The corona virus pandemic that has ravaged the world recently has caused enormous damage to individuals, families, and all kinds of social constructs, including businesses and governments. In addition to the obvious health problems that the virus causes, the impact of the corona virus has had significant negative financial implications for many people and businesses due to the massive economic shut down that has occurred resulting from “shelter in place” restrictions. Many individuals and businesses have had difficulty paying debts and expenses that would normally not be an issue were business functioning normally. For example, individuals and families may have difficulty paying rent, the mortgage, food, gas, utilities, insurance, or other key expenses during this time. Likewise, businesses may also have difficulty operating with the “shelter in place” restrictions, as many are causing major declines in revenue to the point where it is impossible to stay open or afford existing payroll obligations or debt payments.
During this unprecedented time, individuals and businesses can sometimes utilize bankruptcy as an effective means of assisting with the financial situation engendered by this pandemic. Bankruptcy has always existed to allow individuals and businesses to obtain a “fresh start” by eliminating debt obligations or by reorganizing debt obligations in a manner that is more affordable. In this regard, bankruptcy can sometimes allow individuals and businesses to deal with completely unexpected shocks to the financial climate and emerge relatively unscathed, at least compared to what the situation might look like without bankruptcy. The goal of this article is to describe some of the many ways in which bankruptcy can be helpful to individuals and businesses dealing with the unexpected economic impact of the corona virus and other similar major shocks to the economy.
The first section of this article will discuss different methods in which bankruptcy can assist individuals with financial hardship, such as that caused by the corona virus and “shelter in place” restrictions. The most common types of bankruptcy filed by individuals are chapter 7 cases, chapter 11 cases, and chapter 13 cases. We will discuss each in turn.
Chapter 7 bankruptcy cases for individuals are designed to allow the filing individual, called the “debtor,” a fresh financial start. In chapter 7, an individual gets to retain certain exempt property that he or she owns and has to surrender any non-exempt property to a bankruptcy trustee to be sold for the benefit of his or her creditors. Property is often determined to be either “exempt” or non-exempt” depending on a variety of factors, most of which are dependent on state law. In California, there are two types of exemption systems debtors may choose, often with the assistance of counsel—those listed in California Code of Civil Procedure §703 and §704. In general, §703 provides for greater exemptions for personal property and is often the exemption schedule of choice for most people, whereas §704 provides a much greater homestead exemption for those debtors with significant home equity and is often the preferred choice for debtors in this situation. Chapter 7 bankruptcy will eventually grant most individual debtors what is called a bankruptcy “discharge,” which effectively forever prevents the filing individual from any obligation to pay anything on the debts he or she owed at the time of filing bankruptcy. For all practical purposes, the bankruptcy discharge operates legally as a permanent injunction against the enforcement of most types of debt against the debtor, such that the individual can move on with his or her financial future without paying most debts that he or she had at the time of filing the bankruptcy case. While not every type of debt can be discharged, the vast majority of debts can be, with limited exceptions. For example, John in Mountain View, CA, gets corona virus while performing his job as a doctor at the local hospital in Los Altos, CA, and accordingly, is mandatorily sent home and cannot work. He is promptly terminated and applies for unemployment, but the unemployment checks he receives are barely enough to cover his rent and living expenses, let alone payments on the $100,000 in credit card debt he owes. Six months later, John has used up most of his savings making credit card payments and doesn’t know what to do. John hires Nova Law Group to help assist him with his situation. Nova Law Group recommends a chapter 7 bankruptcy, because John doesn’t have any property that exceeds the California exemption limits and gets to keep all of his property in bankruptcy. John also gets a complete discharge of his debt in chapter 7 bankruptcy and never has to pay anything on his credit card debts ever again. Although John is on unemployment and can’t work, he now is able to pay his living expenses with unemployment money he receives, because he no longer has any credit card payments. He can now afford to live until he can regain a job as a doctor after recovering from corona virus. John is able to obtain a debt-free fresh financial start and subsist on unemployment until he is ready to go back to work and recovers from being infected by corona virus.
A second major type of bankruptcy is called Chapter 13 bankruptcy. Chapter 13 bankruptcy cases are designed for many specific situations in which a debtor can afford to pay a portion or all of the debts the debtor owes, but needs to repay them on a different schedule or in a different amount than that originally agreed to by the creditors. Chapter 13 bankruptcy is particularly helpful to individuals who own property with non-exempt equity that they don’t desire to give to the trustee, individuals who owe tax debts, individuals who are facing home foreclosure, and certain individuals who might earn too much money to qualify for chapter 7 bankruptcy. In a chapter 13 bankruptcy case, the debtor proposes what is called a “plan” to a government appointed official called the “chapter 13 trustee.” The “plan” is essentially a business plan for the debtor’s return to financial health over either a 36-month or 60-month term, depending on the debtor’s income. Chapter 13 bankruptcy debtors pay back a portion of what they owe creditors, but not necessarily all that is owed. Additionally, even chapter 13 debtors who pay back everything they owe creditors, called a “100% plan,” do not actually end up paying the same amount to such creditors that they would owe outside of bankruptcy. Chapter 13 bankruptcy allows debtors to pay back many types of debts at much, much lower interest rates than could normally be obtained on the open market or through the creditors themselves. Additionally, some creditors do not file claims with the bankruptcy court and never become entitled to payment during the chapter 13 case. These debts, after a period of a few months, become not entitled to payment and such creditors can no longer recover against the debtor as long as the debtor completes his or her chapter 13 plan and obtains a discharge. Accordingly, most chapter 13 debtors save significant amounts of money reorganizing their debts in chapter 13, relative to less advantageous plans like debt settlement, paying such debts in full outside of bankruptcy, or “doing nothing.” Chapter 13 bankruptcy can also be used by individuals to reorganize significant amounts of tax debt or prevent home foreclosure, even permanently in some instances, if a debtor is able to make payments on the debts owed over time. For example, Mary in Palo Alto, CA works for Facebook in Menlo Park, CA. Mary has worked in tech for a decade, but until recently, was unable to get a job in her career field for three years until she became employed at Facebook. Mary is three years and $120,000 behind in her mortgage payments on her Palo Alto, CA home and is two weeks away from foreclosure, in which her home would be sold at auction. However, Mary has the ability with her high salary at Facebook to afford her mortgage payments now—she just can’t “catch up” on the $120,000 in mortgage arrears she owes the lender from the time she was unemployed. Fortunately, Mary hires a Nova Law Group attorney to advise her regarding her bankruptcy options in chapter 13. Nova Law Group informs her that using chapter 13 bankruptcy, she can split the $120,000 in mortgage arrears she owes her lender into 60 monthly payments of $2,000/month each, which she will pay on top of the normal mortgage payment to the lender monthly. While substantial, the chapter 13 bankruptcy will save Mary’s home from foreclosure and at the end of the five-year period, Mary will be fully caught up on her mortgage payments and out of default on her loan. Unlike a “loan modification,” Nova Law Group informs Mary that the lender does not need to consent to this payment plan and that the court can force the lender to accept it. Furthermore, the bankruptcy case can also be used to reorganize other debts Mary owes at the same time, like credit card debt, medical debt, personal loans, and tax debts. However, chapter 13 bankruptcy, unlike chapter 7 and chapter 11 bankruptcy, can only be filed by living, breathing individuals (like Mary)—it is not available to corporations and other “legal” entities which are not actually people except in law.
A third major type of bankruptcy is called Chapter 11 bankruptcy. This type of bankruptcy is often used by individuals in bankruptcy who owe very significant debts or who need significant financial flexibility in the type of bankruptcy plan they intend to file with the court. Chapter 11 bankruptcy is by far the most complex, time intensive, and expensive type of bankruptcy, but it can be the right option for some clients with very complex cases or very high quantities of debts and who wish to reorganize those debts. Chapter 11 bankruptcy cases can be used to reorganize an unlimited amount of debt owed by individuals, unlike chapter 13 bankruptcy, which is subject to the debt limits contained in 11 U.S.C. §109(e). This is a primary use of chapter 11 bankruptcy in the San Francisco Bay Area, and more specifically, in areas where bankruptcy debtors tend to have high amounts of secured and unsecured debt, like San Francisco, San Jose, Cupertino, Mountain View, Sunnyvale, Palo Alto, Los Altos, Los Altos Hills, East Palo Alto, Atherton, and Menlo Park. A full description of chapter 11 bankruptcy is beyond the scope of this article, but many chapter 11 debtors propose to retain many assets while potentially selling off other assets or creating money through other means, like operating a business or working, to fund their proposed “plan.” Creditors are entitled to vote on the plan and so it is important to understand how plan voting works and have an experienced bankruptcy attorney guide a debtor through this complex process to avoid a plan being rejected by the debtor’s creditors. Chapter 11 bankruptcy is frequently used when the debtor intends to introduce plan provisions that are very unusual or where payments will be made over an unconventional timeframe or from unconventional sources, which might be more objectionable in a chapter 13 bankruptcy case or even impossible. For example, Bob is a major real estate developer who lives in Los Altos, CA. Bob owns multiple investment properties in Sunnyvale, CA and San Jose, CA, a home in Los Altos, CA, and a home for his mother in Atherton, CA. Bob owns multiple businesses that have been terribly impacted by the “shelter in place requirements” enacted to prevent the further spread of the corona virus, and is worried that in six months, he may be unable to catch up on his mortgage payments for his home and his investment properties, even if business returns to normal. He is concerned he will face mass foreclosure on his properties and that he and his mother will be out of their homes. Fortunately for Bob, he consults with a Nova Law Group bankruptcy attorney who advises him that chapter 11 bankruptcy might be a good option for Bob’s needs. Although Bob owes a total of $20,000,000 in secured debt on his twelve properties throughout the San Francisco Bay Area, there is no debt limit in chapter 11 bankruptcy (unlike chapter 13), and accordingly, Bob can reorganize his significant debts and save his investment properties and home from foreclosure, by curing the arrearages on all of his properties over time. He can even reorganize his credit card debt, tax debts, personal loans, and other unsecured debts at the same time. Bob chooses a bankruptcy plan that is seven years (7 years) in length and convinces his creditors to support his plan of reorganization—a time period for repayment that would be impossible in chapter 13, for which the longest term would be five years (5 years). Bob is able to save his home and his investment properties and utilize chapter 11 to rebuild his finances after corona virus.
The second section of this article will discuss how various types of bankruptcy can be used to benefit business entities, such as LLCs, corporations, LLPs, LPs, and other types of entities. Please note that sole proprietorships and other types of business ownership that do not involve separate legal entities fall under the same umbrella legally as the assets and liabilities of the individuals that own them, and so, people owning these types of businesses include the business assets and liabilities on their own personal statements and schedules when filing for bankruptcy.
There are two main types of corporate bankruptcy typically filed by business entities which are legally incorporated, like C-Corporations, S-Corporations, LLCs, LPs, etc.—Chapter 7 bankruptcy and Chapter 11 bankruptcy. Chapter 7 bankruptcy cases are used by business entities which want to liquidate and shut down the business and pay off creditors to the extent possible. Chapter 11 bankruptcy cases are used by business entities that wish to reorganize the debts of the business entity in an attempt to continue to operate the business as a going concern while paying the debts of the business over time, albeit perhaps on a different schedule or at a different interest rate than was previously anticipated by the creditors. The main elements of chapter 7 bankruptcy and chapter 11 bankruptcy applicable to business entities are discussed above in the sections on individuals filing for bankruptcy in each chapter. However, there is one very important distinction between individuals filing for bankruptcy and business entities in the same bankruptcy chapters—business entities do not receive a bankruptcy discharge. Only real, breathing people can receive a discharge in bankruptcy. While business entities can utilize bankruptcy to liquidate and wind down their operations in chapter 7, or reorganize the payment structure, payment schedule, interest rates, and other elements of repayment in chapter 11, they may not ever discharge any debt owed and they do not get any exemptions to shelter assets or property. For this reason, chapter 7 corporate bankruptcy is mostly designed to allow for liquidating a business in a manner that will be respected by creditors and other stakeholders as court-approved and final, as a business entity will not receive a discharge of any debt in chapter 7 bankruptcy. Chapter 7 corporate bankruptcy will not generally enable the company to operate again, unless the company is sold as a going concern in the chapter 7 case by the bankruptcy trustee. Likewise, Chapter 11 may be used by business entities to reorganize debts and obligations, but not to eliminate debt entirely through discharge, even though chapter 11 may be used to eliminate debt as part of negotiations with the debtor’s creditors if such creditors agree.
If you have a question or would like to discuss your situation or your business’s situation with a Nova Law Group attorney, feel free to give us a call to schedule a consultation.
Nova Law Group represents both debtors and creditors in bankruptcy cases and associated bankruptcy litigation throughout the San Francisco Bay Area from our headquarters in Mountain View, CA. Nova Law Group frequently represents clients in all major divisions of the Northern District of California, including San Jose Division, San Francisco Division, and Oakland Division of the United States Bankruptcy Courts.
