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The following guidance has been posted by the United States Trustee in respect to the treatment of the IR rebate checks. The federal government will soon begin issuing recovery rebates to qualified individuals under the Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020 (the “Act”).The rebates total at most $1,200 per individual or $2,400 per married couple filing jointly, with an additional $500 paid for each qualifying child under the age of 17. The rebates are payable in full to qualifying individuals earning less than $75,000, $150,000 per married couple filing jointly, or $112,500 for heads of household, and decrease by 5 percent of income exceeding those thresholds until completely phased out. Two bankruptcy questions have arisen about whether the rebates: (1) should be included in the calculation of current monthly income or projected disposable income; and (2) are property of the bankruptcy estate.The Act explicitly answers the first question. Under Sec. 1113(b)(1) of the Act, which amends 11 U.S.C. §§ 101(10A)(B)(ii) and 1325(b)(2), “payments made under Federal law relating to the national emergency declared by the President under the National Emergencies Act (50 U.S.C. § 1601 et seq.) with respect to the coronavirus disease 2019 (COVID-19)” are excluded from the statutory definitions of current monthly income and disposable income. Accordingly, recovery rebates received within six months before the filing of the petition should not be included in calculating a debtor’s currently monthly income in a chapter 7 or 13 case, and further should be excluded from projected disposable income available to pay creditors through achapter 13 plan.The Act is silent as to whether the recovery rebate is property of the estate. In chapter 7 cases, the “property of the estate” issue will only arise in cases filed after March 27, 2020, the effective date of the Act. Regardless of whether the rebate is property of the estate, the United States Trustee expects that it is highly unlikely that the trustee would administer the payment after consideration of all relevant circumstances, including: the modest amount of the recovery rebate; the applicability of state and federal exemptions; any interest of a non-debtor spouse in the recovery rebate; the cost to the estate of recovering and administering the recovery rebate,including litigation with debtors who may seek a judicial determination; and the extent to which recovering the recovery rebate will enable creditors to receive a meaningful distribution.In rare chapter 13 cases filed on or after March 27, 2020, the recovery rebate may be relevant to the confirmation standard contained in 11 U.S.C. § 1325(a)(4). For chapter 13 cases filed before March 27, 2020, the recovery rebate is excluded from that analysis because it would not have been available for payment to creditors in a chapter 7 case.Trustees are directed to notify the United States Trustee prior to taking any action to recover recovery rebates or objecting to a chapter 13 plan based on the treatment of recovery rebates. Read More

An article in the New York Times today reported that funding for the Paycheck Protection Program could be exhausted within the next day or two. “As of Wednesday evening, more than 1.4 million loans had been approved at a value of more than $315 billion, according to the Small Business Administration.” Congress originally allocated $350 Billion to this program, although there are serious talks about infusing an additional $250 Billion. There are approximately 30 million small businesses in the U.S. UPDATE: The SBA announced that as of 9 p.m. Wednesday, there were more than 1.5 million small-business loan applications approved totaling more than $324 billion with more than 4,900 lending institutions participating in the program. Additionally, Republicans and Democrats are working on more funding, but those efforts seem to be stalled over disputes about Democrat provisions that call for at least $60 billion in small-business lending for women, minority and veteran-owned businesses in underserved urban, rural and tribal areas, $100 billion for hospitals and $150 billion for state governments. Read More

One of the key provisions of the CARES Act is a $600 per week enhancement to each State’s unemployment benefit. Anecdotal evidence indicates this attribute of the massive legislation may lead some workers to choose to stay off the employment roles during the coming months, even if they have the option of returning to work. Depending on their wages, they could collect more staying home from a job than working; a choice made easier if the Covid-19 risk remains. For example, Illinois calculates the weekly unemployment benefit by taking earnings for two prior quarters (if earnings fluctuate the two highest quarters during a base period are used), multiplying that amount by .47, and then dividing the result by 26, subject to a maximum weekly unemployment benefit of $484 (for a single person). Thus, an employee paid $50,000 per year (or $962 per week), would have $25,000 gross during the prior two quarters and 47% of that amount would yield $11,750, and thus $452 per week of unemployment. Under the CARES Act, moreover, there is an enhanced unemployment benefit of $600 per week, which has the potential to rearrange employment incentives. The person earning $50,000 per year would collect $1,052 per week in gross unemployment benefits ($600 under the CARES Act and $452 under current law), which is more than their weekly wage of $962. And if the employment separation does not trigger lost benefits (e.g., health insurance, 401k matching) because they never existed in the first place, the incentive to stay home becomes clearer. Furthermore, the option of returning to work might not defeat an unemployment claim in the current Covid-19 environment because an employee is not required to take or resume a job that endangers their “safety, health or morals.” Read More

The SBA has provided the following answers to frequently asked questions about the Paycheck Protection Program (“PPP”). The full guidance is available at https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Frequenty-Asked-Questions.pdf and should be consulted. According to the SBA, borrowers and lenders may rely on the guidance as SBA’s interpretation of the CARES Act and of the Paycheck Protection Program Interim Final Rule (“PPP Interim Final Rule”) (link). The U.S. government will not challenge lender PPP actions that conform to this guidance, and to the PPP Interim Final Rule and any subsequent rulemaking in effect at the time. Question: Paragraph 3.b.iii of the PPP Interim Final Rule states that lenders must “[c]onfirm the dollar amount of average monthly payroll costs for the preceding calendar year by reviewing the payroll documentation submitted with the borrower’s application.” Does that require the lender to replicate every borrower’s calculations? Answer: No. Providing an accurate calculation of payroll costs is the responsibility of the borrower, and the borrower attests to the accuracy of those calculations on the Borrower Application Form. Lenders are expected to perform a good faith review, in a reasonable time, of the borrower’s calculations and supporting documents concerning average monthly payroll cost. For example, minimal review of calculations based on a payroll report by a recognized third-party payroll processor would be reasonable. In addition, as the PPP Interim Final Rule indicates, lenders may rely on borrower representations, including with respect to amounts required to be excluded from payroll costs. If the lender identifies errors in the borrower’s calculation or material lack of substantiation in the borrower’s supporting documents, the lender should work with the borrower to remedy the issue. Question: Are small business concerns (as defined in section 3 of the Small Business Act, 15 U.S.C. 632) required to have 500 or fewer employees to be eligible borrowers in the PPP? Answer: No. Small business concerns can be eligible borrowers even if they have more than 500 employees, as long as they satisfy the existing statutory and regulatory definition of a “small business concern” under section 3 of the Small Business Act, 15 U.S.C. 632. A business can qualify if it meets the SBA employee-based or revenue-based size standard corresponding to its primary industry. Go to www.sba.gov/size for the industry size standards. 1 This document does not carry the force and effect of law independent of the statute and regulations on which it is based. Additionally, a business can qualify for the Paycheck Protection Program as a small business concern if it met both tests in SBA’s “alternative size standard” as of March 27, 2020: (1) maximum tangible net worth of the business is not more than $15 million; and (2) the average net income after Federal income taxes (excluding any carry-over losses) of the business for the two full fiscal years before the date of the application is not more than $5 million. A business that qualifies as a small business concern under section 3 of the Small Business Act, 15 U.S.C. 632, may truthfully attest to its eligibility for PPP loans on the Borrower Application Form, unless otherwise ineligible. Question: Does my business have to qualify as a small business concern (as defined in section 3 of the Small Business Act, 15 U.S.C. 632) in order to participate in the PPP? Answer: No. In addition to small business concerns, a business is eligible for a PPP loan if the business has 500 or fewer employees whose principal place of residence is in the United States, or the business meets the SBA employee-based size standards for the industry in which it operates (if applicable). Similarly, PPP loans are also available for qualifying tax-exempt nonprofit organizations described in section 501(c)(3) of the Internal Revenue Code (IRC), tax-exempt veterans organization described in section 501(c)(19) of the IRC, and Tribal business concerns described in section 31(b)(2)(C) of the Small Business Act that have 500 or fewer employees whose principal place of residence is in the United States, or meet the SBA employee-based size standards for the industry in which they operate. Question: Are lenders required to make an independent determination regarding applicability of affiliation rules under 13 C.F.R. 121.301(f) to borrowers? Answer: No. It is the responsibility of the borrower to determine which entities (if any) are its affiliates and determine the employee headcount of the borrower and its affiliates. Lenders are permitted to rely on borrowers’ certifications. Question: Are borrowers required to apply SBA’s affiliation rules under 13 C.F.R. 121.301(f)? Answer: Yes. Borrowers must apply the affiliation rules set forth in SBA’s Interim Final Rule on Affiliation. A borrower must certify on the Borrower Applic… Read More

The Federal Reserve appears to be taking action designed to bolster the Payroll Protection Program by allowing banks to sell the low-interest loans (which are capped at $10 million) to the U.S. central bank for cash. This move is designed to ease previously reported concerns among banks, particularly Chase and Bank of America, about getting stuck holding the low interest loans and administering them. Details on this action are expected to be announced later this week. The American Bankruptcy Institute reports that this move could make the program more attractive to lenders, given the fees of up to 5 percent banks can earn for what now amounts to processing the paperwork. Read More

Businesses that have obtained financing through Merchant Cash Advances, and that have been shuttered by the Covid-19 pandemic, may be hit with a double-whammy — reduced cash flow to pay critical expenses (e.g., payroll) and aggressive collection efforts from cash hungry merchant cash lenders. This phenomenon is discussed in a recent article from NBC News: https://www.nbcnews.com/business/economy/ftc-official-legal-loan-sharks-may-be-exploiting-coronavirus-squeeze-n1173346?cid=eml_nbn_20200403 Businesses struggling with Merchant Cash Advances may be able to benefit from the expedited Chapter 11 processes available under the recently enacted Small Business Restructuring Act (a “Subchapter 5” filing). FactorLaw has previously reported how a Subchapter 5 filing can be used by small businesses dealing with financial distress. FactorLaw attorneys are available to discuss how the SBRA can help businesses deal with Merchant Cash Advance issues. Read More

On April 2, 2020, the Small Business Administration issued guidance on the Paycheck Protection Program contained in the recently enacted Coronavirus Aid, Relief, and Economic Security Act (a/k/a the CARES Act). The Paycheck Protection Program will provide up to $349 billion in loans to eligible small businesses (generally a business with fewer than 500 employees), independent contractors, and self-employed individuals to cover payroll and other costs. Key highlights of the Paycheck Protection Program include: -100% of the loan’s principal may be forgiven if borrowers satisfy certain conditions. – The loans will have a two-year term with payments deferred for six months. – The loans will carry an interest rate of 1%. – The loans will be in the amount of the lesser of $10 million or an amount calculated on a specified payroll-based formula. More information, including eligibility criteria, can be found in the guidance issued by the Small Business Administration. [INSERT LINK https://content.sba.gov/sites/default/files/2020-04/PPP–IFRN%20FINAL.pdf] The application process for the Paycheck Protection Program opened officially on April 3, 2020 but several banks are still in the process of developing procedures to accept applications. The funds are available on a first come first serve basis. The attorneys at FactorLaw will continue to monitor legal and regulatory developments to assist clients during the current crisis. Read More

On Monday, March 30, 2020, the Illinois Department of Financial and Professional Regulation announced a series of actions to ensure the protection of Illinoisans in many areas of small business and consumer borrowing, servicing, and collections. The link to the guidance put forth by the IDFPR can be found at https://www.idfpr.com/News/2020/2020%2003%2030%20IDFPR%20financial%20guidance.pdf Read More