them.

Understanding Foreclosure

Generally speaking, foreclosure is a process that an entity takes to reclaim ownership of a property from a homeowner who is behind on their payments.

As mentioned, different states have their own specific rules for how these processes must proceed.

Foreclosure is a formal legal process that allows the entity to take possession of the property under certain conditions. It allows the entity to recover any outstanding debt the homeowner owes by taking title to the property and then selling the property to someone else. 

Differences between Mortgage Foreclosure and Property Tax Foreclosure

Mortgage foreclosure is a process that’s initiated by the lender when a homeowner fails to make timely repayments. There are various steps that the mortgage company must follow to formally foreclose on the property and take control of it.

Property tax foreclosure, meanwhile, is a statutory foreclosure process initiated by a local government to collect any unpaid property taxes. The government is able to place a lien on the property when homeowners don’t pay their taxes, which gives the entity the right to collect those taxes plus any associated penalties and interest.

If, in time, the homeowner still doesn’t pay, the government has the ability to foreclose on the property and then sell it at an auction to cover those unpaid taxes.

Foreclosure Types and Processes

There are two different types of foreclosure that a lender can initiate, and each follows a slightly different process. 

Judicial foreclosure involves the lender filing an official lawsuit in court to initiate the process. Some states mandate that judicial foreclosure be used.

Nonjudicial foreclosure, sometimes called foreclosure by advertisement, doesn’t involve the court system. There are 29 states that allow this type of foreclosure. This process can be quicker than judicial foreclosures, but there are still plenty of requirements the lender must meet.

Property Taxes

Along with the mortgage and interest, homeowners must pay property taxes — and most will pay them through their mortgage. This isn’t a requirement for everyone, though, so some people may opt to pay property taxes separately on a quarterly basis.

These taxes go to pay for things that local government entities provide, such as public schools, libraries, road repair and maintenance, trash and recycling collection and more.

What is Property Tax Foreclosure?

Property tax foreclosure is the process that local governments take to recover unpaid property taxes. If homeowners fail to pay their property taxes, the government that is owed the tax can file to take control of the property and sell it to make up for their lost money.

Tax Lien Sale vs. Tax Deed Sale

When homeowners don’t pay their property taxes, local governments place tax liens on the property. This gives them a legal claim to the property so that they can secure the payment of the taxes that are owed. In many states, this lien is given a “first-priority status,” which means it must be paid before all other debts, including the mortgage. In the State of Michigan, after the third year of unpaid property taxes, the County will initiate the tax foreclosure process. 

Governments then hold public auctions, and the winning bidder agrees to pay the money to enforce the tax lien. This allows the government to recoup its money.

A tax deed sale, by contrast, is held to actually sell a foreclosed home. The winner of this auction will actually take control of the home itself, rather than just the certificate to collect the outstanding taxes.

How Does the Foreclosure Process Proceed?

All foreclosures must start with official processes of notification by the entity — either the local government or the mortgage lender. How they proceed depends on what type of foreclosure it is and who is filing it.

 

Legal and Financial Implications

There are many legal and financial implications of foreclosure, including the fact that your home can be taken from you. You can lose any equity in the property you have acquired. Long-term, your credit score can be affected by a foreclosure significantly as well.

How Do I See If There Are Any Tax Liens on a Home?

Anyone can check for tax liens on a home through either the local courthouse, county assessor or county recorder known as the register of deeds. Sometimes, you can search these records online for a fee, submit the request by mail or even conduct the search in person at one of those offices.

Each local jurisdiction might have different offices that handle this task.

 

Intervention and Resolution Strategies

Just because foreclosure has been filed doesn’t mean that you will instantly lose your property. There may be multiple options during the process to intervene and pay off the outstanding debt to exit the foreclosure process depending upon the state you reside in. There are even some options for redeeming the property after it has already been sold at sheriff’s sale.

Can a Mortgage or Property Tax Foreclosure Be Stopped in the Same Way?

Each state has different rules for stopping the foreclosure process. Generally speaking, there are more options to stop a mortgage foreclosure. This could include simply paying what’s outstanding, or even modifying the loan to new terms that are amenable to both the borrower and the lender.

It’s a little more straightforward with property tax foreclosure. This can be prevented by coming to an agreement with the local government entity to pay whatever outstanding balance is due on the property taxes.

In either case, the filing of a bankruptcy proceeding would stop the foreclosure process in its tracks through the bankruptcy’s automatic stay provision.  

How Can I Buy a Home Subject to a Tax Sale?

Homes that are sold at a tax sale will be done so at public auctions. They will likely be advertised in local newspapers ahead of time, and then anyone can attend and bid on the property.

Working with a Professional to Resolve Property Tax Debt

There are many outlets for homeowners who are struggling to resolve outstanding property tax debt. One of the best ways is to hire a law firm such as Babi Legal that has years of experience in this area.

The expertise they can provide will be unmatched, and will give you the best chance to prevent your home from being foreclosed on and sold.

Financial Relief Programs and Options

There are many different financial relief programs and options for homeowners who are struggling to pay their mortgage and/or property taxes. Here are some of the most common ones.

Installment Agreement

Some government entities and mortgage companies will allow you to enter into an installment agreement to pay back your outstanding debt. This will allow you to set up a payment plan to pay the balance off over a set amount of time.

File for Bankruptcy

As a last result, you could file for bankruptcy to get some debt relief. This would work if you have other outstanding debts that you could get discharged, such as high credit card balances.

Lump Sum Payment / Redemption

If you have enough cash on hand, you can always exit the foreclosure process by making a lump sum payment of the amount of money you owe, this is known as a redemption. You even might be able to negotiate down the total amount you owe if you make one lump sum payment.

 

Choosing the Right Option for You

What is best for one person is not necessarily the best for someone else when it comes to dealing with foreclosure.

Assessing your financial situation and options

Working with an experienced law firm such as Babi Legal Group, you can assess your financial situation and the options you have to get out of foreclosure status, or to avoid it. By looking at your entire financial picture, you’ll be able to make a decision that’s smart for both now and over the long haul.

How to make informed decisions about foreclosure and debt settlement

There is no one right way to make a decision about foreclosure and debt settlement. That being said, it’s important to have an in-depth grasp on your overall financial situation, including your income, all the debts that you owe, your assets and what your outlook is.

Only then can you make a real informed decision about what would be best for you.

Is CBD Legal in Michigan?

Since Michigan legalized marijuana usage in 2018 through Proposal 1, CBD is completely legal in Michigan. This bill allowed for the recreational growth, purchase, production and possession of marijuana by anyone who is at least 21 years old. This also included any CBD product derived from marijuana.

There are some important things to note if you are under 21 years old, though.

In 2018, the Agricultural Improvement Act, also known as the Farm Bill, made CBD oil that’s derived from industrial hemp legal for people of all ages across the country. One year later, in 2019, Michigan adjusted its state laws to align with the new federal law, through what’s known as the Industrial Hemp Research and Development Act.

These products can’t be added to beverage and food in Michigan, though. So, this means if you’re under 21, you can’t possess beverages infused with CBD or CBD edibles.

CBD that’s derived from marijuana is illegal for anyone under the age of 21 to possess. Anyone 21 and older may use and possess any form of it.

It’s also important to note that even though recreational marijuana is legal in Michigan — and CBD derived from industrial hemp is legal across the country — you still can’t travel with it across state lines. At airports, for instance, you could face serious consequences if TSA finds cannabis in your luggage.

Is CBD a Drug?

Before diving into the specific laws, it’s important to understand what CBD is. CBD is the acronym for Cannabidiol, a chemical that comes from a plant called Cannabis stavia, which is more colloquially known as either hemp of cannabis. 

There have been more than 80 chemicals found in that same plant, and they’re collectively known as cannabinoids. The most well-known is THC, the active ingredient in marijuana that gives people the feeling of being “high.”

CBD comes mainly from hemp, which is a form of the same Cannabis sativa plant, though it contains much smaller THC amounts. It has similar effects on the body as THC, without the “high” feeling THC produces in the brain.

For this reason, CBD has been used for a while now as a prescription to treat people with seizures, pain, anxiety, Crohn disease, Parkinson disease and other conditions.

CBD is considered a controlled drug, and its legality is set by various laws in America.

What is the CBD Law in Michigan?    

Michigan first legalized CBD in 2008, along with legislation that made medical marijuana legal. In 2018, the federal government weighed in on the issue, making industrial hemp that contained 0.3% TCH or less legal.

In 2019, Michigan altered its laws slightly so that they aligned with federal law, making CBD products derived from hemp legal as long as they had less than 0.3% THC.

Michigan also made recreational marijuana usage legal the same year, which expanded what CBD products people were allowed to purchase, possess and use in the state.

What CBD Products are Legal?

CBD products that are derived from both marijuana and hemp are now legal in Michigan. Once the state legalized the recreational use of marijuana, both of those products became legal.

If you are in Michigan and over the age of 21, you are legally allowed to purchase, possess and use any CBD products, no matter where they are derived from. 

Under the state’s recreational marijuana law, anyone who is over that age are allowed to have in their possession as much as 2.5 ounces of marijuana when they’re outside their home and as much as 10 ounces when they’re on their own property. These rules also apply to CBD that is derived from marijuana.

The one thing to keep in mind is that these are state laws and not federal laws. It is only legal to possess CBD that’s derived from hemp and has less than 0.3% THC federally. So, if you are traveling out of state, it’s important that you follow each individual state’s laws in regard to CBD.

Are Edibles Legal in Michigan? 

CBD products come in many different forms. Edibles, those that you eat, are one of the most popular forms. Michigan law doesn’t stipulate which forms people are and are not allowed to purchase, possess and use. As such, CBD edibles are legal in Michigan.

How Much CBD Can You Buy in Michigan? 

   

The rules for CBD follow the rules laid out in the recreational marijuana law passed in 2019. Anyone who is over the age of 21 can legally purchase CBD in Michigan.

If the CBD product is derived from hemp, there is no limit to how much you can purchase legally — as long as it contains less than 0.3% THC. The limits to how much you can legally purchase only come into play when the hemp-derived CBD contains more than 0.3% THC or is derived from marijuana.

In these cases, you can purchase up to 2.5 ounces at a time. That is because you are only allowed to possess that much outside of your home. You can possess up to 10 ounces while on your property, though, which means you can purchase up to 2.5 ounces multiple times and then keep it for future use.

Do I Need a Card to Buy CBD?

Once voters in Michigan passed the recreational usage of marijuana in 2018 — and it officially became law in 2019 — people no longer had to have a card to buy CBD in the state. Before then, you were required to have a medical marijuana card to purchase CBD products that were derived from marijuana.

In 2022, you do not need a card to buy CBD. You only need to be at least 21 years old.

Is it Legal to Give Your Child CBD Oil in Michigan?

Parents can legally give their children CBD oil in Michigan as long as it contains less than 0.3% THC and is derived from hemp. This product, as mentioned before, is not regulated the same as marijuana either in the state of Michigan or federally.

Only in rare cases are other forms of CBD available for children, and those forms must come from a doctor’s prescription.

Is it Legal to Smoke CBD and Drive in Michigan? 

   

Michigan has very strict laws when it comes to driving under the influence. In fact, the state treats driving while under the influence of marijuana the same was as driving under the influence of alcohol.

Technically speaking, it is not illegal to smoke CBD and drive in Michigan as long as the product contains less than 0.3% THC. The problem, though, is that if you are pulled over and have THC in your system, you could be charged with driving under the influence.

That’s why it’s always advisable to not drive in Michigan if you have consumed CBD recently — regardless of what product it is.

 

Waiting Period After Bankruptcy for a Conventional Loan

Waiting Period After Bankruptcy for a Conventional Loan

Bankruptcy can be a the best solution for individuals who have gotten themselves in a bad financial situation. Through the bankruptcy process, unsecured debts — and even some secured debts — can be discharged.

This allows people to start afresh on solid financial footing, rather than getting buried in mounds of debt with no end in sight. Of course, there are some downsides to filing for bankruptcy, including the immediate hit on your credit score that will come.

If you are also looking to apply for a mortgage, it’s important to understand that there will be a waiting period before you can apply for different types of loans. We’ll discuss that in more detail below.

Understanding the Waiting Period

Once you file for bankruptcy, there is a mandatory waiting period put in place by home lenders before you can apply for a new home loan. Each type of loan has a different waiting period, with conventional mortgages traditionally having the longest period. 

Why Is There a Waiting Period for Mortgages After Bankruptcy?

Lenders have put the waiting period in place to ensure that you didn’t use the bankruptcy process to get in a more favorable financial situation for a home loan. In addition, the lenders want to see that you have done the financial work necessary post-bankruptcy to afford a home loan.

How Long After Bankruptcy Can You Buy a House?

Technically speaking, you can buy a house immediately after you file bankruptcy. However, this isn’t a likely outcome, as most lenders will require the waiting period to get a new home mortgage. And if you had enough cash to purchase a home outright without a loan, you likely wouldn’t have needed to file bankruptcy in the first place.

Waiting Periods by Home Loan Type

The waiting period post-bankruptcy depends on two things — the type of bankruptcy protection you filed and the type of home loan you are seeking.

 

Bankruptcy and Mortgage Types

As mentioned, each different type of mortgage has a different waiting period post-bankruptcy. In addition, the waiting period also may differ depending on the type of bankruptcy you file.

Conventional Loan Waiting Period: 2–4 Years

Conventional loans have the longest waiting period. For Chapter 13 bankruptcy, the waiting period is two years from the discharge date or four years from dismissal.

For Chapter 7 bankruptcy, the waiting period is four years from the discharge date.

FHA Loan Waiting Period: 2 Years

FHA loans, backed by the Federal Housing Administration, have a shorter waiting period. For Chapter 13 bankruptcy, the waiting period is one year from the discharge date. For Chapter 7 bankruptcy, it’s two years from the discharge date.

USDA Loan Waiting Period: 3 Years

USDA loans, backed by the U.S. Department of Agriculture, have the same one-year waiting period from the discharge date for Chapter 13 bankruptcy, and three years from the discharge date for Chapter 7 bankruptcy.

VA Loan Waiting Period: 2 Years

VA loans, backed by the federal Department of Veterans Affairs, share the waiting period with FHA loans.

 

Post-Bankruptcy Financial Rehabilitation

The trade-off for the financial freedom that comes from bankruptcy is, of course, the hit to your credit score and the tightening of credit you’re likely to feel from different lenders. These restrictions, though, are only temporary. 

There are plenty of steps that you can take that will help you to re-establish a solid credit profile and get you on the right track.

Getting Your Finances and Credit in Shape

There are many things that you can do to get your finances and credit in shape following bankruptcy. First and foremost, make sure that you create and stick to a solid budget. This will help you to stay on top of your bills, set some money aside for savings and make sure that you don’t find yourself in the same financial position again.

Steps to Improve Your Credit Scores after Bankruptcy

The first step in improving your credit score after bankruptcy is to pay all of your bills on time. By not missing any payments, you’ll be ensuring that you aren’t making your situation worse than it already is.

At some point, it will be a good idea to try to open a credit card so that you can start building your credit. You may not be extended any offers for unsecured credit cards at first, so consider a secured credit card — which will require you to put up collateral, such as cash.

What Can I Do During the Waiting Period After I File Bankruptcy?

During the waiting period, it’s important to put yourself in the best financial position possible. Build your credit as aggressively as you can, put money aside for extra savings and for a down payment, and build a budget that works for you.

 

Credit and Mortgage Application Process

The mortgage application process post-bankruptcy will be the same as if you never filed bankruptcy. The lender will, of course, look at your entire financial and credit history, which will include your bankruptcy.

How Long After I File Bankruptcy Can I Apply for a Mortgage?

As mentioned above, different mortgage types have different waiting periods.

Minimum Credit Score Requirements

The minimum credit score requirements vary by mortgage type as well. Typically speaking, you will need a minimum credit score of 620 for a conventional loan. An FHA loan will require a credit score of 580 if you’re making a down payment of 3.5% or 500 if you’re making a 10% down payment.

While the VA doesn’t have a credit requirement, most lenders will require a credit score of 580 for this type of loan. The same goes for USDA loans, though many lenders will require a credit score of at least 640.

Importance of Credit Report in Mortgage Approval

Lenders will take a look at every aspect of your current financial status and past financial history to make a lending decision. 

 

Strategies for Mortgage Approval After Bankruptcy

Bankruptcy isn’t a death sentence for a future mortgage. There are things you can do to put yourself in a good position in time.

Tips to Improve Your Chances of Getting a Mortgage after Bankruptcy

Make sure that you increase your credit score by reducing debt and paying all your bills on time. Set and keep a good budget that includes extra money set aside for savings. And ensure that you establish a stable income.

Write a Letter of Explanation to Lenders

A good idea could be to write a letter of explanation to lenders. This gives you the opportunity to explain why you filed for bankruptcy, and the steps you have taken to change your financial situation in the time since.

Respond To Lender Inquiries

It’s always advisable to be on top of all lender inquiries. Don’t be afraid to talk about your bankruptcy and what you’ve done to put yourself in a better position since then.

 

Types of Mortgage Loans Post-Bankruptcy

There are many different types of mortgage loans you can get after a bankruptcy.

What Are FHA Loans?

FHA loans are backed by the Federal Housing Authority, which guarantees a large portion of the loan. They are offered through private lenders with the government’s backing. 

The minimum requirements to qualify are lower, including a down payment of as little as 3.5%.

What Are Conventional Loans?

Conventional loans are considered the gold standard of mortgages. They follow all standards of Freddie Mac and Fannie Mae. They typically have the most competitive interest rates and flexible repayment options. You’ll need a better interest rate to qualify, and will need to make a down payment of at least 20% to avoid paying monthly private mortgage insurance (PMI).

Understanding Different Mortgage Loan Options After Bankruptcy

It’s important to understand the different type of mortgage loan options you’ll have after bankruptcy. Which loans you will qualify for will depend on your current situation as well as that of the house.

For instance, to qualify for a VA loan, you must be a veteran or active duty military personnel, or be a spouse of one. To qualify for a USDA loan, your home must be located in what’s considered a rural part of the country.

 

Navigating Bankruptcy and Its Aftermath

Navigating bankruptcy can be difficult and challenging, but you don’t have to go it alone.

Is It Hard To Get New Credit After Bankruptcy?

Getting new credit after bankruptcy may be difficult at first, but after building up your credit by paying bills on time, it will get much easier.

Need Help Navigating the Bankruptcy Process?

You should never go into the bankruptcy process alone. It’s complicated, complex and can get quite expensive. That’s why you should always hire an experienced bankruptcy law firm such as Babi Legal to help you navigate the bankruptcy process.

Reset Your Finances

If you’ve found yourself in a bad financial situation, you can reset your finances by filing bankruptcy. To find out your options, contact Babi Legal today.

Bankruptcy and Utility Bills

Bankruptcy and Utility Bills

When you file Chapter 7 bankruptcy, there are many protections that you get as soon as you file. Certain creditors are not allowed to pursue you for debts, and some — if not all — of your debts can be discharged through the process.

One question that many people have about Chapter 7 bankruptcy is how utility bills are handled. Let’s dive deeper into this topic below.

Understanding Bankruptcy and Utilities

Just like other outstanding debts that you may have, overdue utility bills can be discharged through Chapter 7 bankruptcy. That’s because most unsecured debts can be completely wiped out through this bankruptcy process.

Handling Utility Bills in Chapter 7 Bankruptcy

Under Chapter 7 bankruptcy laws, utility bills are clumped under the unsecured debt umbrella. This puts them in the same category as credit cards and personal loans. As such, they can be discharged through the process of bankruptcy.

Chapter 7 Impact on Utility Bills

While Chapter 7 bankruptcy is proceeding, you will still incur normal charges on your utility bills. Those bills can also be discharged if they are incurred before the bankruptcy closes.

Outcome of Overdue Utility Bills Post-Bankruptcy

The bankruptcy process will discharge overdue utility bills that you have incurred and included in the filing. Once the bankruptcy process is over, though, you must resume your payments of utilities. Bankruptcy doesn’t do anything to discharge future payments. 

 

Immediate Effects of Bankruptcy Filing

There are federal protections in place for people who file Chapter 7 bankruptcy. Utility companies are not able to change, refuse or disconnect service once you’ve filed bankruptcy. They also can’t refuse to provide you services or shut you off just because you filed for bankruptcy.

You may need to file an emergency petition to ensure that your utility services remain connected as you file bankruptcy, though. This will allow you to start the petition process so utility shut-offs can be prevented, and then proceed with filing the remainder of the necessary documents at a later time.

Bankruptcy’s 20-Day Utility Shut-Off Protection

After the bankruptcy filing has been completed, you will have 20 days to make a security deposit with your utility company. If that deposit isn’t paid within that time, then the utility company can shut off your service. In many cases, though, the utility company could extend that deadline.

Post-Bankruptcy Utility Service Continuation

Once the bankruptcy process has ended, the utility company will use your security deposit to open a new account for you. You will then pay under this new account and will have to abide by all the rules for paying to avoid having your service shut off.

Deadline for Utility Disconnection After Bankruptcy

Once bankruptcy has ended, your relationship with utility companies will revert to how it was before. You will pay for your service on a monthly or quarterly basis — depending on the company — and will need to do so to avoid your service being cut off.

 

Navigating Post-Filing Requirements

Filing bankruptcy doesn’t fully protect you from utility bills, in and of itself. There are some other steps you must take to ensure that your services aren’t shut off.

How to pay past due utility bills in bankruptcy

Past due utility bills can get discharged through bankruptcy, but only if you listed them as debits in the bankruptcy schedules. By doing so, you’ll be ensuring that the court notifies the utility company that you’ve filed bankruptcy, which ensures your services aren’t shut off. 

Ensuring Utility Payment in Bankruptcy

In bankruptcy, you will still have to pay for any current or future utility bills you incur. Bankruptcy can only discharge any previous past due bills you have. 

As mentioned before, you will have 20 days from filing to prove to the utility company that you can pay future bills, by providing them with “adequate assurance.” If you don’t provide this, then the utility company could disconnect your service, even if all your past due payments are discharged by bankruptcy.

Handling Inadequate Assurance for Utilities

When you provide documents to the utility company, it’s still possible they may not believe that your assurance is adequate enough. If you can’t come to an agreement on this with the utility company, you can file to ask the bankruptcy judge to force the utility company to accept the payment assurance you provided.

It’s possible for the judge to order that the deposit amount be modified as a result of findings.

How to Pay Future Utility Bills in Bankruptcy

All future utility bills must be paid as normal during and after bankruptcy. That’s because bankruptcy can only discharge past overdue bills.

 

Legal Representation and Bankruptcy

If you are considering filing bankruptcy, it’s essential that you hire an experienced law firm to help guide you through the process. Trying to navigate bankruptcy on your own is generally not a good idea, as you may not be overlooking some aspects of the process that would work to your disadvantage.

Advantages of a Bankruptcy Lawyer

One of the biggest advantages a bankruptcy lawyer can provide is defending your petition. While you will gain protection from debt collectors and creditors by filing bankruptcy, they can challenge your petition or the payment plan you have proposed. 

Bankruptcy attorneys can also bring you peace of mind as you go through what can be a complicated process. Most people who aren’t educated on how bankruptcy works could easily become confused and may miss important deadlines or steps.

Importance of Legal Assistance in Bankruptcy

Having an experienced attorney on your side, like the ones at Babi Legal, is essential when you file bankruptcy. Having legal assistance is so important as there are many intricacies of the bankruptcy system that would be tough for the everyday person to understand.

An experienced bankruptcy lawyer can help you file all the appropriate paperwork on time, and help you minimize mistakes, which could be extremely costly.

 

Rights and Protections Under Bankruptcy

When you file Chapter 7 bankruptcy, a utility company is prohibited from refusing, disconnecting or changing your service. They also can’t shut off your service or refuse

to provide service to you simply because you filed bankruptcy.

Utility Access During Bankruptcy

To continue to gain access to utilities during bankruptcy, you will have to provide adequate assurance to the company that you can pay future bills. This may involve you submitting documentation as well as a security deposit.

Main things to know about the Small Business Reorganization Act (SBRA)

Main things to know about the Small Business Reorganization Act (SBRA)

Chapter 11 bankruptcy is one of the most popular options for businesses to seek relief when they are struggling financially. But, it is often an expensive and cumbersome process, which dissuades small businesses from pursuing it.

That’s a main reason why Congress passed the Small Business Reorganization Act of 2019 — to make it easier for small businesses to file for bankruptcy protection. The streamlined process called Subchapter V is the main aspect of the SBRA, which is a manageable and cost-effective option for small businesses to pursue.

Below are some more details about the SBRA.

Best bankruptcy for your small business

The type of bankruptcy that you pursue for your small business will depend on not just the financial situation that you’re in, but how you want to manage your business after the process.

Chapter 7 bankruptcy, for instance, is known as “liquidation.” That’s because all property and assets are sold off under the oversight of a bankruptcy trustee, and those proceeds are dispersed to creditors. Once the bankruptcy proceedings end, the business will shut down.

Chapter 11 bankruptcy is known as “reorganization.” That’s because the process allows business owners to still operate while they work out a plan to meet all their debts. Chapter 11 is much more in-depth and expensive, though, but Subchapter V makes available a streamlined version of it.

Personal Bankruptcy for Small Business Owners

Small business owners who want to file personal bankruptcy have a few options. 

Chapter 13 bankruptcy is also known as a reorganization bankruptcy, but it’s intended just for individuals. Sole proprietors can use this tool, therefore, to help them reduce their personal debt, which could include balances on credit cards, so that their business can remain open.

Sole proprietors and individuals can also file Chapter 7 bankruptcy, which will erase their personal debts, though their personal assets that are not protected could be subject to be sold.

Continuing Your Business: Factors to Consider

Before you decide what type of bankruptcy to file, there are some factors that you should consider about continuing your business.

First, you should analyze whether your business is making money. If you are losing money consistently, then it might be best for you to close the doors rather than trying to operate after bankruptcy. If you are profitable, though, reorganization could be a great way for you to restructure.

Second, consider if the value of your assets are greater than your liabilities. If your assets are worth more than your liabilities, then it would be in your best interest to try to continue operating after bankruptcy.

Finally, consider if you might be personally liable for your business debts. If you are responsible for these debts, then it could make more sense for the business to continue operating. If you close it, after all, your personal assets could be at risk.

The SBRA (Small Business Reorganization Act)

The SBRA took effect on February 19 of 2020, right before the full outbreak of the COVID-19 pandemic in the U.S. This act created Subchapter V for Chapter 11 bankruptcy that streamlined the reorganization process for small business owners. 

Subchapter V is essentially an alternative that small business owners can use to pursue Chapter 11 bankruptcy. In essence, the SBRA seeks to strike a solid balance between the two most popular bankruptcy options — Chapter 11 and Chapter 7 — allowing businesses to continue operating while also having a quicker, cheaper and more streamlined option for figuring out their debts.

Pros and cons of Chapter 7 and Chapter 13 bankruptcy

There are many pros and cons of the different types of popular bankruptcies. 

Chapter 7 allows you to wipe away personal debts and basically start anew. It provides a fresh start to a lot of individuals who find themselves underwater with debt, allowing them to wipe away unsecured debt while still protecting significant assets such as homes and cars.

On the flip side, Chapter 7 bankruptcy from a small business standpoint means that the business will have to be liquidated to cover outstanding debts. Small businesses will close once the Chapter 7 bankruptcy proceedings end.

Chapter 13, meanwhile, allows the filer to keep some of the assets and property that they’d normally lose through Chapter 7. It allows business owners to reorganize their personal debts so that they can continue operating their business.

The downside is that Chapter 13 doesn’t include any business debts at all. In addition, it can be a rather expensive process.

Going to bankruptcy court as a small business owner

Bankruptcy court can be a daunting place for small business owners to go. That’s why any business owner who is considering filing for bankruptcy should enlist the services of an experienced bankruptcy law firm such as Babi Legal.

Chapter 7 Bankruptcy for a Sole Proprietorship

Sole proprietors can file for Chapter 7 bankruptcy, just as individuals may. This allows filers to erase both their personal and business debts. Any assets that they have — both personal and business — are subject to be sold if they’re not protected by certain exemptions.

The business might end up closing through this bankruptcy process if the bankruptcy trustee needs to sell property and assets to cover debts. 

What Happens When a Business Files for Bankruptcy?

What happens to a business when it files for bankruptcy depends on which type of bankruptcy is filed. Chapter 11 bankruptcy allows the company to continue to operate and reorganize rather than liquidate.

Chapter 7 small business bankruptcy

Under Chapter 7, the business will immediately cease operating and will go out of business. The company’s assets will be sold off to cover its debts. As mentioned, the debts will be completely wiped out, but the company won’t be able to operate afterward. 

Limited Liability Partnerships (LLP)

Members of a LLP can file Chapter 7 bankruptcy so that all business debts can be disposed. In most cases, partnerships won’t receive discharges through this type of bankruptcy. 

All of the assets under this bankruptcy for LLPs will be liquidated and then dispersed to all creditors. In most cases, if any partner is liable for the debts of the partnership, then their liability won’t suffer from the bankruptcy that the LLP files.

However, if the value of the LLPs assets aren’t sufficient to pay off all creditors, then the credits could be able to claim the partners’ personal assets are liable for the debt.

The downsides of bankruptcy

While there are many advantages to filing bankruptcy, there are also some downsides as well.

How does filing a business bankruptcy impact credit?

Filing Chapter 7 or Chapter 11 bankruptcy shouldn’t affect a business owner’s personal debt if they’re operating a corporation or LLC. There are exceptions to this, however, including if you’re personally liable for the debt.

Your small business credit might get impacted by a bankruptcy as well. Bankruptcies make up anywhere from about 5% to 10% of business credit scores, which shows how significant filing for bankruptcy can be.

At the same time, if you file personal bankruptcy, it could also affect the credit score of your business.

Can a Small Business Owner Benefit From Filing a Personal Chapter 13 Bankruptcy Case?

While businesses can’t file Chapter 13 bankruptcy, the business itself can benefit from an owner filing this type of personal bankruptcy. If a small business owner frees up cash through the Chapter 13 bankruptcy, then the small business could benefit substantially from the investments that could be made.

Forgivable Loans and the CARES Act

Forgivable Loans and the CARES Act

The federal government passed several emergency aid bills during the COVID-19 pandemic that were meant to help people survive during what was one of the most challenging times in U.S. history.

The first of these aid bills was called the CARES Act. Passed in March 2020, there were many aspects to the multi-trillion-dollar package. Multiple forgivable loans were created specifically for use by small businesses, while other forgivable programs were created for individuals.

Below is a description of some of the most popular of these new programs under the CARES Act.

Disaster loans

The CARES Act created a COVID-19 Economic Injury Disaster Loan, more commonly known as the EIDL. There were two types of EIDL programs created by the bill.

The first was a loan program through which small businesses could use funds to pay for working capital and other normal operating expenses. These loans aren’t forgivable and had to be repaid.

There were different requirements for this EIDL loan, depending on how large the loan amount was. Loan increases were also available until all the funds were exhausted.

The second type is the EIDL Advance funds. They were awarded to existing EIDL applicants who met additional criteria. The Advances are treated like grants without the typical requirements the federal government places on such programs.

Because of their grant-like nature, EIDL Advance funds were forgivable and didn’t need to be repaid.

Public Service Loan Forgiveness (PSLF)

The CARES Act also included programs for loan forgiveness and a break in repayments for borrowers of federal student loans. 

The Public Service Loan Forgiveness program, or PSLF, applied to borrowers who had federal direct loans. These borrowers could qualify for loan forgiveness after they made 12o monthly payments while they were working for an eligible employer on a full-time basis. 

Payments made as part of an income-driven repayment plan also qualify as payments toward the PSLF. 

The CARES Act automatically suspended student loan repayments for federal loans from March 13, 2020 through September 30, 2020, and that pause was extended multiple times. 

Paycheck Protection Program (PPP) vs. CARES Act

Perhaps the most popular program created by the CARES Act was known as the Paycheck Protection Program, or PPP. It is essentially a new loan backed by the Small Business Administration aimed at helping small businesses continue employing their workers during the pandemic.

The money handed out under the program was a loan that could turn into a forgivable grant if the recipient met certain qualifications. 

Loans of as much as $10 million were available to small businesses to use for as much as six months of their average monthly payroll costs from the previous year. Businesses that received the loans could use as much as 40% of the total on non-payroll costs, including utilities, rent and mortgage interest.

All loans were for five years with a fixed interest rate of 1%. If the loans were used for the purposes described above, they could qualify for full forgiveness. The amount to be forgiven would be reduced, though, depending on how the funds were allocated.

Small business debt relief program

The SBA also offered other small business debt relief programs through the CARES Act. The SBA would pay six months of principal, interest and all associated fees for borrowers who have an SBA Microloan, 504 or 7(a) loan. 

The debt relief depended on when the loans were taken out and didn’t apply to the EIDL program.

Can a small business get an EIDL and a PPP loan?

Small businesses were eligible to receive both an EIDL and a PPP loan under the CARES Act. However, the funds from these two separate loan programs could not be used to cover the same expenses. 

Direct forgiveness through SBA

The SBA was the agency tasked with handling the loan forgiveness programs created through the CARES Act. This made sense, as the agency already offered many loan programs with favorable rates for small businesses.

SBA’s new loan program for small businesses

The PPP was the most popular new loan program created for small businesses under the CARES Act. 

Those that were eligible to apply must have 500 employees or less. Each business could apply for a loan worth as much as 250% of its average monthly payroll costs — with a maximum of $10 million — and it was meant to cover up to eight weeks of payroll, and help with the other expenses mentioned above.

Those who are self-employed, an independent contractor or sole proprietor were also eligible to apply for a PPP loan. Any portion of the PPP loan that wasn’t forgiven was subject to a loan term of 10 years, with a maximum rate of 4%. 

Conditions for loan forgiveness

In order for small businesses to receive loan forgiveness under the PPP program, there were a number of requirements they had to meet. Only 40% of the funds could be used for non-payroll expenses, while the rest had to be used to maintain payroll.

Businesses that received these loans had to compile proper documentation, fill out a forgiveness form and submit the documentation to the lender. Those files would all be reviewed, with a decision sent back to the small business.

Loan Payments

Small businesses that received a PPP loan before June 5, 2020, had to repay their loans fully in two years, or within five years if they were approved after that time. Payments could also be deferred for as much as 10 months after the disbursement date of the loan. 

Updates for eligible borrowers

Most of the forgivable loans created by the CARES Act have expired. That being said, there is still time to apply for forgiveness if you haven’t already.

The SBA also offers many other loan programs for small businesses that are much more favorable than traditional loans from private financial institutions. Terms of those loans depend on which loan you’re applying for and what you want to use the money for.

How the CARES Act shields homeowners from foreclosure and eviction

How the CARES Act shields homeowners from foreclosure and eviction

The CARES Act, passed in the early stages of the COVID-19 pandemic, was a massive aid package that was meant to provide financial relief to individuals and businesses struggling during the pandemic and mandatory government shut-downs. 

With much of the country forced to shut down during the outbreak of the pandemic, people were left scrambling to figure out how they were literally going to put food on the table.

The CARES Act had many parts, including direct payments that most every American received. It also enhanced unemployment benefits and provided loans to small businesses to maintain their payroll — which turned into grants if certain requirements were met.

Another main aspect of the act dealt with mortgages and foreclosures. Below, we’ll dive deeper into the details of how the CARES act shields homeowners from foreclosure and eviction.

Coronavirus and the CARES Act

When the COVID-19 pandemic broke out in the U.S. in March 2020, virtually everyone across the country was forced to lock down in their homes. Schools and businesses were shuttered, except for a few essential services such as grocery stores and medical facilities. 

While some people were able to continue working from home, many others were laid off overnight. Some who weren’t laid off didn’t receive payment from their companies, because those businesses were no longer generating sales.

With all of this happening swiftly and at once, Congress stepped in to pass the CARES Act — with trillions of dollars in financial aid going to a number of different areas.

So many people were struggling paying their bills that the federal government didn’t want to see millions of homes go into foreclosure overnight. That’s why one of the areas that was covered under the CARES Act was mortgages and a moratorium on foreclosures that were backed by the federal government.  The CARES Act did not apply to privately held mortgages.

Foreclosure and the Coronavirus Pandemic

There were three main provisions in the CARES Act that dealt with mortgages and foreclosures. 

The most commonly-used aspect was a forbearance period, which allowed homeowners to pause the monthly payments on their mortgage for as much as one year. During the forbearance period, lenders were not allowed to charge late fees for missed payments, and also couldn’t report homeowners to credit agencies.

Mortgage forbearance didn’t forgive monthly payments, but rather allowed homeowners to skip them for a temporary period of time so they could use the money on other everyday essentials.

There were also provisions for foreclosures, sheriff sales and evictions.

Foreclosure Provisions of the CARES Act

To receive a forbearance on your mortgage, you had to request it directly from your mortgage servicer. All mortgages that were backed by the federal government in some capacity were eligible for this forbearance. That includes loans obtained through the VA, FHA, USDA, Freddie Mac and Fannie Mae.

The CARES Act stated that you only had to make this request and verbally declare that you were impacted by the Covid-19 Pandemic, and didn’t have to provide any documentation regarding your financial hardship.

While lenders weren’t able to charge late fees for any missed payments for loans that were in a forbearance period, they were allowed to choose how those missed payments would be handled once the period ended.

They could charge a lump sum payment — meaning that all missed payments would come due in one large lump sum once the forbearance ended. They could prorate the payments, evenly dividing the amount of all the missed payments by the number of missed payments, and then adding that amount on top of the regular monthly mortgage.

A third option would be to extend your loan so your missed payments were just tacked on at the end. The lender wasn’t required to allow borrowers to choose the repayment method, though they could certainly work together on it.

Sheriff sales and foreclosures judgment under the CARES Act

During the pandemic, homeowners who were being foreclosed on or were facing foreclosure got some major relief. Any lender working with a mortgage backed by the federal government wasn’t allowed to move for a judgment of foreclosure, initiate any foreclosure process (non-judicial or judicial), seek a sheriff sale, or execute an eviction related to a foreclosure or foreclosure sale.

The moratorium was put in place for three months initially, but then was extended multiple times. The only exceptions to the rule was if a property was abandoned or vacant.

Eviction restrictions

Homeowners facing foreclosure were not allowed to be evicted from their homes during the moratoriums. This basically put a pause on all foreclosure proceedings for a temporary period of time.

Foreclosure and your mortgage payment

The foreclosure process differs from state to state, based on the local laws that are in place. Typically speaking, mortgage companies are not allowed to initiate foreclosure until a certain number of days after the first missed mortgage payment.

From that point, there are many steps that must be followed.

Foreclosure process: How does foreclosure work?

In the state of Michigan, foreclosure can either be judicial or by advertisement. The timeline for each is the same, but there are some slight differences for how the process plays out.

Foreclosure timeline

In Michigan, the payment delinquency timeline actually begins on the second day after a missed mortgage payment. All payments are due on the first of the month, and will then be considered delinquent on the second. 

The mortgage company then has a process that they must follow to pursue foreclosure, which generally requires at a minimum 90 to 120 days of missed payments.

Missed mortgage payments

Once a mortgage payment is missed, late charges can be assessed. The lender or servicer of the loan is required to make live contact with the homeowner to inform them about options for loss mitigation.

On Day 45 after the missed payment, the lender or servicer has to assign a single point of contact to the homeowner and also provide a written notification of options for loss mitigation and the fact that they are delinquent.

The lender and borrower can work on a loan workout, modification of the loan or other option for loss mitigation. You can also make a partial payment if the lender allows it.

Foreclosure counsel and notice of default

At Day 121 after the missed payment, the foreclosure process can begin, if all other attempts at resolving the outstanding debt are unsuccessful.

At this point, an official notice of foreclosure will be recorded at the local courthouse. A date for a sheriff sale will be scheduled and published in a county newspaper for four consecutive weeks. That notice will also be posted at the property within two weeks of the first publication.

At this point, it is very important for homeowners facing foreclosure to enlist the services of an experienced foreclosure law firm to determine if the foreclosure process was followed correctly and if all options under the CARES Act were provided.

Other Foreclosure Provisions

In Michigan, the redemption period begins at the date of the sheriff sale through six months after it, though it could also last for 12 months in certain circumstances. The homeowner is allowed to live in the property during the redemption period and is not required to make payments as long as they maintain the property, utilities and insurance.

The borrower can redeem the property by paying the amount bid at the sheriff sale plus all interest and fees.

Judicial Foreclosures Vs. Nonjudicial Foreclosures

A judicial foreclosure requires the lender to take the borrower to court to get an official judgment. A non-judicial foreclosure includes a sheriff’s sale that must be advertised in a local newspaper with additional required notices such as placing a notice of foreclosure sale on the home itself.

Judicial Foreclosure States

There are 21 states plus the District of Columbia that predominantly use judicial foreclosure. They include Wisconsin, Vermont, South Carolina, Pennsylvania, Oklahoma, Ohio, North Dakota, New York, New Mexico, New Jersey, Maine, Louisiana, Kentucky, Kansas, Iowa, Indiana, Illinois, Hawaii, Florida, Delaware and Connecticut.

Nonjudicial Foreclosure States

The other 29 states predominantly use the non-judicial foreclosure process.

FAQS

Should I Have Filed Bankruptcy During the Pandemic?

The CARES Act and other economic stimulus packages passed during the pandemic provided some relief to people experiencing financial hardship. That being said, some people still needed to file for bankruptcy during the pandemic.

Do I Owe Money if the House Sells for Less than I Owe?

If your home is sold at sheriff’s sale for less than you owe on the loan, the lender can still go after you for the unpaid amount, which is referred to as the deficiency.

Can I Keep the Profits from a Foreclosure Sale?

In most cases, the borrower can keep any profits from a foreclosure sale. There may be other claimants to that profit, though.

How Will Foreclosure Hurt My Credit Score?

A foreclosure will typically lower your credit score by 100 points or more, and will typically last for about seven years. Over that time, your credit score will improve.

How Can I Stop the Foreclosure Process?

In Michigan, you can stop the foreclosure process by working directly with your lender to make up for missed payments, or by redeeming the property following a sheriff’s sale.

Quick overview of Chapter 11 Sub Chapter V for Small Businesses

Quick overview of Chapter 11 Sub Chapter V for Small Businesses

Chapter 11 bankruptcy is commonly known as a “reorganization” bankruptcy. It’s a tool that any individual that meets the requirements, or business, no matter what type of organization it is, can use if they are having trouble meeting their debt obligations.

While individuals can use Chapter 11 bankruptcy, it’s typically used by corporate entities that want to reorganize and continue operating afterward, rather than liquidating their assets and shutting down. 

Chapter 11 bankruptcy can be overly expensive and cumbersome, though, which provides challenges to small business owners. A few years ago, Congress passed a new bill that streamlines the Chapter 11 bankruptcy process, making it more affordable in the process.

Below, we’ll give a quick overview of Chapter 11 Sub Chapter V Bankruptcy for small businesses.

Types of business bankruptcy

There are four types of business bankruptcy, each of which is designed for a different purpose.

The most common type is Chapter 11, as it allows businesses to continue operating after the bankruptcy proceedings. Chapter 7 bankruptcy, by contrast, is a full liquidation and will result in the business immediately dissolving upon the bankruptcy filing.

Chapter 13 bankruptcy is similar to Chapter 11 in many ways, though it’s only a fit really for certain sole proprietors. Chapter 12 bankruptcy is one option that small fishing and farming operations have. It provides a framework for restructuring that family businesses can use so they don’t have to liquidate.

Chapter 11 for business

The reason why Chapter 11 is so popular for businesses is that it allows them to continue operating after the bankruptcy restructuring. Through the process, business owners will enter into repayment plans with their creditors so that they can pay them back over time — as opposed to the previous repayment arrangement.

The restructuring plan is created and then presented to the court, which must approve it before it goes into practice. The creditors will be part of the process as well.

Secured and unsecured debts in Chapter 11

During the Chapter 11 bankruptcy proceedings, most debtors enjoy a moratorium on repayment of general unsecured debts that will last anywhere from about six to 12 months. 

In the same period, though, debtors may still need to pay their secured debts, if the services, goods and/or property is needed to continue operating the business.

The Chapter 11 debtor in possession

The debtor in possession (DIP) is a term that refers to the debtor who will be the one to operate the business after the Chapter 11 bankruptcy petition is filed. The person is a fiduciary and basically has the powers and rights of a trustee in the bankruptcy proceedings.

The DIP can hire outside professionals such as accountants, appraisers and attorneys, as long as the court approves.

Subchapter 5 bankruptcy

Subchapter 5 bankruptcy is made available to certain small businesses that need to file bankruptcy. There are certain limits that apply for business owners to qualify, though.

Non-contingent debt limit

To qualify for Subchapter 5 bankruptcy, debtors must engage in commercial activity and have debt that totals less than $7.5 million total — both unsecured and secured combined.

In addition, at least half of that non-contingent debt must come from activities related to the business. When filing, the debtor has to specify that they want to file under Subchapter 5.

The Small Business Reorganization Act

The Small Business Reorganization Act of 2019 was enacted in August 2019, and became effective in February 2020. The original debt limit was set at $2.75 million, though that was increased to $7.5 million temporarily after the outbreak of the COVID-19 pandemic.

That $7.5 million limit is effective for any Subchapter 5 bankruptcy filed between March 27, 2022, and June 21, 2024. After that date, the limit will revert to the original $2.75 million, unless Congress acts to extend and/or change the limit.

Small business debtors

Subchapter 5 is available only to small business debtors. These organizations are determined based on the size of their debt, not the size of the company itself.

Protection for creditors

The debtor will come up with a repayment plan that will be presented to each class of creditors through the court. Assuming the plan meets all the requirements of the bankruptcy court, the plan will be approved if at least half of the creditors in the class approves it.

Equity security holders

Unlike typical Chapter 11 bankruptcy, Subchapter 5 allows all equity security holders to retain interests they have in a debtor over the objection of non-consenting creditors, and they don’t have to pay all other claims that are higher priority in full.

Subchapter V for individuals

Individuals can also qualify for Subchapter V, just as they can through traditional Chapter 11 bankruptcy. They must meet the same debt limits as outlined above, and must be engaged in business activities.

Single asset real estate debtor

People whose primary business activity is owning a single asset real estate is typically excluded from Subchapter V. There are some exceptions to this rule, including if a debtor’s multiple parcels of property are not considered a single property or project.

A bankruptcy attorney can help

While Subchapter V provides a streamlined approach to Chapter 11 bankruptcy, it’s still a complex and complicated process. Making a mistake can be extremely costly for small business owners.

That’s why it’s always important to hire an experienced bankruptcy attorney who can help guide you through the process. The professionals at Babi Legal have years of experience in business bankruptcy cases, and can help you get through the process in the best situation possible.

Bankruptcy court and the U.S. Trustee or Bankruptcy Administrator

Once a bankruptcy case is filed, a U.S. trustee or bankruptcy administrator is assigned to monitor the case, and all actions that are taken by the parties involved. 

In North Carolina and Alabama, a bankruptcy administrator is the person who will oversee all bankruptcy cases. In every other state, a U.S. bankruptcy trustee will be assigned to monitor bankruptcy cases.

Creditors’ committees

A creditors’ committee is a group that represents all creditors in bankruptcy proceedings. This committee is given broad responsibilities and rights, which includes coming up with a reorganization plan for companies that file bankruptcy, and ultimately deciding whether liquidation would be the best path forward.

Appointment of a case trustee according to the bankruptcy code

The U.S. trustee will appoint a bankruptcy case trustee, after consulting with all parties who have an interest in the case. Once selected, this case trustee must be approved by the bankruptcy court.

The plan of reorganization

The plan of reorganization is a comprehensive and complex document that will be prepared by a business debtor that will detail their plans for how they will repay their creditors over time, and how they will operate once the bankruptcy proceeding ends.

It’ll categorize creditor claims into different classes and describe how each class will be treated. Creditors will receive the plan and vote on it to approve it. Then, the bankruptcy court must give final approval.

Acceptance of the plan of reorganization

Each creditor class must vote on the reorganization plan. Under Subchapter V, at least half of the creditors in each class must approve the plan of reorganization for it to be approved. If not, the bankruptcy court will chime in on the process.

Post confirmation modification of the plan

After the plan is confirmed, it’s still possible to modify it, as long as the details of the modification meet certain requirements under federal bankruptcy code. The court also must determine that there are circumstances that warrant the original plan to be modified.

Post confirmation administration

A court order will initiate the post-confirmation administration of a reorganization plan. Some legal actions will be taken by a creditors’ committee or bankruptcy trustee if the debtor objects to certain claims or if they need to recover funds.

Impact of the CARES Act Mortgage Forbearance Rules and Loan Modifications

Impact of the CARES Act Mortgage Forbearance Rules and Loan Modifications

The CARES Act was passed in March 2020 not long after the COVID-19 pandemic exploded in the United States. It’s a $2.2 trillion economic stimulus package that Congress passed and then-President Donald Trump signed to provide economic relief to people all around the country who were struggling financially.

There were many provisions in the CARES Act, including direct economic stimulus payments to individuals, grants and tax incentives for businesses and more. 

One of the most popular programs available under the CARES Act was mortgage forbearance. This was available to millions of people who had loans that were backed by different federal agencies.

Below, we dive deeper into CARES Act mortgage forbearance rules and loan modifications as they still apply today, four years after the law was passed.

 

Loans covered under the CARES Act

Loans eligible for mortgage forbearance under the CARES Act are those backed by different federal government agencies and GSEs, or government-sponsored enterprises. 

These include some of the most popular loan programs in the country, such as those:

  • Insured by the Federal Housing Administration (FHA)
  • Administered by the Department of Housing and Urban Development (HUD)
  • Insured or guaranteed by the Department of Veterans Affairs (VA)
  • Insured, guaranteed or made by the Department of Agriculture (USDA)
  • Securitized or purchased by the Federal National Mortgage Association (Fannie Mac) or Federal Home Loan Mortgage Corp. (Freddie Mac)
  • Guaranteed under certain sections of the House and Community Development Act of 1992 that target Hawaiian and American Indian families

These loans could be eligible if they are held by individuals or even some commercial owners and landlords, though the rules for forbearance are different for each type of borrower.

 

Mortgage forbearance

Mortgage forbearance is a process that provides financial relief to those who qualify under the CARES Act. It’s a way that you can pause monthly repayments on your mortgage so that you can have that extra cashflow to pay for other essentials. This is available to those who experienced financial hardship related to the COVID-19 pandemic.

Covered forbearance period

The initial forbearance period was 18 months if Freddie Mac or Fannie Mae backed your mortgage. To be eligible for those 18 months, though, you had to be in an active forbearance plan by September 30, 2021. The maximum extension period of forbearance after that is 12 months.

Other federal mortgages were also available for a forbearance period of 18 months, but again, only if you were in an active plan as of September 30, 2021. Otherwise, the forbearance period is 12 months.

During the forbearance period, the loan servicer is banned from charging interest, fees or penalties. They also can’t report you to a credit bureau for a missed or late payment, as long as you’re officially in one of the CARES Act forbearance programs.

Options for repaying after your mortgage forbearance ends

When your mortgage forbearance ends, you will be required to resume your monthly repayments as they were before the forbearance began. If you can continue to make those payments, then simply do so to get started again.

However, if you are having trouble working that back into your budget — or if you are still experiencing financial hardship — there are options that you have at your disposal.

Repayment options vary by agency

An important thing to note is that your repayment options following mortgage forbearance depends on the agency that backs your loan. This is why you’ll need to reach out to your loan servicer immediately if you are having trouble repaying your loan once the forbearance period ends.

Some options might include reducing the amount of your repayments or modifying your loan in some other way to provide you with financial relief.

Steps to request forbearance under the CARES Act

To request forbearance under the CARES Act, you must directly contact your loan servicer, which is the company you make your payments to. The servicer will require you to submit certain documentation to prove the reason you need the forbearance, though it’s not extensive.

In most cases, a simple phone call will suffice to get the process started. You may have to follow up and submit documents via email or mail, though.

Mortgage forbearance end dates

The mortgage forbearance periods under the CARES Act have all ended. The Biden administration, in conjunction with the Consumer Financial Protection Bureau, have passed some rules that were meant to prevent a huge number of foreclosures happening once the periods ended. 

Additional Resources on CARES Act Forbearance

Some of the additional resources that the Biden administration has passed include allowing borrowers to resume their mortgage payments and have their missed payments applied to the end of the total mortgage. They might also be able to reduce their monthly payments through a streamlined loan modification.

Borrowers also may have the option to sell their homes to get out of a mortgage they can no longer afford. Again, though, keep in mind that what is available to you will depend on your individual situation and your specific loan.

Penalties that accompany a CARES forbearance request

As mentioned before, your mortgage servicer cannot charge any penalties, interest or fees during the forbearance period, and you cannot be charged any penalties for applying, either. Late fees, penalties and accrued interest can resume once the forbearance period ends, though.

Loan modification and the CARES Act

While the CARES Act itself didn’t provide any official loan modification programs, it did require the lender to offer loss mitigation options to determine the borrower’s feasibility to modify the loan and other related options once your forbearance period ends. Those are described in more detail below.

Refinancing FHA loans after forbearance with your mortgage servicer

One common way that you could gain some financial relief after forbearance is by refinancing your FHA loan. Depending on your situation — including your credit score, how much equity you have in your home and what interest rate you qualify for — refinancing could result in a lower monthly mortgage payment.

A refinance will result in you basically replacing your current mortgage with a new one that has better financial terms. You’ll need to reach out directly to your mortgage servicer to initiate and apply for a refinance.

Refinancing VA loans after forbearance

If you have a VA loan, you will have two options to refinance. The first is called a VA streamline, or a VA IRRRL, or a cash-out refinance. 

The VA IRRRL could be an option if you already have a VA mortgage, want to save money on your monthly payment but don’t want to take any cash from the equity you might have in your home. If you wish to take equity out of your home through a refinance, you’ll have to turn to the cash-out refinance option.

Next steps after mortgage forbearance (including your mortgage payments)

Once your mortgage forbearance period resumes, you’ll be required to resume your monthly payments as they were set before the period began. If you find that you are having trouble making those repayments, it’s important to reach out to your loan servicer immediately to see which options you might have at your disposal.

 

FAQs

How will forbearance impact my credit?

Loan servicers were barred from reporting you to a credit agency for missed payments during forbearance periods under the CARES Act.

What happens if your CARES forbearance plan extension is about to expire?

It’s important to reach out to your loan servicer if your CARES forbearance plan extension is about to expire. They will be the ones that could help you with any further financial assistance or other options available.

How do you request a mortgage forbearance extension?

You will have to contact your loan servicer to request a mortgage forbearance extension. They will be the ones to decide whether or not to offer you an extension, based on a number of factors.

Can you exit your CARES forbearance plan early?

Yes. You can request to end your forbearance period early and to be qualified for a repayment option at any time.

Update on Student Loan Forgiveness

Update on Student Loan Forgiveness

Student loan forgiveness has been a highly-debated topic for the last few years, as the federal government under both former President Donald Trump and current President Joe Biden has initiated various programs to delay repayments or forgive outstanding debt altogether.

Since the onset of the COVID-19 pandemic four years ago, there have been many twists and turns in the student loan forgiveness saga, leaving many borrowers unsure of what the future will hold.

Even still, millions of student loan borrowers have been able to benefit from different executive actions that relaxed rules for eligibility, modified programs in existence and streamlined all application processes. Some modifications to repayment systems have allowed some student loan borrowers to save as well.

Borrowers struggling with student loan debt may be able to qualify for forgiveness through various federal programs. Those who don’t qualify may not have many options, as we’ll dive into further below.

Federal student loans

Last June, the Supreme Court struck down a plan by Biden that would’ve canceled billions of dollars of student loan debt. In the time since, the White House has been working hard to find new ways to bring borrowers relief.

In mid-February, the latest plan was announced that would do just that. The latest update on student loan forgiveness will see more than 150,000 borrowers qualify for the cancellation of nearly $1.2 billion in total student loan debt.

Those who qualify are eligible under the SAVE plan, which is a repayment program for federal student loan debt based around income. Borrowers who have lower balances — $12,000 or less — and also have made repayments for at least 10 years qualify to have the remaining debt wiped away.

In total, the Biden administration has now canceled almost $138 billion in federal student loan debt, benefitting nearly 3.9 million borrowers in the process.

 

Student loan borrowers seeking discharge

While this latest announcement is surely a welcome one for many borrowers, it still leaves many students without any relief at all. Those who don’t qualify for the loan forgiveness through the SAVE program don’t have nearly as many options for automatic and immediate relief.

It’s possible to seek discharge of student loan debt, but that’s a more complicated and complex process, as we’ll dive into further. There are other options to lower payments, though.

 

Student loan debt relief

Even if you aren’t eligible for complete forgiveness of your student loan debt, you can still take advantage of other plans to lower your monthly repayments.

The SAVE plan, as mentioned above, offers some borrowers the ability to lower their monthly payments based on their income — even if they don’t qualify for full forgiveness. This can provide some significant relief to those who need it.

It’s also possible to refinance student loans in much of the same way that other loans are refinanced. In this option, you would be replacing your old loan with a new one that has more favorable terms.

If you’re able to lower your interest rate, it could help to reduce your monthly payments. At the same time, if you refinance to a private loan servicer, you would lose any benefits that the federal government provides or may provide in the future.

It also may be possible to seek temporary deferment of repayment depending on your situation. If this is something you’d like to look into, it’s best to reach out to your loan servicer directly.

 

Student loans and bankruptcy

Until recently, getting student loans discharged through bankruptcy was a very difficult process. That’s because student loan debt is treated differently than other types of debt in bankruptcy proceedings.

In the 1970s, Congress passed legislation that put protections in place, because they were afraid that wealthy people would eventually abuse the system to get their student loan debt discharged. 

This meant that in order to get student loans discharged through bankruptcy, a person had to sue the federal government and try to prove that the loan was causing them “undue hardship.”

That was a significant hurdle to overcome, not only because it was hard to prove the “undue hardship” but also because it was expensive to do so. 

A law professor at Villanova University actually conducted a study in 2020 that found that only a little more than one in 1,000 people who declared bankruptcy and had student loans were able to get that debt discharged.

 

Approval for student loan discharges in bankruptcy

In November 2022, the Department of Education updated rules to make it easier for student loan debt to be discharged through bankruptcy. Now, borrowers who wish to have their student loan debt discharged through bankruptcy have to fill out a form that’s 15 pages long. Then, attorneys working for the government will use new guidelines on exactly what would qualify as “undue hardship.”

This has made the process simpler and more effective for borrowers. In fact, in November 2023, the DOE reported that 99% of people who used this new process were successful in getting their student loan debt discharged through bankruptcy.

While that only included a little more than 600 people total, the department believes an increasing number of these filings will be made in the future.

 

Final extension of the student loan repayment pause

During the COVID-19 pandemic, the federal government instituted a pause on all federal student loan repayments. That stood in place for more than three years, but came to an end in September 2023. 

Interest began accruing again on September 1, while repayments resumed on October 1.

When the payments were put on pause, interest rates were dropped to 0% as well, so that debt wouldn’t continue to rack up as borrowers didn’t make payments. Once those payments resumed, the interest rates returned to whatever their fixed rate was.

There is a 12-month “on-ramp” as part of this resumption of payments, though. Through September 30, 2024, borrowers who aren’t able to make repayments won’t default on their loans. However, interest still accrues if payments aren’t made, adding to the total outstanding debt.

This has caused many borrowers to be faced with the daunting challenge of fitting student loan repayments back onto their already tight budgets.

Challenges for borrowers seeking loan forgiveness through bankruptcy

While the Department of Education has made it easier for borrowers to seek loan forgiveness through bankruptcy, it’s still not as straightforward as having credit card debt discharged. It’s not an automatic that this debt will be forgiven. The federal government still needs to agree that the loan is causing “undue hardship,” even if the guidelines by which they make that decision have been relaxed.

That’s why it’s important to work with an experienced bankruptcy law firm if you have student loan debt that you wish to discharge. Babi Legal has a team of experienced professionals who can help you navigate the complicated web of student loan debt forgiveness, giving you a better chance of having it discharged through bankruptcy.

 

Further student loan forgiveness reading

Babi Legal has provided additional reading on student loan forgiveness for you to review, including the impact of bankruptcy on student loans, and the pros and cons of student loan forbearance.