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.

What is the Corporate Transparency Act?

What is the Corporate Transparency Act?

Enacted back in 2021, the Corporate Transparency Act, or CTA, was passed with the aim of enhancing transparency in various ownership and entity structures to combat illicit activities such as tax fraud and money laundering.

As a result of the CTA, more information will be captured about how specific entities that operate within or access the U.S. market are owned. And while many people may have forgotten about the new law in the nearly three years since it was passed, it went into effect on January 1 of this year.

Businesses of all sizes throughout the U.S., and even some outside of the country’s borders, will be affected by the new law. Understanding what the CTA requires, which companies are subject to its requirements and the penalties that could be incurred for violating it is essential for any business leader.

Reporting companies

The federal government sought to gain additional transparency into business activities happening in the U.S. through the CTA. A main reason for this is that more than 27 million small businesses in America are termed “nonemployer firms” with no employees, according to a report from the Small Business Administration.

The CTA looks to create this transparency by requiring certain companies to report Beneficial Ownership Information, or a BOI.

Reporting companies can either be foreign or domestic.

Domestic reporting companies are considered LLPs, LLCs, corporations and other entities that are created through filing documents with the relevant department in their location, such as the secretary of state.

Foreign reporting companies are LLCs, corporations or another entity that is formed in a foreign country but registered to do business in a tribal jurisdiction or state through the applicable process. 

Sole proprietorships that aren’t a single-member LLC don’t fall under the definition of a reporting company.

In most cases, they typically include LLPs, LLLPs, business trusts and many limited partnerships. There are some exemptions to this rule, which are outlined in further detail below.

 

What information do I have to report?

What information has to be included in a company’s BOI report varies depending on when the business was first established.

Those that were established or registered after January 1, 2024, have to provide information about the business itself, its applicants and beneficial owners. This includes:

  • Names of applicants and owners (if applicable)
  • Addresses
  • Birthdays
  • ID numbers, such as a passport or license number
  • Jurisdiction of relevant documents

Any business established before the start of 2024 don’t have to include information about company applicants.

Regardless of when the company was established, every reporting company has to provide its legal name, trademarks and current address. This should be the main business site location for domestic companies and the U.S. operational location for foreign companies.

In addition, all reporting companies have to provide their taxpayer identification number and the jurisdiction where they were either registered or formed.

 

Company applicants of a reporting company

Company applicants are defined in two ways.

For domestic companies, company applicants can be the person who directly filed the document that initially created the business entity. For foreign companies, company applicants can be the person who filed the document that registered it to do business in the U.S.

Company applicants can also be the individual who holds primary responsibility for either controlling or directing the filing of that document by someone else.

 

BOI reports

As mentioned before, companies that are subject to the CTA must file BOI reports that will include, among other things, beneficial owners of the company.

The law separates beneficial owners into two categories.

The first category includes any individual who either indirectly or directly exercises “substantial control” over a reporting company. The second category includes any individual who either indirectly or directly controls or owns at 25% or more of a reporting company’s ownership interests.

All beneficial owners have to report certain information to the Financial Crimes Enforcement Network, better known as FinCEN. This includes their:

  • Name
  • Date of birth
  • Address
  • Unique identifier number from an issuing jurisdiction that’s recognized
  • A photo of that same document

 

File the initial BOI report

Any company that was established before January 1, 2024, has until January 1, 2025, to file their initial BOI report to FinCEN. Any company created between January 1, 2024, and January 1, 2025, has to file this report within 90 days of a public announcement of its formation or the actual notice of formation — whichever date is earlier.

Businesses created after January 1, 2025, have 30 days from public announcement or notification to submit their initial BOI report.

 

How are BOI reports filed?

All BOI reports are filed directly with FinCEN. This is done electronically through the BOI e-filing website that FinCEN established. Navigate to boiefiling.fincen.gov, and select “File BOIR.”

Penalties for Violations of the CTA

Reporting companies can be subject to civil and criminal penalties for either failing to report or update information, or by providing false or fraudulent information to FinCEN.

Anyone who’s found to be violating the CTA reporting requirements could face a civil penalty of up to $500 for every day the violation continues. They could also be subject to criminal penalties of as much as two years in prison and fines of as much as $10,000.

Any individual who’s found to have disclosed or used information regarding beneficial ownership could face a civil penalty of as much as $500 for each day of the violation, as well as criminal penalties of as much as 10 years in prison and fines of as much as $500,000.

 

Implementation and compliance challenges

Many companies must adjust what they track and what they report to FinCEN under the CTA. Accounting professionals also must evaluate certain practice areas.

Companies must take proactive steps to ensure they are gathering and tracking certain information if they’re subject to the reporting requirements. A good suggestion is to implement a system for organization, as well as preparing a checklist to ensure nothing is missed.

Accountants need to define the scope of engagement for the advisory services they provide their clients as well.

By approaching the CTA in a proactive way, it’ll help to ensure nothing is missed and the company is in complete compliance.

The 23 Exemptions to the definition of Reporting Company

Corporations, LLCs and other entities aren’t considered a reporting company under the CTA’s definition if they meet one of 23 different exemptions. These include:

  • Securities reporting issuer
  • Governmental authority
  • Bank
  • Credit union
  • Depository institution holding company
  • Money services business
  • Broker or dealer in securities
  • Securities exchange or clearing agency
  • Other Exchange Act registered entity
  • Investment company or investment adviser
  • Venture capital fund adviser
  • Insurance company
  • State-licensed insurance provider
  • Commodity Exchange Act registered entity
  • Accounting foirm
  • Public utility
  • Financial market utility
  • Pooled investment vehicle
  • Tax-exempt entity
  • Entity assisting a tax-exempt entity
  • Large operating company
  • Subsidiary of certain exempt entities
  • Inactive entity

Other reporting timelines

The CTA set specific deadlines for when companies must file their initial BOI reports. These deadlines are based on when the company was first established.

 

Times to file reports for the Corporate Transparency Act

The deadline to file the initial BOI report is January 1, 2025, for any company that was formed before January 1, 2024. The deadline is 90 days from the initial filing for companies formed anytime in 2024, and 30 days from that same point for companies formed in 2025 and beyond.

Reporting companies must also file updates to their initial BOI reports for when certain situations change. This could include, for instance, if a beneficial owner has a name or address change, or if there are operational changes at the company.

Some of the deadlines for these updates to the report could be as little as 30 days, too.

FAQ

Where can I find more information about BOI reporting?

A wealth of information about BOI reporting can be found right on the FinCEN website. They have even set up a FAQ page about this, which is fincen.gov/boi-faqs.

Can an individual beneficial owner or company applicant provide their information directly to FinCEN instead of the reporting company?

Yes. Beneficial owners and company applicants are responsible for reporting all changes directly to FinCEN, not to the applicable reporting company.

Priority of Claims in Bankruptcy

Embarking on the intricate landscape of bankruptcy involves unraveling the complex web of claims and their prioritization. In this comprehensive guide, we’ll explore the nuances of the priority of claims in bankruptcy proceedings, shedding light on how creditors are categorized and paid. From secured debts to unsecured priority claims, join us on this journey through the bankruptcy code, navigating the hierarchy that dictates how creditors receive their share.

Whether you’re a debtor seeking to understand the implications or a creditor aiming to comprehend your position, this exploration of priority claims will provide valuable insights into the dynamics of the bankruptcy process.

Priority claims

Priority claims occupy a unique position in the bankruptcy hierarchy, enjoying preferential treatment over other unsecured claims. These claims, outlined in the bankruptcy code, cover specific obligations that hold a higher priority for repayment.

Examples of priority claims include domestic support obligations, unpaid wages, and certain taxes. The concept of priority aims to ensure that essential debts are satisfied before other creditors receive their share of the debtor’s remaining assets.

As we delve deeper, we’ll dissect the various priority claims and their implications within the bankruptcy process.

Unsecured priority claims

Among the different types of priority claims, unsecured priority claims play a distinctive role. These are obligations without collateral but hold a higher priority than general unsecured claims. Examples include certain tax claims and unpaid wages.

In the intricate landscape of bankruptcy proceedings, understanding the nuances of unsecured priority claims is crucial. We’ll explore their significance, treatment, and impact on the distribution of assets to creditors, shedding light on how they navigate the bankruptcy process.

Unsecured creditors

Unsecured creditors constitute a diverse group of claimants in bankruptcy, holding debts not backed by collateral. Unlike secured creditors, who have specific assets securing their claims, unsecured creditors lack such security. This category encompasses various obligations, including credit card debt, medical bills, and personal loans.

Priority Unsecured Debts?

Priority unsecured debts are obligations that, despite being unsecured, receive preferential treatment in bankruptcy proceedings. They are granted a higher priority for payment compared to general unsecured claims when it comes to distributing the debtor’s assets. Some key examples of priority unsecured debts include certain tax claims, unpaid wages, and domestic support obligations such as child support or alimony.

The prioritization of these debts is governed by specific rules outlined in the bankruptcy code. These rules establish the order in which different types of debts must be satisfied from the available assets. By placing priority unsecured debts ahead of general unsecured claims, the legal system aims to address the importance of certain obligations that society considers crucial.

In practical terms, when a debtor files for bankruptcy, available funds or assets are distributed among creditors. Priority unsecured debts are paid in a specific order, ensuring that certain essential obligations receive satisfaction before other unsecured claims. This prioritization recognizes the significance of fulfilling obligations related to taxes, employee wages, and family support.

Creditors holding priority unsecured claims have a higher chance of receiving payment compared to those with general unsecured debts. Understanding these distinctions is vital for both debtors and creditors navigating the bankruptcy process, as it influences the outcome of asset distribution and the resolution of financial obligations.

Are the Rules Really “Absolute?”

While the term “absolute priority rule” is commonly used, it doesn’t imply an unyielding or inflexible standard in all situations. The concept of absolute priority is a foundational principle in bankruptcy law, emphasizing the hierarchical payment structure among different classes of creditors. However, there are instances where deviations or exceptions to the absolute priority rule may apply.

Bankruptcy courts have some flexibility to confirm reorganization plans that deviate from the absolute priority rule under certain conditions. For example, if all impaired classes consent to the plan, a court might approve it even if it doesn’t strictly adhere to the absolute priority rule. This flexibility is exercised to facilitate the acceptance of viable reorganization plans that promote the debtor’s successful emergence from bankruptcy.

The idea behind the term “absolute priority” is to underscore the general importance of respecting the established priority structure. It serves as a guide for equitable distribution of assets among creditors. Still, the practical application of the rule can involve considerations of fairness and the specific circumstances of each case.

The Code’s Order of Priority

The Bankruptcy Code establishes a priority order for distributing funds among creditors. Secured creditors, with collateral-backed claims, take the top spot, followed by priority unsecured creditors, including specific claims like domestic support obligations and employee wages. General unsecured creditors, without collateral or statutory priority, come next and receive a pro-rata share after secured and priority claims.

Equity holders, like shareholders, are at the bottom and only receive payment if assets remain after higher-priority claims are satisfied. This structured approach ensures a fair allocation of resources in bankruptcy proceedings.

Most Priority Debts are Nondischargeable

Many priority debts are nondischargeable, meaning they survive the bankruptcy process and the debtor remains obligated to pay them. Many of the debts mentioned earlier, such as domestic support obligations, certain tax claims, and debts for death or personal injury caused by the debtor’s intoxicated driving are examples of nondischargeable priority debts.

The nondischargeable nature emphasizes the importance of addressing these obligations even in bankruptcy.

The Supreme Court, Jevic and the Order of Claims in Bankruptcy

The Supreme Court’s decision in the Jevic case significantly impacted the traditional order of claims in bankruptcy. In the Jevic case, the Court addressed structured dismissals and the distribution of assets in a way that deviated from the usual priority rules. The decision introduced flexibility in certain situations, allowing for deviations from the absolute priority rule under specific circumstances. This landmark ruling reshaped how bankruptcy courts approach the prioritization of claims and highlighted the need for careful consideration of the unique aspects of each case.

How Does Priority Debt Affect a Bankruptcy Filing?

Priority debt plays a crucial role in the bankruptcy filing process, influencing the distribution of assets and the satisfaction of creditors. In a bankruptcy case, certain debts are designated as priority claims, and they are entitled to be paid before other claims.

The order in which these priority claims are settled can significantly impact the outcome for both debtors and creditors. For instance, certain tax debts may take precedence over other unsecured claims, influencing the distribution of available funds. The intricate nature of these priorities reflects the legal framework’s attempt to ensure fair treatment among creditors while considering the distinctive characteristics of each debt category.

Absolute Priority Rule (APR) in Bankruptcy Code

The Absolute Priority Rule (APR) is a fundamental concept embedded in the Bankruptcy Code, dictating the order in which creditors are repaid during bankruptcy proceedings. This rule establishes a hierarchy, ensuring that certain creditors receive payment before others. The key principle behind the APR is that creditors with higher priority must be satisfied in full before those with lower priority receive any payment.

Under the APR, secured creditors are generally the first to be repaid, followed by priority unsecured creditors, and finally, general unsecured creditors. This rigid structure aims to maintain fairness in the distribution of assets and provides a framework for determining the order of claims. However, exceptions and complexities exist, and navigating the nuances of the APR requires a comprehensive understanding of bankruptcy laws and procedures.

Secured Claims (1st or 2nd Lien)

Secured claims, whether first or second lien, play a pivotal role in the bankruptcy process, guided by the Absolute Priority Rule (APR). When a debtor files for bankruptcy, secured creditors holding collateral – such as a mortgage lender with a property lien – are typically positioned at the top of the priority hierarchy. In the event of liquidation or asset distribution, secured creditors receive payment from the sale of the collateral before other creditors.

The APR dictates that secured claims must be satisfied in full before unsecured creditors receive any payment. While first and second lienholders share this fundamental priority, nuances may arise based on the value of the collateral and the specific terms outlined in the bankruptcy proceedings. 

Finding the Right Debt Relief Option for You

Navigating the myriad of debt relief options requires careful consideration of various options to find the right solution for your unique financial situation. From debt consolidation and credit counseling to bankruptcy and negotiation with creditors, each avenue comes with its own set of implications. Analyzing factors such as the amount and type of debt, income, and long-term financial goals is crucial in determining the most suitable course of action.

Debt consolidation involves combining multiple debts into a single monthly payment, potentially with a lower interest rate. Credit counseling provides guidance on budgeting and debt management plans. Bankruptcy, while carrying significant consequences, may offer a fresh start for those facing overwhelming debt. Negotiating with creditors can lead to modified repayment terms.

Choosing the appropriate debt relief option requires a comprehensive understanding of your financial circumstances and the potential impact on your credit score. Seeking professional advice from financial experts or bankruptcy attorneys can provide valuable insights and help pave the way to a more stable financial future.

Babi Legal’s experienced team is dedicated to assisting individuals in finding the most effective debt relief solution tailored to their specific needs, offering guidance through every step of the process to achieve a more secure financial future.

Chapter 11 and Chapter 7 Creditor Recoveries Claims

Chapter 11 and Chapter 7 bankruptcies present distinct scenarios for creditors seeking recoveries.

In Chapter 11, a reorganization process, creditors may have the opportunity to influence the debtor’s restructuring plan, potentially leading to better recoveries. On the other hand, Chapter 7 involves liquidation, where a trustee sells the debtor’s assets to repay creditors.

The hierarchy of creditor claims, secured or unsecured, significantly impacts the recovery amounts. Navigating these complexities requires a keen understanding of bankruptcy laws and strategic decision-making. Creditors need to assess their positions, evaluate potential outcomes, and make informed choices to maximize their recoveries in either Chapter 11 or Chapter 7 proceedings.

General Unsecured Claims (“GUCs”)

General Unsecured Claims (GUCs) represent debts without any collateral or specific priority. In bankruptcy proceedings, these claims are lower in the hierarchy, and their treatment depends on the available funds after higher-priority claims have been satisfied.

In both Chapter 7 and Chapter 11 bankruptcies, GUCs often receive repayment only if there are remaining assets after satisfying secured and priority claims. Creditors holding GUCs face a higher risk of partial or no repayment compared to those with secured or priority claims.

Preferred and Common Equity Holders

Preferred and common equity holders are distinct classes of shareholders in a company, each with its own set of rights and preferences. Preferred equity holders have a higher claim on a company’s assets and earnings than common equity holders. They typically receive dividends before common shareholders and have a preference in the distribution of assets in the event of liquidation.

On the other hand, common equity holders have residual rights in a company, meaning they are entitled to the remaining assets and earnings after all other obligations have been satisfied. While common equity holders have voting rights and potential for higher returns, they stand lower in the hierarchy of claims compared to preferred equity holders.

Understanding the differences between preferred and common equity is crucial for investors, as it influences their potential returns, voting power, and overall position in the company’s capital structure.

Waterfall Payment

A “waterfall payment” refers to the systematic order in which creditors are repaid from the available assets of a debtor. The term “waterfall” is used to illustrate the cascading flow of funds down the hierarchy.

In a bankruptcy proceeding, the waterfall payment typically starts with priority claims being satisfied first. Once these priority claims are addressed, the remaining funds, if any, move down to the next tier of creditors, such as secured creditors. The process continues until all claims in the established hierarchy have been addressed or until the available assets are exhausted.

Common Complications of the Payment Process

Navigating the payment process in bankruptcy can be fraught with complexities, and several common complications may arise. One challenge involves the prioritization of claims, where creditors vie for repayment based on their claim status. Secured creditors may face difficulties if the value of collateral falls short of the debt owed. Additionally, disputes may arise over the classification of certain claims, impacting their position in the payment hierarchy.

Another complication stems from the potential insufficiency of available assets to meet all creditor demands. In such cases, the waterfall payment system becomes critical, determining the order in which creditors receive satisfaction. Furthermore, disputes may emerge among creditors, particularly if there’s uncertainty or disagreement regarding the validity or priority of claims.

How Do Creditors Get Paid?

Creditors receive payment in a structured manner through a process governed by bankruptcy rules. The payment hierarchy, or “waterfall,” outlines the order in which creditors receive satisfaction from the available assets.

Secured creditors, holding liens on specific assets, are typically the first to be paid. They receive satisfaction from the sale or use of the collateral securing their debt. Following secured creditors, priority claims are addressed. Unsecured creditors, including general unsecured claims and credit card debt, come next in line.

The specific order of payment can vary, and the bankruptcy code provides guidance on the classification of claims and the treatment of different creditor classes.

Understand the Restructuring and Bankruptcy Process

The restructuring and bankruptcy process involves several key steps. It begins with a financial assessment, exploring alternatives like debt restructuring or bankruptcy. If bankruptcy is chosen, a petition is filed, triggering an automatic stay on creditor actions. A creditors meeting is held for transparency.

In Chapters 11 and 13, debtors propose a repayment plan, while Chapter 7 involves asset liquidation. Once a plan is confirmed, debtors work to implement it. Successful completion leads to a discharge of eligible debts. Babi Legal’s experienced professionals can guide you through this process, providing essential expertise to ensure a smooth resolution tailored to your specific situation.

Bankruptcy and Adversary Proceedings

Bankruptcy and Adversary Proceedings

In the realm of bankruptcy, adversary proceedings stand as crucial legal actions that can significantly influence the course of a bankruptcy case. Babi Legal offers insights into the intricacies of these proceedings, unraveling their importance, procedural aspects, and the broader impact they have on federal rules of bankruptcy and litigation. Whether you’re a debtor seeking relief or a creditor safeguarding interests, explore key information about bankruptcy and adversary proceedings.

Adversary Proceeding Attorneys – Lawyers Litigating Bankruptcy Adversary Proceedings to Defend Debtors in Bankruptcy Court

Adversary proceedings are a crucial aspect of the bankruptcy process, involving litigation within the bankruptcy court. These legal contests can arise for various reasons, from disputing the dischargeability of a particular debt to addressing issues related to fraudulent transfers.

Adversary proceeding attorneys play a crucial role in the bankruptcy process, specializing in navigating the complexities of legal disputes within the bankruptcy court. These legal professionals are adept at handling a range of issues, from challenging the dischargeability of specific debts to addressing fraudulent transfers.

Their expertise lies in understanding and applying federal bankruptcy rules, ensuring a robust defense for debtors facing litigation. Adversary proceeding attorneys serve as advocates, guiding clients through the intricacies of legal contests and working to achieve favorable outcomes within the bankruptcy proceedings.

Adversary Proceedings Explained

Adversary proceedings represent a distinct facet of the bankruptcy process, offering a formalized framework to address intricate disputes and legal challenges that extend beyond standard bankruptcy cases. Functioning akin to traditional lawsuits, these proceedings are initiated to tackle complex issues such as disputes over debt dischargeability, challenges to the validity of liens, and objections to asset sales.

Structured as formal legal actions, adversary proceedings encompass essential processes and rules of civil procedure, including the filing of a complaint, responses from involved parties, a discovery phase, and, ultimately, a trial before the bankruptcy court. This specialized avenue provides a comprehensive means of addressing nuanced matters that demand a more in-depth examination than what the standard bankruptcy process accommodates. Understanding adversary proceedings is pivotal for both debtors and creditors navigating the intricate landscape of a bankruptcy case.

Dealing with an Adversary Proceeding

Navigating an adversary proceeding can be a complex and nuanced process, requiring careful consideration and legal expertise. If you find yourself involved in such proceedings, it’s crucial to consult with an experienced bankruptcy attorney who specializes in litigation for adversary cases. These attorneys possess the necessary knowledge to guide you through the intricate steps of an adversary proceeding, ensuring that your rights and interests are safeguarded.

Whether you’re a debtor facing challenges to the dischargeability of specific debts or a creditor seeking to protect your claims, an adversary proceeding attorney can offer strategic counsel. They play a crucial role in formulating a robust legal strategy, presenting evidence, and advocating on your behalf during court proceedings. Understanding the role of a seasoned bankruptcy adversary proceeding’ attorney is essential for those navigating the complexities of bankruptcy litigation.

Types of Adversary Proceedings

Adversary proceedings in bankruptcy encompass a range of legal actions that can significantly impact the outcome of a case. Some common types include challenges to the dischargeability of debts, objections to property exemptions, and disputes over fraudulent transfers or preferential payments.

Creditors may initiate adversary proceedings to assert their rights or contest the debtor’s actions during the bankruptcy process. Understanding the specific type of adversary proceeding relevant to your situation is crucial, as it determines the legal issues at stake and the appropriate legal strategy to employ.

Bankruptcy Trustee

A bankruptcy trustee plays a pivotal role in overseeing the case and ensuring fair distribution to creditors. Appointed by the United States Department of Justice, the bankruptcy trustee’s primary responsibility is to administer the bankruptcy case, by managing the debtor’s assets, liquidate non-exempt property, and administer the proceeds to satisfy creditors’ claims.

The trustee also evaluates the debtor’s financial affairs, examines relevant documents, and conducts the section 341 meeting with creditors. Their impartiality is critical to maintaining the integrity of the bankruptcy process.

Defending Against Creditor Adversary Proceedings

Navigating the intricacies of a bankruptcy case involves addressing adversary proceedings initiated by creditors. When faced with such legal challenges, debtors must mount a robust defense.

In adversary proceedings, creditors may assert claims, object to debt discharge, or allege fraudulent activities. Engaging a skilled bankruptcy attorney becomes imperative to craft an effective defense strategy. Attorneys adept in adversary proceedings can analyze creditor claims, present counter arguments, and safeguard debtors’ rights. Proactive defense, coupled with a nuanced understanding of bankruptcy law, is crucial for achieving favorable outcomes in the face of creditor-initiated adversary proceedings.

Babi Legal stands ready to provide expert legal guidance and advocacy, ensuring debtors have a dedicated ally in defending against creditor adversary proceedings.

Debtor Initiated Adversary Proceedings

When debtors find themselves facing specific challenges within the bankruptcy process, they can initiate adversary proceedings to address and resolve issues. These proceedings, filed by the debtor, often revolve around disputes, challenges to discharge, or objections to certain creditor claims as well as removing unsecured creditor junior liens from their property.  Even though the creditor lien is properly filed securing its interest in the property, through a Chapter 13 bankruptcy proceeding the debtor can seek to strip off the junior lien if the property value is less than the amount owed to the first lien holder through an adversary proceeding.  Debtors can even challenge the validity of student loan balances through an adversary proceeding.

Debtor-initiated adversary proceedings provide a legal avenue for individuals to protect their rights and interests throughout the bankruptcy journey, and Babi Legal is well-equipped to navigate these complexities on behalf of our clients.

Initiating or Defending Against an Adversary Proceeding

Initiating an adversary proceeding is akin to launching a legal challenge within the bankruptcy case. This often occurs when a debtor believes there are grounds to dispute certain claims, such as challenges to specific debts. On the flip side, defending against an adversary proceeding demands a nuanced understanding of the claims presented by the plaintiff and crafting a robust defense strategy.

Our experienced team at Babi Legal specializes in navigating these intricate legal landscapes. Whether we are initiating an adversary proceeding on behalf of a client or defending against one, our attorneys leverage their expertise to analyze claims, gather evidence, and present compelling arguments. We prioritize our clients’ interests, aiming for favorable outcomes in the complex arena of bankruptcy adversary proceedings.

Negotiation or Litigation a Better Resolution for Adversary Proceedings?

Determining the most suitable resolution method for adversary proceedings involves a careful evaluation of the specific circumstances. In some cases, negotiation may be a prudent approach, allowing parties to reach a mutually agreeable settlement without protracted litigation. Negotiation can be more cost-effective and expeditious, fostering a collaborative resolution.

On the other hand, when disputes are deeply entrenched or involve complex legal issues, litigation may become necessary. Litigation provides a formal process for presenting evidence, legal arguments, and seeking a resolution through court judgment. The decision between negotiation and litigation depends on the nature and severity of the issues at hand, with each avenue offering distinct advantages based on the unique dynamics of the adversary proceeding.

Are There Benefits to the Debtor in a Bankruptcy Case Where There is a High Risk That the Debtor Would Be a Defendant in an Adversary Proceeding?

In a bankruptcy case where the debtor faces a high risk of becoming a defendant in an adversary proceeding, several potential benefits may exist. One significant advantage is the opportunity to proactively address potential disputes and legal challenges. By anticipating the likelihood of adversary proceedings, debtors can work closely with their legal counsel to develop strategic defenses and gather relevant evidence, bolstering their position in case such proceedings arise.

Additionally, engaging in early negotiations or alternative dispute resolution mechanisms may offer a chance to resolve issues amicably, potentially avoiding the need for protracted litigation. This proactive approach empowers debtors to take control of their legal strategy, potentially mitigating the impact of adversary proceedings and fostering a more favorable outcome within the broader bankruptcy process.

Why Use Our Law Office to Defend You in an Adversary Proceeding?

Selecting Babi Legal for your defense in an adversary proceeding in bankruptcy also means tapping into a wealth of expertise and specialized knowledge tailored to your legal representation. Our experienced attorneys are well-versed in the intricacies of bankruptcy law and adversary proceedings, ensuring a robust defense strategy crafted for your specific case.

We pride ourselves on a client-centric approach, offering personalized attention and guidance throughout the legal process. At Babi Legal, we comprehend the complexities of adversary proceedings and are committed to navigating these challenges on your behalf.

By choosing our law office, you gain access to a skilled and dedicated legal team that is steadfast in safeguarding your interests and pursuing the most favorable outcome in the face of any legal challenges. 

Preferential Transfers In Bankruptcy

Navigating the intricate terrain of bankruptcy, the concept of preferential transfers takes center stage. In the financial intricacies of insolvency, understanding what constitutes a preferential transfer and its implications is paramount.

What Is a Preferential Transfer?

A preferential transfer in bankruptcy involves a payment made to a creditor shortly before filing for bankruptcy, potentially favoring one creditor over others. Identifying and addressing preferential transfers is essential for ensuring fair treatment among creditors and maintaining equitable distribution of assets in bankruptcy proceedings.

Five Elements Define Preferential Transfers

Preferential transfers in bankruptcy involve five crucial elements:

  • Payment to a Creditor: A payment must be made to a creditor.
  • Within the Preference Period: The payment should occur within the defined preference period.
  • Antecedent Debt: The payment is linked to an antecedent debt.
  • Debtor’s Insolvency: The debtor must have been insolvent at the time of the payment.
  • Creditor Receives More: The payment results in the creditor receiving more than in a Chapter 7 distribution.

Ordinary Course of Business

In bankruptcy, the term “ordinary course of business” refers to the normal and routine transactions a debtor conducts with its creditors. When evaluating preferential transfers, the court examines whether a payment made to a creditor was consistent with the ordinary course of business.

If a payment aligns with the historical dealings between the debtor and the creditor, it may be deemed an ordinary transaction and not subject to avoidance as a preferential transfer. Understanding what constitutes the ordinary course of business is crucial for both debtors and creditors navigating bankruptcy proceedings.

What Is Preferential Payment in Bankruptcy?

A preferential payment in bankruptcy refers to a payment made by a debtor to a creditor before filing for bankruptcy that gives the creditor an advantage over other creditors. The bankruptcy code allows the bankruptcy trustee to avoid or undo such preferential transfers to ensure fair treatment among creditors.

To qualify as a preferential payment, the transfer must meet specific criteria, including being made to a non-insider creditor, occurring within a certain time frame before the bankruptcy filing, and allowing the creditor to receive more than they would in a Chapter 7 liquidation.

How Far Back Can the Bankruptcy Trustee Look for Preferential Transfers?

The bankruptcy trustee can typically look back for preferential transfers up to 90 days before the debtor filed for bankruptcy. This period is extended to one year if the preferential transfer involves an insider, such as a family member or business partner. The ability to scrutinize transactions within these time frames helps the trustee identify and address preferential payments made by the debtor before the bankruptcy filing. It’s essential for creditors and debtors alike to be aware of these look-back periods and the potential implications for preferential transfer claims.

Preferential Payment Cases Designed to Protect All

Preferential payment cases are designed to protect all creditors by preventing debtors from favoring certain creditors over others before filing for bankruptcy. The bankruptcy code aims to ensure fair treatment of creditors by allowing the trustee to recover payments made to specific creditors within a specified timeframe before the bankruptcy filing.

This helps distribute the debtor’s assets more equitably among all creditors, discouraging preferential treatment and maintaining the integrity of the bankruptcy process.

The Look-Back Period for Insider Creditors vs. Regular Creditors

In bankruptcy, the look-back period for insider creditors, such as family members or business partners, differs from that of regular creditors.

While regular creditors are subject to a 90-day look-back period, insider creditors face a more extended scrutiny period of one year before the bankruptcy filing. This distinction is crucial as it allows the bankruptcy trustee to review transactions involving insiders for a longer period, preventing potential abuse or preferential treatment within the year leading up to the bankruptcy.

What Preferential Treatment Looks Like

Preferential treatment occurs when a debtor favors one creditor over others by making payments to that specific creditor before filing for bankruptcy. This preferential payment might involve paying off an old debt, providing an unsecured creditor with more than they would receive in the bankruptcy proceedings, or giving special treatment to certain creditors.

Payments Not Considered Preferential Transfers

Certain payments made by a debtor are not considered preferential transfers under bankruptcy law. For example, payments made in the ordinary course of business, payments made in accordance with ordinary business terms, or payments that qualify as substantially contemporaneous exchanges for new value are typically excluded from being deemed preferential transfers.

What Is an Avoidance Lawsuit?

An avoidance lawsuit, in the context of bankruptcy, refers to legal actions initiated by a bankruptcy trustee to undo certain transactions that could be detrimental to the overall distribution of assets to creditors.

The trustee has the authority to avoid or set aside specific transactions, such as preferential transfers or fraudulent conveyances, which may impact the fair and equitable distribution of assets among creditors. These lawsuits aim to recover the transferred property or funds so that they can be included in the bankruptcy estate and distributed according to the priorities established by bankruptcy laws.

Avoidance lawsuits play a crucial role in maintaining the integrity of the bankruptcy process and ensuring an equitable outcome for all parties involved.

Are There Exceptions to Preferential Transfers?

Yes, there are exceptions to preferential transfers. While bankruptcy law allows trustees to avoid and recover preferential transfers, certain transactions are exempted or may be protected by defenses.

Common exceptions include:

  • payments made in the ordinary course of business
  • payments made for new value received by the debtor
  • transactions that meet the criteria for the contemporaneous exchange for new value defense.

Additionally, certain types of creditors, such as employees for wage claims, may receive preferential payments without facing avoidance actions. It’s essential to understand the specific circumstances and criteria that may exempt a transfer from being deemed preferential, and consulting with a bankruptcy attorney can provide guidance on available defenses and exceptions.

Preferences and Secured or Priority Debt

Preferences in bankruptcy primarily relate to unsecured creditors, and the concept is not typically applied to secured or priority debts.

Secured debts, which are backed by collateral, and priority debts, such as taxes and domestic support obligations, operate under different rules. The bankruptcy code generally prioritizes the repayment of secured and priority debts over unsecured debts.

Therefore, preferences, as defined in bankruptcy law, focus on transactions involving unsecured creditors rather than those holding secured or priority claims.

A Bankruptcy Lawyer Can Help You Organize Your Debts

Navigating the complexities of bankruptcy can be challenging, and seeking the assistance of a skilled bankruptcy lawyer can be invaluable. A bankruptcy lawyer can help you organize your debts, assess your financial situation, and guide you through the legal processes involved in filing for bankruptcy.

At Babi Legal, we understand the complexities involved and are here to guide you every step of the way. Our team of experienced bankruptcy lawyers is dedicated to helping you organize your debts, assess your financial situation, and navigate the legal processes seamlessly. With personalized advice tailored to your unique circumstances, we empower you to make informed decisions aligned with your financial goals. Whether you’re exploring Chapter 7 or Chapter 13 bankruptcy, our expertise ensures you have the support needed for a successful outcome.

Exceptions to the 90-Day Rule

In bankruptcy, the 90-day rule refers to the preferential transfer period, during which certain payments made by the debtor to creditors before filing for bankruptcy might be scrutinized.

However, there are exceptions to this rule that can impact the assessment of preferential transfers. These exceptions often revolve around specific types of creditors, the nature of payments, and the relationship between the debtor and the creditor.

  1. Contemporaneous Exchange: Payments made in the ordinary course of business and in a substantially contemporaneous exchange for new value might be exempt from the 90-day rule. This recognizes that some transactions are part of normal business operations.
  2. Ordinary Course of Business: If a payment is consistent with the ordinary course of business between the debtor and the creditor, it may be considered an exception to the 90-day rule. This acknowledges that routine transactions are less likely to be preferential.
  3. New Value Exception: Payments that secure new value for the debtor and are made to the creditor can be exempt from avoidance. This exception encourages creditors to continue dealing with financially troubled debtors.

Navigating these exceptions requires a nuanced understanding of bankruptcy law. At Babi Legal, our experienced team can provide guidance on how these exceptions may apply to your specific situation, helping you make informed decisions during the bankruptcy process.