The new year of 2021 brings us face to face with a desolate economic landscape and the hope of better things to come. For some significant slice of Americans, bankruptcy will be a consideration.
You’ll want to know what’s new in 2021 in the array of bankruptcy options and alternatives. I’m writing after passage of the national CAA 2021 bill that provided $600 relief payments to many Americans and before a new Congress is sworn in. It’s likely that the landscape will further change, perhaps soon.
Keeping their home is high on every distressed debtor’s list of concerns. Whether you rent or own, there’s news here.
Bankruptcy currently offers slim protections for renters intent on maintaining their current digs if an eviction judgment has been entered. Waiting to file bankruptcy until the sheriff is at the door is usually fruitless.
The most recent COVID relief bill extends the national moratorium on evictions to January 31, 2021. States and localities have enacted a patchwork of local and regional bars to evictions. For most folks, the threat of homelessness has been pushed back, but only a little way.
California homeowners can claim a homestead exemption in their home of a minimum of $300,000 and perhaps as much as $600,000, effective January 1, 2021.
That expanded exemption, available to Californians filing bankruptcy, should widen the group of individuals who can file Chapter 7 bankruptcy without fear of sale of the family home by the trustee.
Individuals choosing Chapter 13 will find it easier to pass the “best interests of creditors” test which looks at the value of their non exempt assets to determine how much they must pay creditors through their plan . Bigger homestead exemption, less home equity exposed to creditors.
Orders of federal agencies have directed lenders servicing federally owned or guaranteed home loans to offer forbearance options to borrowers. California law has been amended to include notices of forbearance options as part of the state’s non judicial foreclosure process.
The law on mortgage defaults at this point is ragged, uncertain, and patchwork as to the ultimate path to curing mortgage defaults. Legislators are clearly concerned about the issue and the automatic stay in bankruptcy will still stop foreclosures while the parties assess the situation.
Options in bankruptcy
Subchapter V was added to the Bankruptcy Code in February, 2019, creating a streamlined Chapter 11 reorganization procedure for entities and for individuals with primarily business debts. The debt limits for Subchapter V eligibility are $2,725,625, but that limit was almost tripled in the CARES act, with the increased debt limit to $7.5M until March 27, 2021.
Chapter 13 changes
The Consolidated Appropriations Act of 2021, enacted December 27, 2020, created an opportunity for individuals to obtain a full-performance Chapter 13 discharge if they 1) have a residential mortgage, and 2) haven’t made all the payments called for by their plan. Chapter 13 gift to homeowners. It is effective for 12 months from enactment.
That joins an amendment to the Bankruptcy Code created by the CARES Act that allows Chapter 13 debtors with confirmed plans to extend the duration of their plans to as long as 84 months, two years beyond the current term limit of 60 months.
Utility shutoff protections
CAA 2021 created another short lived protection for bankruptcy debtors who owe pre filing utility bills. Debtors who pay for the utility service provided in the 20 days after filing bankruptcy are excused from putting up a security deposit so long as they pay for post filing service.
Assorted other relief
Congress has clarified that the forgiveness of PPP loans does not create taxable cancellation of debt income under 26 USC 108. That’s a boon to those who won’t need bankruptcy. It makes little difference to those discharging debts in bankruptcy where none of the forgiven debt triggers tax.
Relief payments under either of the existing COVID bills will be excluded from the calculation of disposable income in the means test. Should debtors still have any of the relief payments under the CAA-2021 when they file bankruptcy, that money is not property of the estate.
The latest COVID relief provisions make it illegal to discriminate against those in bankruptcy in connection with PPP loans. And in the broader context, PPP and EIDL loans are dischargeable in bankruptcy.
We can expect, I think, that some of the temporary measures set to expire in the next couple of months will be extended and that further relief measures will be enacted. Stay tuned, things are in flux.