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Minnesota consumers considering filing for bankruptcy had enough on their minds before the onset of the COVID-19 pandemic. Many who never imagined considering bankruptcy may now have little choice. Misery, as they say, loves company. Nevertheless — and in either case — the best way to handle crises of any sort is to keep a cool head and make the best decisions possible with the best information available.
With the enactment of the Corona Aid Relief and Economic Security Act signed into law March 27, 2020, that information includes important updates to federal bankruptcy laws. These key provisions (which sunset one year from enactment) provide greater access to bankruptcy relief under chapters 7 and 13 (and ch. 11 for businesses) of the federal code. They should be clearly understood and carefully considered by individuals seeking a fresh financial start.
Federal Bankruptcy Code Chapters Defined
Chapter 11 Bankruptcy
Chapter 11 (which includes Subchapter V as amended by SBRA) provides a process for small businesses struggling with overwhelming debt to successfully restructure, minimize liquidations, preserve jobs and increase creditor recoveries.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy relief is available to individuals and businesses and involves the sale of a debtor’s non-exempt assets by a court-appointed trustee. The proceeds from those sales in then paid to creditors according to the rules as determined in the bankruptcy code.
Chapter 13 Bankruptcy
Chapter 13 is available only to consumer debtors and provides individuals with regular income the option to develop a schedule for repaying all of a portion of their debt. In chapter 13, consumer debtors propose a repayment schedule involving installment payments to creditors over a period of 3 to 5 years.
Provisions Affecting Bankruptcy Included in CARES Act, Section 1113:
- The Small Business Reorganization Act of 2019 (SBRA) is amended to increase the debt level eligibility threshold for small businesses from $2,725,625 to $7,500,000. In a sense, this provision redefines “small business,” making it easier for more business to access relief.
- Chapters 7 and 13 of the Bankruptcy Code are amended to exempt coronavirus-related payments from the federal government from definition of/consideration as “income.”
- Clarification that coronavirus-related payments shall not be included in calculations of “disposable income” for purposes of confirming a Chapter 13 plan.
- Section 1113 explicitly permits families and individuals currently in Chapter 13 to pursue payment plan modifications if they are undergoing a coronavirus-related material hardship. It also allows for extension of payments for up to seven years after initial payment was due.
Moreover, Cares Act Section 3513 mandates the Secretary and Department of Education to defer without penalty student loan payments, principal and interest for six months, through September 30, 2020. This provides significant relief to federal student loan borrowers, who comprise more than 95% of all student loan borrowers.
Continuing Realities of Debt Collection and Court Action
The provisions of the CARES Act noted above are a positive development for consumers considering or already in bankruptcy. They do not, however, affect private creditors nor preclude collection activities, including civil actions, pre-bankruptcy.
Most mortgages, for example, are privately held. Indeed, they are generally owned by holding companies who buy bundles of mortgages and other loans as investments. In short, they are not your local bank, and they are not particularly motivated to work with you in tough times. Loans issued by the Department of Housing and Urban Development are subject to federal regulation and foreclosures on HUD mortgages have been temporarily suspended. But the vast majority of mortgages, like house and apartment leases, are not a subject of regulatory relief.
The same more or less goes for credit cards and other forms of private and business debt. Not only are they unaffected as of this writing by any federal relief legislation, anxious creditors anticipating a cascade of bankruptcies and defaults may want to be “first in line” and more quickly intimate or step up collection activity.
Walker & Walker Is Committed To Helping You Begin A New Life
In these uncertain times, Walker and Walker PLLC is more committed than ever to helping consumers begin life anew. And while bankruptcy certainly may not be the ideal solution in every situation, it is designed with the best interests of all parties in mind. Consumers can avoid foreclosure, end wage garnishments and bank account levies, eliminate debt, protect assets and begin rebuilding credit in a surprisingly short period of time. Contact us today for a consultation with an experienced attorney for more information on the benefits of bankruptcy and for help determining your best path forward.