Friday, August 07, 2020

Bankruptcy Subchapter V Updates


As many readers of our blog and emails, Congress passed a new bankruptcy law known as Subchapter V. Information about that law can be found at our blog

New Subchapter V is similar to chapter 13 of the bankruptcy code but it can only be used by a business, not an individual.

Some creative uses of Subchapter V are  to discharge repayment of a PPP loan, to reject a commercial lease which a tenant no longer wants to occupy, or to reject unfavorable agreements.    

Subchapter V became effective on February 19, 2020 and several decisions have been announced by various bankruptcy courts which are favorable to Debtors. 

First, if a company filed bankruptcy under Chapter 11 can they convert their case to a case under Subchapter V? Yes. 

In re Progressive Solutions, Inc., No. 8:18-bk-14277-SC, 2020 WL 975464, at *5 (Bankr. C.D. Cal. February 21, 2020) (small business designated Chapter 11 debtor could retroactively proceed under Subchapter V after the case had been pending approximately 15 months).

-In re Glass Contractors, Inc., No. 20-40185 (Bankr. E.D. Tex. February 25, 2020) (small business designated Chapter 11 debtor could retroactively proceed under Subchapter V after the case had been pending approximately 1 month).

-In re Body Transit, Inc., 613 B.R. 400 (Bankr. E.D. Pa. March 24, 2020) (small business designated Chapter 11 debtor could retroactively proceed under Subchapter V when the case had been pending 48 days).

Second, can a debtor file under Subchapter V, if the debtor is not currently engaged in business? Yes, if a majority of its debt was business debt. 

-In re Wright, No. 20-01035-HB, 2020 WL 2193240, at *3 (Bankr. D.S.C. April 27, 2020) (debtor who was not currently engaged in business operations qualified as “small business debtor” where 56% of its debt amounted to residual business debt).

Third, does a Subchapter 5 Bankruptcy Trustee have the automatic right to retain counsel? No. 

-In re Penland Heating and Air Conditioning, Inc., No. 20-01795-5-DMW, 2020 WL 3124585, at *_ (Bankr. E.D.N.C. June 11, 2020) (Bankruptcy Petition #: 20-01795-5-DMW) (denying Subchapter V trustee’s application to retain counsel, which was filed as a matter of course, because the need for legal representation had not arisen). A Subchapter V trustee may not retain legal counsel automatically like a bankruptcy trustee can do in a Chapter 7 case.

Clients, accountants or lawyers who have questions regarding Subchapter V should contact Jim Shenwick at 212 541 6224  or

Monday, August 03, 2020

One-Third of New York’s Small Businesses May Be Gone Forever New York Times August 3, 2002

This article originally appeared in the New York Times on August 3, 2020

One-Third of New York’s Small Businesses May Be Gone Forever

Small-business owners said they have exhausted federal and local assistance and see no end in sight after months of sharp revenue drops. Now, many are closing their shops and restaurants for good.

William Garfield, the owner of Glady’s, a Caribbean restaurant in Brooklyn, said he decided to close after his landlord told him he would need to start paying his full monthly rent.
William Garfield, the owner of Glady’s, a Caribbean restaurant in Brooklyn, said he decided to close after his landlord told him he would need to start paying his full monthly rent.

In early March, Glady’s, a Caribbean restaurant in Brooklyn, was bringing in about $35,000 a week in revenue. The Bank Street Bookstore, a 50-year-old children’s shop in Manhattan, was preparing for busy spring and summer shopping seasons. And Busy Bodies, a play space for children in Brooklyn, had just wrapped up months of packed classes with long waiting lists.

Five months later, those once prosperous businesses have evaporated. Glady’s and Busy Bodies are closed for good and Bank Street, one of the city’s last children’s bookstores, will shut down permanently in August.

The three are victims of the economic destruction that threatens to derail New York City’s recovery from the financial collapse triggered by the coronavirus pandemic.

An expanding universe of distinctive small businesses — from coffee shops to dry cleaners to hardware stores — that give New York’s neighborhoods their unique personalities and are key to the city’s economy are starting to topple.

More than 2,800 businesses in New York City have permanently closed since March 1, according to data from Yelp, the business listing and review site, a higher number than in any other large American city.

About half the closings have been in Manhattan, where office buildings have been hollowed out, its wealthier residents have left for second homes and tourists have stayed away.

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When the pandemic eventually subsides, roughly one-third of the city’s 240,000 small businesses may never reopen, according to a report by the Partnership for New York City, an influential business group. So far, those businesses have shed 520,000 jobs.

While New York is home to more Fortune 500 headquarters than any city in the country, small businesses are the city’s backbone. They represent roughly 98 percent of the employers in the city and provide jobs to more than 3 million people, which is about half of its work force, according to the city.

When New York’s economic lockdown started in March the hope was that the closing of businesses would be temporary and many could weather the financial blow.

But the devastation to small businesses has become both widespread and permanent as the economy reopens at a slow pace. Emergency federal aid has failed to provide enough of a cushion, people remain leery of resuming normal lives and the threat of a second wave of the virus looms.

The first to fall were businesses, especially retail shops, that depended on New York City’s massive flow of commuters. And months into the crisis, established businesses that once seemed invincible, including some that had ambitious expansion plans, are cratering under a sustained collapse in consumer spending.

One business that will not reopen is Bank Street Bookstore, a nonprofit on the Upper West Side run by the Bank Street College of Education. More than 90 percent of its revenue was in-store sales, mostly to neighborhood parents, the college’s students and elementary schoolteachers.

“We had to keep reinventing the business every week to two weeks, based on new guidelines,” Caitlyn Morrissey, the store’s manager, said about the past months. “Our cornerstone was in-person sales, not web sales.”

Image“Our cornerstone was in-person sales, not web sales,” said Caitlyn Morrissey, the manager of Bank Street Bookstore, a children’s book shop that is closing for good.
“Our cornerstone was in-person sales, not web sales,” said Caitlyn Morrissey, the manager of Bank Street Bookstore, a children’s book shop that is closing for good. Credit...Amr Alfiky/The New York Times
Unlike larger firms, small businesses — bookstores, bodegas, bars, dental practices, gyms and day care centers — typically do not have the financial resources to overcome a few rough days or weeks, let alone months.

There is no clearinghouse for reliable data on the number of small businesses that have closed in New York or nationwide. The actual number of permanent closings in New York is probably higher than Yelp’s tally since it largely focuses on consumer-facing businesses. A small business is generally defined by economists as those with under 500 employees.

From March 1 to the end of April, during the height of the pandemic in New York City, businesses in the city that use the payment company Square saw their revenues drop by half, according to an analysis the company provided to The New York Times. The most significant revenue declines were in the Bronx and Manhattan, the company said.

As part of a $2.2 trillion emergency aid package adopted in March, the federal government set aside about $500 billion in small-business loans to keep workers employed and companies afloat. But business owners said they have spent all or most of their loans, paying salaries and bills, including rent.

More help for small businesses is part of negotiations as the Trump administration and Republicans and Democrats in Congress try to iron out another rescue package.

While the worst of the pandemic in the United States struck New York City first, small businesses across the country have been clobbered.

Between early March and early May, roughly 110,000 small businesses nationwide shut down, according to researchers at Harvard.

In New York, the restaurant and hospitality industry has been one of the hardest hit. More than 80 percent of the city’s restaurants and bars did not pay full rent in June, according to the NYC Hospitality Alliance.

Among those restaurants was Glady’s in Brooklyn. Its revenue plummeted by two-thirds since March, to about $12,000 per week in June. The majority of its sales were from tropical rum drinks served through a side window of the restaurant.

The owner, William Garfield, said he decided to close in June before officials started allowing outdoor dining after his landlord said he had to start paying the full monthly rent, $8,000, starting in July. Mr. Garfield said the healthy revenue from drink sales was still not enough to make ends meet.

“We were thriving,” said Mr. Garfield, 32, said about Glady’s business before March. “I would disagree with the sentiment that if someone had a thriving business they should be able to survive this.”

Mr. Garfield has another restaurant, Mo’s Original, and a bar next door, both of which he plans to keep open. His staff among his businesses has shrunk from 56 to seven.

He has spent almost all of his small-business stimulus loan, known as Payroll Protection Assistance, about $72,000. His insurance company denied his business interruption claim, citing New York State’s order that restaurants were “essential businesses” and could stay open.

“It’s the most frustrating situation because it’s not about passion anymore or the work you put in or the hours you put in,” he said. “It’s all about the mitigating circumstances that are out of your control.”

In recent weeks, “For Lease” signs have started to appear on storefronts on streets throughout New York, evidence that businesses that tried to ride out the initial months or abruptly shift to new online business models could no longer survive.

Business owners said they are at a tipping point. They have exhausted their federal, state and local aid. And while some landlords have offered breaks on rent, some business owners say others have been less flexible.

Owners say they also have to cope with constant uncertainty — not just the threat of a resurgence of the virus but also having navigate shifting reopening plans.

Restaurants in New York City were expecting to restart indoor dining in July. Owners bought food and supplies for what they thought would be larger crowds. But days before the restrictions were to be lifted, officials halted the plans, citing rising cases in other states that had allowed indoor dining.

Nearly a third of the 2,800 businesses in New York City that have permanently closed were restaurants, according to Yelp.

The remaining businesses represent a broad swath of the city’s economy, including small law firms, beauty stores, spas and cleaning companies.

“As a small-business owner, I’m surprised that more businesses have not closed yet,” said Andrea Dillon, the owner of Busy Bodies, a day care she opened on Fulton Avenue in Brooklyn in 2016.

Ms. Dillon said she noticed the ripple effect of the pandemic in late February, a few weeks before the city shut down. Parents and caregivers were canceling upcoming birthday parties and classes.

By early March, she realized that her entire business model — in which up to 70 children and adults cram into a play space with toys and live music — could not coexist with the coronavirus.

She asked her landlord for a break on her $6,000 a month rent, but he refused. Ms. Dillon said she decided in early April to close down.

“The face of New York City storefronts, they will not be forever changed,” she said. “But they will be changed for the foreseeable future.”

While her management company did not offer a break on rent, another landlord, Brian Steinwurtzel, said he was doing just that for some of his roughly 2,000 tenants in New York City, many of them small businesses. Mr. Steinwurtzel, the co-chief executive at GFP Real Estate, said he helped them apply for federal assistance and lowered their rents while business is down.

“It doesn’t make any sense to kick them out or fight with them as long as we are all working together,” Mr. Steinwurtzel said. “We believe we are all in it together, and we all have to help each other out.”

The most vulnerable small businesses in New York City might be those operated by minority or female owners. Recent studies have shown that these were largely shut out of federal aid. There are about 10,500 business that New York City has certified as minority- or female-owned.

A survey of such businesses released by the New York City Comptroller’s Office found that 30 percent of them believed they were likely to fold within the next 30 days.

Among those businesses is ThroughMyKitchen, a catering and snack company owned by Evelyn Echevarria. Before March, she derived most of her income from selling goods at street fairs and catering. Her last event was in March, catering a 120-person wedding in South Carolina.

She is surviving on unemployment benefits, but the largest portion of that, the federal stimulus of $600 per week, expired at the end of July. She also received $2,000 in assistance from the city.

“It’s been very, very hard,” Ms. Echevarria, 58, said. “The small businesses won’t be able to survive this. This, to me and many others, is devastating. It’s devastating.”

Sheelagh McNeill contributed research.

Thursday, July 30, 2020

CORONAVIRUS Coronavirus pandemic puts NYC’s struggling taxi industry on brink of ruin, data show New York Daily News July 29, 2020

This story originally appeared in the New York Daily News on July 20, 2020 ,


Coronavirus has left the city’s yellow taxi business gasping for breath.

Ridership was down 92% in June — and just one in five of the city’s 13,500 yellow cabs even hit the streets, according to data the city Taxi and Limousine Commission released Wednesday after months of delays.

When New York became the epicenter of the outbreak in April, the amount of money yellow cab drivers grossed before expenses was down to $54 per day, a decline of 70% from the $176 per day they grossed in February. Their gross rebounded to $105 per day in June, but was still 47% lower than the $195 cabbies took in daily in June 2019.

Uber, Lyft and other app-based car services also hurt — but their drivers’ losses weren’t as steep.

Nearly 50,000 app-based drivers stopped working between February and June, which helped driver pay remain stable.

TLC data shows app-based drivers who kept working through the pandemic earned just 5% less in June than they did the same month last year. In June they were doing roughly 251,696 rides per day, nearly 14 times the 18,325 rides yellow cabs saw.

App-based drivers are still doing more business than the the 217,000 daily rides yellow cabs recorded in February, before the pandemic.

“It’s quite remarkable how Uber and Lyft have bounced back to a degree, while taxis have much less,” said Bruce Schaller, a transportation consultant. “What you see in the numbers is more of the same of what you saw pre-pandemic, with Uber and Lyft doing much better than the yellow taxis both as an industry and for drivers individually.”

A woman wears a face mask near the Port Authority in Midtown Manhattan in March.

A woman wears a face mask near the Port Authority in Midtown Manhattan in March. (Luiz C. Ribeiro/for New York Daily News)

Owners of New York City’s taxi medallions — which give drivers the exclusive right to take street hails in the busiest areas of Manhattan — were in trouble before the pandemic hit.

Medallion owners faced an average debt in January of about $700,000 — a figure that began to balloon in 2014 when the app-based companies Uber and Lyft began to siphon rides away from cabs.

Now the outlook for their business is even worse.

“If this isn’t a wake up call for the city and its leaders, then we will know who was responsible for ending this industry and I still wouldn’t say it was COVID,” said Bhairavi Desai, president of the New York Taxi Workers Alliance and a medallion owner.

More people working from home means fewer people commuting by yellow taxis. And with air travel down 85%, fewer people are visiting New York for business or tourism — meaning cabbies can’t count on fares and tips from out-of-towners.

The pandemic has forced nearly 9,000 yellow taxi drivers off the streets since March, giving them little income to pay off their piling bills.

Medallion owners in January called for the city to help find “mission-driven investors” who could help bring down some debt. Now, with the nation facing a severe recession, that option appears to be off the table.

Yellow Taxis are seen parked on 37th Street and 11th Avenue on April 6.

Yellow Taxis are seen parked on 37th Street and 11th Avenue on April 6. (Luiz C. Ribeiro/for New York Daily News)

App-based drivers who stopped working during the pandemic also face uncertainty.

Varinder Kumar, 47, stopped driving for Lyft in March out of fear for his health.

Kumar said he plans to return to work next month if Congress does not renew the $600 in weekly unemployment benefits he’s received from the federal government since April. The extra money is slated to stop coming on Friday.

Varinder Kumar, a Lyft Driver who left work in March out of fear for his health.

“I was making less with unemployment than I was when I was driving in February,” Kumar said. “But I have a family and I need to keep them safe. I won’t make the same money as I did before the pandemic if I go back to work either.”

“If things don’t work out maybe I’ll move to another state that is not so expensive,” he added.

Schaller expects many more app-based drivers will begin to return to the streets in the coming months, which could lead to a reduction in their average pay.

Unlike yellow cab drivers, if Kumar returns to work he would benefit from the city’s minimum wage and paid sick leave rules. He also won’t face the insurmountable debt that taxi medallion owners are having an even harder time paying off due to dismal ridership.

But Schaller said the crisis could bring an ugly reckoning to the yellow taxi medallion business: It could force many medallion owners who are still hanging on to file for bankruptcy, and effectively reset the entire industry.

“The question is: Does this huge drop end up basically flushing all the bad debt down the toilet?” Schaller said. “The thing about the taxi industry is, it could be healthy if you just started over. Bankruptcy could give you a fresh start.”

Monday, July 27, 2020

Landlords Jump the Gun as Eviction Moratorium Wanes New York Times July 23, 2020

This story, Landlords Jump the Gun as Eviction Moratorium Wanes. originally appeared on New York Times on July 23, 2020.

The CARES Act temporarily protects millions of renters from being kicked out of their homes for nonpayment. Filings aren’t supposed to resume until after Friday.

Legal Aid lawyers say a tenant received an eviction notice from this apartment complex in Tucker, Ga., even though she’s protected under the CARES Act.

Legal Aid lawyers say a tenant received an eviction notice from this apartment complex in Tucker, Ga., even though she’s protected under the CARES Act.Credit...Melissa Golden for The New York Times

By Matthew Goldstein July 23, 2020

The four-month pause that has protected millions of Americans from eviction cases is set to expire at the end of this week. But that hasn’t stopped landlords across the country from trying to get a head start forcing renters out.

Landlords in Tucson, Ariz., filed dozens of eviction cases last month despite the federal moratorium, which was put in place because of the coronavirus crisis. Legal aid lawyers had to go to court to stop the eviction of a San Antonio renter who had lost her job during a citywide stay-at-home order. And in Omaha, a court found that a struggling renter’s attempted eviction had violated the emergency law.

As the number of Covid-19 cases has surged across the country, a disturbing trend has emerged: landlords commencing eviction proceedings even though the CARES Act relief law currently protects about 12 million tenants living in qualifying properties.

Yolanda Jackson, a special-education paraprofessional in the DeKalb County schools outside of Atlanta, lost her job in March when the schools shut down. Ms. Jackson, a mother of two, has yet to receive an unemployment check, despite confirmation that she was approved, and hasn’t been able to pay her rent. A charitable organization agreed to cover her missed payments, but so far the manager of her complex, LaVista Crossing Apartments, hasn’t sent the necessary documentation to accept it.

“I have tried everything in my power not to get to this point,” Ms. Jackson said. “I’ve been here seven years, and they will not work with me. I am just stressed out and trying to hold it together.”

She received an eviction notice in late June, and the manager said in a court filing that the property wasn’t covered by the federal moratorium. But on Tuesday, lawyers for Legal Aid in Atlanta decided to take her case after finding that the complex is in fact listed as having a federally backed mortgage — making it covered by the CARES Act moratorium.

Yolanda Jackson, still waiting for unemployment benefits after losing her job during the pandemic, is trying to fend off eviction from LaVista Crossing.Credit...Melissa Golden for The New York Times

Lawyers for LaVista Crossing did not respond to messages seeking comment.

At least two other residents of the apartment complex have been served with eviction notices for nonpayment, said Lindsey Siegel with Atlanta Legal Aid. “Many Legal Aid clients are facing evictions simply because their unemployment benefits haven’t come through,” she said.

State and local governments have also issued eviction moratoriums, but the CARES Act is the furthest reaching, covering as many as 12.3 million renters living in an apartment complex or single-family home financed with a federally backed mortgage. But like other moratoriums, it’s about to expire: After Friday, landlords can begin filing eviction notices for failure to pay rent. It will be at least 30 days after that before any tenants are kicked out.

The moratorium has been a lifeline for millions of unemployed people, allowing renters waiting on slow-to-arrive aid to stay in their homes and make up the payments later.

But the far-ranging and hastily assembled CARES Act — which, among things, had provisions for direct relief payments, a temporary expansion of unemployment insurance and hundreds of billions of dollars in small-business aid — does not penalize landlords who violate the moratorium.

Paula Cino, a vice president for policy and government affairs at the National Multifamily Housing Council, a landlord group, said there had been some legitimate confusion at the outset with the federal moratorium and local and state eviction pauses.

“That said, I wouldn’t minimize the fact that there is the potential for bad actors in this space,” she said. “Even if they weren’t initially taking advantage of the system, they have the responsibility to better understand.”

Once an eviction case enters the legal system, it can have lasting consequences: Even a wrongfully filed action can be difficult to remove from court records and keep turning up when renters go through background checks.

“An eviction judgment stays on a tenant’s credit report for seven years, is grounds for wage garnishment and makes it more difficult for a tenant to find future housing,” said Stacy Butler, a law professor at the University of Arizona who has been tracking violations of the CARES Act.

Even with a moratorium in place, landlords have been serving eviction notices in places across the country, housing advocates say.

Even with a moratorium in place, landlords have been serving eviction notices in places across the country, housing advocates say.Credit...Melissa Golden for The New York Times

The moratorium bars the start of evictions for nonpayment for about 12 million renters in properties that have federally backed mortgages.

The moratorium bars the start of evictions for nonpayment for about 12 million renters in properties that have federally backed mortgages.Credit...Melissa Golden for The New York Times

The scope of the problem is elusive. Wrongly evicted renters might not bother trying to challenge their landlords, sometimes because of their immigration status, or because they do not know they have the right.

But wrongful evictions have been reported across the country. The Private Equity Stakeholder Project, a consumer advocacy group, found more than 100 filings in apparent violation of the CARES Act in Arizona, Texas, Florida and Massachusetts.

And in a survey of 100 legal aid lawyers in 38 states, by the National Housing Law Project, all but nine said they knew of attempts at illegal evictions in their cities. The problem prompted the group to create a draft complaint to challenge a violation of the CARES Act moratorium.

Judges have been troubled, too. The Texas Supreme Court issued a statewide order on Tuesday requiring landlords to certify whether the CARES Act applies to an eviction case, and Arizona’s Supreme Court took a similar action earlier this month.

Lawmakers in Washington are debating another relief law — including possible stimulus payments, aid for governments and schools, and a decision on what to do about the extra $600 weekly unemployment benefit — and housing advocates want it to have more help for renters.

The landlord group is in favor of help for tenants, too. The National Multifamily Housing Council said it favored the creation of an emergency rental assistance program of up to $100 billion. But the organization opposes a “protracted extension of a federal eviction moratorium.”

If the moratorium is extended in another relief bill — it is part of the $3 trillion package passed by House Democrats — there are calls from housing advocates to give it enough teeth to keep landlords from trying to skirt the rules.

“There should also be clearly delineated enforcement mechanisms and steep penalties for landlords who flout the law,” said Diane Yentel, president of the National Low Income Housing Coalition, which has set up a webpage to help tenants determine if their rental is covered by the CARES Act.

With some forms of aid slow to arrive, the eviction moratorium has allowed struggling tenants to stay in their homes.

With some forms of aid slow to arrive, the eviction moratorium has allowed struggling tenants to stay in their homes.Credit...Melissa Golden for The New York Times

Nelson Mock, an attorney with Texas RioGrande Legal Aid, said lawyers across Texas had seen “landlords trying to sidestep the issue.”

Juanita Herrera DeLeon, 57, who lost her job in March during San Antonio’s stay-at-home order, had to fend off an eviction attempt despite the CARES Act moratorium.

Soon after Ms. DeLeon lost her job, the manager of her apartment complex, the Olmos Club Apartments, tried to lock her out by installing a device on her doorknob. It was removed after she complained to the police, but she said the complex had tried other tactics to get her to leave, like posting on her front door a three-day notice to vacate the premises.

That was when she sought help from RioGrande Legal Aid. In a statement filed with her lawsuit, she said the property manager “did not leave me anything in writing about locking me out” before the first attempt.

The suit was recently settled; Mr. Mock said he was not permitted to discuss the terms.

Jason Adelstein, a lawyer for the Olmos Club Apartments, said, “The dispute was settled between the parties, my client denies any wrongdoing, and due to the terms of the settlement agreement between the parties there can be no further comment.”

The issue of CARES Act violations may be worst in Arizona.

In June alone, at least 80 eviction proceedings that were started in the local courts in Pima County appeared to violate the CARES Act, according to research by a team that included Ms. Butler, the law professor in Tucson. Many were filed by small landlords, and it’s hard to know whether the filings were intentional or a mistake, she said.

One property owner, however, was responsible for filing more than a dozen cases against residents of the Cordova Village apartment complex on Tucson’s south side.

The landlord, Equilibrium Properties, which operates several apartment buildings in Tucson and Washington, D.C., said in an emailed statement that the eviction filings had been made in error. The company, which received at least $150,000 under the Paycheck Protection Program established by the CARES Act, said it had moved to vacate the proceedings and was “rescinding all notices for nonpayment that have been given to tenants.”

“Moving forward,” the company said, “we will take every effort to comply with the CARES Act.”

Monday, July 20, 2020

Federal Aid Has So Far Averted Personal Bankruptcies, but Trouble Looms Once federal benefits dry up, highly indebted consumers could be forced to file. New York Times July 17, 2020

This story, Federal Aid Has So Far Averted Personal Bankruptcies, but Trouble Looms

Once federal benefits dry up, highly indebted consumers could be forced to file.

originally appeared in the New York Times on July 17, 2020 at


Federal Aid Has So Far Averted Personal Bankruptcies, but Trouble Looms
Once federal benefits dry up, highly indebted consumers could be forced to file.

Credit card debt piled up for Jess Brown, and the $600 federal unemployment supplement has kept her afloat. That benefit ends this month.

Credit card debt piled up for Jess Brown, and the $600 federal unemployment supplement has kept her afloat. That benefit ends this month.Credit...Eamon Queeney for The New York Times

Mary Williams Walsh

By Mary Williams Walsh

July 17, 2020

The United States went into the Great Lockdown with the most household debt in history, stagnant incomes for all but high earners and armies of people telling pollsters they were living paycheck to paycheck. Then, for millions, their paychecks stopped.

But instead of a stampede to the bankruptcy courts, personal bankruptcy filings — a useful, if extreme, indicator of the financial health of the American consumer — dropped sharply from April through June, even as unemployment soared, according to calculations by the American Bankruptcy Institute based on data from Epiq Global, a legal research and analytics firm.

Bankruptcy Filings and Household Debt

American households had more debt than ever when the pandemic sent unemployment soaring this spring. But bankruptcy statistics have yet to reflect the struggle to manage that debt; personal bankruptcy filings are in sharp decline.

“Filings have just gone through the floor,” said Henry E. Hildebrand III, a consumer bankruptcy trustee in Nashville. Such trustees supervise the finances of people who have declared bankruptcy and agreed to pay creditors over three to five years. Mr. Hildebrand usually gets 350 to 400 new cases a month, he said, but last month he added just 107. Nationwide, the drop in personal bankruptcy filings is the biggest in 15 years.

One reason for this counterintuitive picture: The federal government’s stimulus package, which, beginning in April, has put cash into unemployed people’s hands on a weekly basis, allowing them not just to buy groceries and pay rent, but to pay down existing debt.

As of mid-June, the Treasury Department had issued nearly $270 billion worth of stimulus payments to some 160 million people. Unemployment benefits, which normally average about $340 a week, were temporarily increased by $600 a week. Some unemployed people now have more income than when they were working.

But those benefits are set to expire this month. Congress will take up the issue of whether to extend them, along with other emergency aid, when the Senate returns next week, but if no more aid is forthcoming after July — given the double-digit unemployment rate and a resurgent virus in many parts of the country — a far more dire portrait of the financial pain of millions of Americans is set to emerge in the coming months. Bankruptcy experts say consumer bankruptcy filings will then start to rise.

The banking industry is already gearing up for a wave of defaults on everything from mortgages to credit card debt. Several of the nation’s biggest banks, including JPMorgan Chase, Wells Fargo and Citigroup, said in their second-quarter earnings reports that they had added tens of billions of dollars to their reserves to cover losses they expect to incur on business and consumer loans.

Jess Brown, 42, quit her marketing job two years ago to start a small house-sitting business, but ended up crushed under more than $40,000 of credit card debt. The card companies offered her rehabilitation plans, but only if she let them automatically withdraw the payments from her checking account. That led to overdrafts and bank penalties.

Not knowing what else to do, last October she dropped out of those plans, moved in with relatives in North Carolina, changed her phone and avoided the debt collectors. She went online to learn about budgeting and compound interest and tried to research consumer bankruptcy, too, but got mostly spam from debt-consolidation companies.

Then came the pandemic. With her patchy recent earnings record, Ms. Brown was eligible for just $135 a week of regular unemployment compensation. But the supplementary $600 has kept her afloat and given her the means to keep looking for work. Ms. Brown tries not to think what will happen if the federal relief stops.

“It only brings me emotional distress,” she said.

For the economy as a whole, which is driven by consumer spending, that extra $600 a week has been “nothing short of a game-changer,” said Matt Schulz, chief industry analyst for LendingTree, the online credit marketplace. The company recently reviewed a large sample of credit card data from 800,000 users and found that unpaid balances, late payments and usage all fell from February to May, as the federal money began to flow.

“Instead of just squeaking by, that extra money has allowed many Americans to actually pay down debt and increase savings in ways that would be unimaginable under normal terms of unemployment,” Mr. Schulz said.

But even if Congress extends the relief measures, they are a temporary salve that will do little to change the long-term patterns of income stagnation and indebtedness that have left American households so vulnerable to a financial shock. Total household debt reached $14.3 trillion in the first quarter of this year, according to the Federal Reserve Bank of New York — a record.

ImageHenry E. Hildebrand III, a consumer bankruptcy trustee in Nashville. His caseload has plunged.

Henry E. Hildebrand III, a consumer bankruptcy trustee in Nashville. His caseload has plunged.Credit...Brett Carlsen for The New York Times

Most of the economic gains from the last 30 years of economic growth, except for the Great Recession, have been going to top earners, leaving the bottom half of wage-earning America struggling — and highly indebted. Research from Gabriel Zucman and Emmanuel Saez, professors at the University of California, Berkeley, showed that in 2018, those in the bottom half carried debt that was 219 percent of their income. And that’s who was hit first and hardest by the economic shock this spring.

Nearly 40 percent of households earning less than $40,000 a year had already lost at least one job by May, according to the Federal Reserve, which has been analyzing household finances closely. That compares with just 19 percent of households earning $40,000 to $100,000, and 13 percent of households earning more than $100,000 a year.

A survey done in May by the Census Bureau showed further that younger households, and those with less education and lower earnings, were likeliest to be losing income in the shutdowns. They were also likelier to say they could not make their rent or mortgage payments and had sought forbearance.

Jenny Doling, a consumer bankruptcy lawyer in San Diego, said consumers whose debts started to snowball were generally better off seeking protection in bankruptcy right away. That’s because bankruptcy automatically halts creditors’ collection efforts, giving insolvent consumers a safe place to work out their three- to five-year repayment plans, and possibly save important assets like a house or a car.

But for many, the idea of bankruptcy comes with the threat of a stigma.

“Filing bankruptcy, for consumers, is sort of an admission that you’re a financial failure, and people just can’t admit that,” said John Rao, a lawyer at the National Consumer Law Center in Boston. “They still think that they can pull out of it somehow.”

People also get sticker shock when they hear that the cheapest consumer bankruptcy case, a liquidation, is likely to cost about $1,500. In 2005, amid concerns that spendthrift consumers were abusing the bankruptcy system, Congress tightened the laws, increasing the cost of a case and requiring legal fees to be paid upfront. The next year, the number of cases fell to around 600,000 from more than two million in 2005, but began climbing again in the aftermath of the 2008 financial crisis. Last year, 752,160 cases were filed; this year, if filings continue at their current rate, there will be 590,854 by the end of December.

While consumers struggle, they often turn to their credit cards to make ends meet, thinking they will pay down the balance when they’re called back to work. In the meantime, they make just the minimum monthly required payment.

Each month’s unpaid interest, accruing at 20 percent or more, is then tacked onto their principal balance, causing their debt to balloon even if they don’t buy anything.

“It becomes completely unmanageable,” Mr. Rao said.

That’s what happened to Ms. Brown. She had good credit when she quit her job in early 2018, and lined up a series of house-sitting gigs in Europe, using her credit cards for airfare and food as she moved from country to country. She was stunned to see how fast the interest compounded. But she also found that when she hit the maximum on one card, other issuers would give her new ones. Sometimes they came with offers of a gift card if she spent a lot more money quickly.

Realizing she had no way out, she returned to the United States.

“I had a wall of credit card debt that was waiting for me,” she said. She kept trying to make a go of her house-sitting business. Then the economy went into shutdown, and people stopped traveling. “In one day I had six cancellations,” she said.

For now, Ms. Brown said, the debt collectors have been leaving her in peace. But any day, she said, she may open the door and find a process server standing there with the papers for a bank’s lawsuit.

“It’s not a question of ‘if’ but ‘when,’ and it weighs on me heavily,” she said.

Sunday, July 19, 2020

A reader of our blog asked a very good question regarding guarantees/guaranties and our post regarding the use of bankruptcy to terminate or end commercial leases in Manhattan, New York. 

The question posed was how does one terminate or end a lease in Manhattan if the lease is guaranteed by a principal of the tenant?

Our response is below.

Our blog can be found at and the post titled "Commercial leases in New York City, COVID-19, Recent Protests and a Strategy to End or Terminate Commercial Leases", dated SUNDAY, JULY 12, 2020 can be found at

First, if a commercial lease has a guarantee/guaranty, terminating the lease without addressing the underlined guarantee, is of no value to the commercial tenant.

Second, there are two types of guarantees/guarantys with respect to commercial leases, there is a general guarantee (“Guarantee” ) which generally requires that the principal of the tenant guarantee the payment of base rent, additional rent and the performance of any requirements under the lease by the tenant.

Third, the second type of guarantee/guaranty is known as a Good Guy Guarantee (“GGG”), which requires the principal of the tenant to pay rent or additional rent until the tenant vacates the space, returns the keys to the landlord and leaves the space in a broom clean condition. Many GGG have a term limit, in which the good guy guarantee expires after a certain number of years, such as 2 to 3 years if there is no default under the lease.

Fourth, after being retained to terminate a commercial lease with a guarantee, we request a copy of the guarantee and review its terms to determine if it is a guarantee, a GGG or a guarantee that has terminated for some reason such as time.

Fifth, we then ask for financial statements from the guarantor, including a balance sheet and income statement.

Sixth, we then engage in asset protection planning for the guarantor to make it more difficult for the landlord to obtain possession of the guarantor's assets if there is a default under the lease or no settlement with the landlord.

Seventh, we then begin negotiations with the landlord, providing the landlord with the pro forma bankruptcy petition for the tenant and financial information regarding the guarantor. Often times we will also prepare a pro-forma bankruptcy petition for the guarantor, although a bankruptcy filing by the guarantor is always a last resort.

Eighth, we aim to convince the landlord that by doing a workout and releasing the tenant and the guarantor, the landlord will regain possession of its premises sooner, the landlord will save on landlord tenant and bankruptcy legal fees. The exercise is similar to that which we do when there is no guarantor, but with a guarantor there is another degree of difficulty or complexity, which is not insurmountable. Additionally, based on the time value of money, a dollar paid to the landlord today has greater value than the landlord being paid over three years and a bankruptcy filing by the guarantor.

Ninth, if we are unable to do a work out with the landlord, then the tenant can file a Chapter 7 bankruptcy and the guarantor can file either a chapter 7 bankruptcy ( liquidation) or Chapter 13 bankruptcy where the landlord will be paid back over three to five years or a Subchapter V Chapter 11 bankruptcy for the guarantor (the landlord would be paid over 3 years).

While we cannot guarantee success, we have used these strategies successfully in Manhattan and for the right tenant and guarantor, they are a very effective way to terminate or end a commercial lease. Jim Shenwick 212 541 6224

Friday, July 17, 2020

Cancel Student Loans In Bankruptcy? You May Not Qualify Forbes July 16, 2020

This story Cancel Student Loans In Bankruptcy? You May Not Qualify  Forbes July 16, 2020 originally appeared

Cancel Student Loans In Bankruptcy? You May Not Qualify
Zack Friedman

Can you discharge your student loans in bankruptcy? A new proposal says yes, but not everyone qualifies.

Here’s what you need to know.

Student Loans
Rep. Mary Gay Scanlon (D -PA) introduced new legislation today that would make it easier for you to discharge student loans in bankruptcy if you are struggling financially and have been impacted by Covid-19. Here’s the good news: the COVID-19 Student 5 Loan Relief Act of 2020 would apply to both private student loans and federal student loans, and be available to all Americans impacted by Covid-19.

Discharge student loans: the fine print
Now, here’s the fine print: you may not qualify to discharge your student loans in bankruptcy under this proposal. According to the bill, to qualify:

your income has been reduced due to the Covid-19 pandemic; or
the primary income earner in your family died; or
you have become permanently disabled
Most Popular In: Personal Finance

Second Stimulus Check Income Limit Will Likely Be Higher Than $40,000
New Stimulus Package May Be Introduced Next Week
Proposal: Discharge Student Loans For Those Harmed By Pandemic And Recession
Now, lets’ break down the first requirement based on the language on the bill. The legislation requires a reduction in income due to Covid-19. What does this mean? Here’s what the bill says. It’s not enough that your income simply declined. Specifically, to qualify to discharge your student loans in bankruptcy

If you make less than this pre-tax income...your income must decline by at least this percentage...

< $75,000 Income: at least 20% decline
$75,000 - $125,000 Income: at least 30% decline
$125,000+ Income: at least 40% decline
Plus, the relevant time period is “beginning January 21, 2020 and extending until 60 days after the duration of the Covid-19 emergency or the duration of the Covid-19 outbreak or as a result of the COVID-19 outbreak.” Even if you wouldn’t qualify under this specific proposal, you still may be able to discharge your student loans in bankruptcy through the normal course based on your financial situation. Traditionally, unlike mortgages or credit card debt, student loans cannot be discharged in bankruptcy. There are exceptions, however, namely if certain conditions regarding financial hardship are met.

Cancel student loan debt
This latest bankruptcy legislation is part of an ongoing effort to provide more student loan relief, particularly as as result of Covid-19. For example, Student Debt Crisis, a leading student loan advocacy not-profit, recently sent Sen. Elizabeth Warren (D-MA) a petition for student loan forgiveness with 1.2 million signatures. Warren, who proposed student loan forgiveness for 95% of Americans, has been a proponent of student loan forgiveness and student loan debt cancellation. Scanlon’s legislation would make it easier by amending Chapter 11 of the U.S. Bankruptcy Code, although the requirements to qualify may be challenging for some. Student loan forgiveness has been a hot topic in Congress, particularly in the wake of the Covid-19 pandemic. For example, former Vice President Joe Biden reiterated his support for student loan forgiveness and his support to discharge student loans in bankruptcy. Other members of Congress have proposed legislation to forgive student loans, although none have become law.

Will student loans be included in the new stimulus?
Maybe. It’s unlikely that this bill or a similar bill to discharge student loans in bankruptcy will be included in the new stimulus. The new stimulus package may be introduced next week. Currently, the focus includes second stimulus checks, state and local aid, unemployment benefits or a return-to-work bonus and liability protection due to Covid-19 for businesses. However, don’t expect student loan forgiveness to be included. However, Congress may extend student loan relief under the Cares Act, or Congress could allow the student loan relief to expire as planned on September 30, 2020. That said, student loans have not been the focus among Republicans (who control the Senate) among other high priority issues. There is bipartisan support to make student loans dischargeable in bankruptcy, but there may not be consensus to act until after the election in the next Congress.

The Eye of the Bankruptcy Storm New York Times July 17, 2020

This post appeared in the New York Times on 7/17/20


The Eye of the Bankruptcy Storm

Chesapeake Energy was among the companies to file for bankruptcy protection in recent weeks.Credit...Brett Carlsen/Reuters
July 17, 2020Updated 7:28 a.m. ET

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The pendulum swings back toward fear

As the pandemic persists, more and more companies have filed for bankruptcy protection, following in the footsteps of Hertz, J. Crew and Neiman Marcus. But financial restructuring advisers — the bankers and lawyers who help troubled companies repair their balance sheets or slog through Chapter 11 — say that they expect filings to accelerate. If anything, we’re now in the lull before the storm.

About 3,600 companies filed for Chapter 11 in the first half of 2020, more than any year since 2012, according to the American Bankruptcy Institute. The past few weeks have brought filings by the fracking pioneer Chesapeake Energy, the Japanese home goods company Muji USA and the retailer New York & Company.


But cases dropped last month. Why? Advisers cited the federal government’s programs for stabilizing the economy and credit markets, as well as efforts by companies to bolster their cash by drawing down their credit lines and issuing new bonds. (Businesses worldwide have sold $2.1 trillion worth of bonds so far this year, up 50 percent from the year before.) Earlier-than-expected reopenings have bolstered some businesses’ performance, allowing them to bring in some sales — critical to servicing their debts.

Yet as coronavirus cases surge again, an uptick in filings may follow. The rise in infections brings the prospect of renewed lockdowns and shakes consumer confidence, testing companies’ abilities to survive another spell of little to no revenue. “We’re starting to see the pendulum swing back toward fear again,” William Hardie, a managing director in Houlihan Lokey’s financial restructuring group, told DealBook’s Michael de la Merced.

And what comes next could be ugly. Many companies that saved themselves by borrowing more money are now in a bind: They have mortgaged nearly all their available assets, leaving little wiggle room.

• Creditors are willing to give companies concessions on existing debt covenants — especially since they don’t want to recognize any of their loans as impaired, hurting their own balance sheets — but if borrowers need more money, they may find lenders are unwilling or unable to front the cash.

Where to expect the next wave: While retailers and energy companies have dominated the first wave, restructuring experts say the next round of filings could hit the travel industry hard, including airlines, hotels and firms that lease planes to carriers.

More companies will be taken over by lenders, who will convert their loans into equity. So far, advisers say, talks between debtors and creditors have been sanguine, with relatively few of the disagreements that often complicate Chapter 11 cases. “There’s no finger-pointing,” Mr. Hardie said. “Everyone realizes this is no one’s fault.”

The C.D.C. has extended a ban on cruise ships until Sept. 30.Credit...Alexandre Meneghini/Reuters