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Merchant Cash Advances and Covid-19 - A Double Whammy.

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
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The Payroll Protection Program -- Offering Help to Small Businesses.

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
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Access to Covid-19 Small Business Loan Program Expected Later this Week

Steven Mnuchin has announced that further details on accessing the SBA’s Covid-19 relief loan program should be available later this week. At this point, applications for the program are not available, but Mnuchin’s announcement hopefully means they will be offered very soon. Small-business owners can go to any of the existing SBA lenders, as well as any FDIC-insured institution, credit union or financial-technology lender that has signed up for the program. Anecdotal information indicates that the competition for these loans could be fierce, with lenders focusing on the needs of existing borrowers first. Read More
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When Does the Covid-19 Crisis Compel a Bankruptcy Option for Small Businesses and their Owners

For your information, FactorLaw has prepared the following discussion of how and when chapter 11 can be a viable option for small businesses (or their owners) that are dealing with financial distress caused by the Covid-19 Crisis (the “CVC”).   Although the Courts in Cook County and the collar counties right now are largely closed for civil matters, the Bankruptcy Courts in Chicago are open and new cases can be filed and administered during these unprecedented times.  We hope you find the following discussion useful and we welcome any questions you might have.   The Highly Vulnerable Business The first tranche of businesses likely to face immediate and severe financial distress due to the CVC likely will be those where demand for goods or services is immediately and drastically reduced (or eliminated) and that have high costs that cannot be easily ratcheted down without impairing the business or incurring unsustainable liabilities.  Businesses whose cash flow or business model have otherwise suffered critical disruption due to the CVC also are likely to suffer extreme financial distress, as are businesses that were teetering before the CVC.  The likely candidates in this category include restaurants, small hotels/motels, small retailers, and businesses that support these establishments.     Highly vulnerable businesses are less likely to have sizeable long-term debt and usually do not fund operations through a revolving line of credit, although some may, particularly if the business owns real estate.  In many cases, credit relationships exist at the vendor level and major stakeholders are suppliers and landlords.  Such businesses also may have used shareholder loans, merchant cash financing or other high-interest products to sustain operations.  Depending upon cash reserves and the ability to reduce operating expenses swiftly, the optimal strategy for the highly vulnerable business is to (1) reduce operating expenses as much as possible during the CVC, with the hope of reengaging in the future and (2) exacting concessions from creditors.  Highly vulnerable businesses also might try to take advantage of the myriad programs at the Federal and State levels to assist troubled businesses, although the response time for these programs currently is not known and some of these programs may not be available if a business reduces its work force. Pursuing these options may require contacting landlords and other creditors, including high interest rate lenders and labor unions, and requesting some type of forbearance or waiver, which should be reduced to writing if possible, particularly in light of the requirement for modifications to be in writing under the Illinois Credit Agreements Act.  Such businesses also need a unified response from management/ownership and if the key decision makers are not aligned, the most effective responses may be unachievable.  Although the wisdom of a chapter 11 filing for a highly vulnerable business should be carefully explored, particularly because chapter 11 relief can be a drastic remedy, it can help preclude a recalcitrant lender or creditor from exercising non-judicial remedies, including setting off bank deposits, sweeping cash to apply to the loan or refusing to perform under a bilateral agreement.  A chapter 11 bankruptcy also can help to preserve asset value to the extent the CVC or other issues threaten that value, particularly if an operational shutdown threatens important contracts because of termination clauses.  On the other hand, the automatic stay may be less relevant to stopping judicial remedies right now because most civil court proceedings and enforcement actions in Cook County and the collar counties have been shut down as part of the shelter in place orders issued in Illinois.  Thus, highly vulnerable businesses might consider a bankruptcy filing to (1) liquidate the business in an orderly fashion, including by selling assets, to avoid the loss of all value, (2) impede a pesky lender or other creditor that threatens to exercise nonjudicial remedies or rights that, if implemented, will make re-engaging impossible or very costly once the CVC has passed, (3) stabilize an imploding business so that it can obtain a breathing spell to pursue other options, including the lending programs recently implemented, (4) limit the forfeiture of rights and property, or (5) facilitate prompt access to additional capital. With respect to the first item – liquidating or selling assets in a coordinated fashion – section 363 of the Bankruptcy Code authorizes the sale of assets free and clear of liens.  It also gives the purchaser protection from trailing claims, including successorship liability claims.  If a highly vulnerable business wishes to engage in a substantial sale transaction and has identified a purchaser, bankruptcy may be a good option fo… Read More
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WSJ Reports that Small Business Lenders are tightening standards in response to current economic uncertainty.

In today’s challenging economic environment a lifeline for small businesses may be harder to access — high interest rate small business loans. According to a report in the Wall Street Journal from March 28, 2020, “banks and financial-technology firms are starting to toughen their approval standards for new loans to consumers and small businesses. That means many people could find it hard to get credit just when they most need it, as the novel coronavirus pandemic puts thousands out of work.” https://www.wsj.com/articles/people-need-loans-as-coronavirus-spreads-lenders-are-making-them-tougher-to-get-11585357440?shareToken=stc8b569a61bc24802a8132278b06cf715 Read More
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SBRA's Debt Ceiling Increased to $7.5 million - More Businesses and Individuals will Qualify

The massive economic stimulus plan circulating in Congress right now will permit more businesses or individuals to take advantage of Subchapter 5 of the Bankruptcy Code (which FactorLaw has analyzed in prior posts) by increasing the debt cap from $2,700,000 to $7,500,000. The 880 page Senate Bill (the Coronavirus Aid, Relief, and Economic Security Act’’ or the ‘‘CARES Act’’) was unanimously approved by the Senate last night and will now go to the House. Reports are that the legislation will be approved by the House and signed by the President today or soon thereafter. If enacted without further change, the legislation will expand SBRA’s expedited processes to more businesses and individuals engaged in business by substantially increasing the debt cap. For cases filed within the next year, the SBRA will be available to debtors that have less than $7,500,000 of aggregate noncontingent liquidated, secured and unsecured debts. Read More
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Covid-19 Federal Disaster Loans for Small Businesses and Nonprofits.

We have been alerted by an email from the Kreshmore Group, an advisory firm in Illinois, about a new programs called the “COVID-19 Federal Disaster Loans for Small Businesses and Nonprofits According to the email from Kreshmore: On 3/19/2020, the SBA issued an administrative declaration that Economic Injury Disaster Loans (EIDLs) are available for small businesses and private nonprofits due to the Coronavirus (COVID-19) pandemic. Highlights of this economic relief program include: ● Up to $2,000,000 in relief assistance for qualified applicants*   ● Interest rate is 3.75% for small businesses and agricultural cooperatives ● Interest rate is 2.75% for nonprofits● Up to 30-year repayment terms ● Incident application period is through 12/17/2020  *Certain restrictions and conditions appplySome pertinent links associated with this SBA Disaster Loan program include: Application website → SBA Disaster Loan Assistance SBA loan form → SBA Disaster Loan Form Pertinent loan links: → Tax Information Authorization (IRS Form 4506T). → Personal Financial Statement (SBA Form 413). → Schedule of Liabilities (SBA Form 2202). FDIC FAQs (FDIC FAQs). Further information from Kreshmore about this program can be obtained from Ian Cumberland (847) 275-4065 or Tom Varga (630) 667-5730 Read More
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Northern District of Illinois Strikes Most Hearings Through April 3, 2020 and Extends Most Deadlines by 21 Days.

The following procedures have been adopted by the District Court for the Northern District of Illinois, effective March 17, 2020: In all civil cases, all deadlines, whether set by the court or by the Rules of Civil Procedure or Local Rules, are hereby extended by 21 days from the current deadline set. This also includes dates set by the Executive Committee in proceedings set before that Committee. The United States District Court remains accessible via electronic filing, and, in emergency situations and where resources permit, phone conferencing and video conferencing.Civil case hearings, trials, and settlement conferences scheduled from March 17, 2020 until April 3, 2020 are stricken from the calendar, to be re-set by the presiding judge on or after April 6, 2020. The parties are cautioned that this Amended General Order does not affect the rights to or deadlines concerning any appeal from any decision of this Court. That is, the deadlines for filing a notice of appeal remain in place and must be followed to preserve appellate rights. The Court invites parties to file an extension of time to appeal under Appellate Rule 4(a)(5)(A) no later than 30 days after the time prescribed by Rule 4(a). If a timely extension motion is filed, then the Court deems that good cause exists for the extension in light of current public-health concerns.During the effective period of this Order, the District Court Clerk’s Office in the Dirksen United States Courthouse in Chicago, Illinois, will be open with limited staff. If possible, filings should be madeelectronically via CM/ECF. Deliveries of documents of any kind in the Eastern Division must be made to the drop boxes in the lobby of the Dirksen Courthouse or the Clerk’s Office located on the 20th floor. No deliveries may be made to chambers.Electronic filings may still be made through the CM/ECF system.This General Order does not affect the authority of judges to enter orders in any civil or criminal cases.Any party may seek emergency relief from this General Order. In addition to filing the motion in the case in which the emergency relief is being sought, the party also must file the motion in Case No. 20-cv-01792, which is a docket created to receive emergency motions under this Amended General Order. The motion must be filed (i) electronically via CM/ECF if possible or (ii) via a paper-copy motion (following guidance in Paragraphs 5 and 6 of this Order) with the Clerk’s Office. The motion will be considered by the presiding judge, an emergency judge, or the Chief Judge.For emergency matters, as defined by Local Rule 77.2, that arise during business hours (Monday through Friday 7:00 a.m. through 6:00 p.m.), parties are directed to send an e-mail message to Emergency_Judge@ilnd.uscourts.gov. The Clerk will monitor the mailbox and send a response. If an emergency matter arises outside of regular business hours, arrangements to bring that matter before the emergency judge may be made by calling (312) 702-8875 and leaving a complete message, including a return telephone number. The Clerk will return the call. CM/ECF users; by first-class mail to unregistered litigants, including pro se litigants, and to attorneys pending pro hac vice admission; and by posting the General Order on the Court’s public website. ENTER: Read More
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NOTICE REGARDING § 341 MEETINGS IN THE NORTHERN DISTRICT OF ILLINOIS – EASTERN DIVISION

The Office of the United States Trustee in Chicago recently announted that: Effective immediately, all in-person chapter 7, 12, and 13 section 341 meetings scheduled through April 10, 2020, are hereby continued until a later date to be determined. Absent special circumstances, section 341 meetings may not proceed during this period except through telephonic or other alternative means not requiring personal appearance by debtors. Appropriate notice will be provided to parties in accordance with bankruptcy law and rules. Subsequent notice regarding the process for appearing at a section 341 meeting through telephonic or alternative means will be issued shortly. Chapter 13 debtors are directed to their standing trustee’s website for further details. Meetings already noticed as telephonic meetings may proceed as scheduled. Read More
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The Warren Bankruptcy Reform Plan

The following is Elizabeth Warren’s description of her bankruptcy reform plan: I spent most of my career studying one simple question: why do American families go broke? When I started my career as a young law professor, I thought — like a lot of people at the time — that most families went broke because they were irresponsible or wasteful. They lived beyond their means. And when their irresponsibility finally caught up with them, they took advantage of our bankruptcy system to get out from under their debts. But when I started to teach bankruptcy, I found that no one — not even the supposed “experts” — had actually dug into the data to figure out what drove families into bankruptcy. So I found two incredible partners and set out to gather the data about why families go broke. That was back when you had to collect information by hand, and courts charged a lot to make copies for you. To save money, I flew around to courthouses all over the country with my own photocopier — nicknamed R2D2 — strapped into the airplane seat next to me, copying thousands of bankruptcy filings to begin understanding why American families turned to bankruptcy.I’ll never forget sitting in a wood-paneled courtroom in San Antonio on one of my first trips, watching the families filing for bankruptcy move in and out of the courtroom to appear in front of the judge. They looked just like the family I grew up in — hanging on to the ragged edge of the middle class. Now they were standing in front of a judge, ready to give up nearly everything they owned just to get some relief from the bill collectors.Our research ended up showing that most of these families weren’t reckless or irresponsible — they were just getting squeezed by an economy that forced them to take on more debt and more risk to cling to their place in America’s middle class. And that meant one bad break could send them tumbling over the edge. The data showed that nearly 90% of these families were declaring bankruptcy for one of three reasons: a job loss, a medical problem, or a family breakup.In the early 1990s, Congress launched a blue-ribbon commission to review the bankruptcy laws and suggest improvements. I was asked to help.Initially, I said no. Then I thought about the stories I had come across in our research. I thought about the family that finally got a shot at their lifelong dream to launch a new restaurant — and it went belly-up. The young and very tired woman who described how she finally managed to leave her abusive ex-husband, but now was alone with her small children and a pile of bills. The elderly couple who had cashed out everything they owned and then went into debt to bail out their son who was fighting addiction and put him through rehab again and again. And then I called back and said yes.That’s what started my ten-year fight against the banking industry’s effort to change our bankruptcy laws to squeeze everything they could out of working families. Just as the commission’s report was due, the banking industry wrote its own version of a bankruptcy bill and got its allies in Congress to introduce it. In the industry’s version of the world, Congress could support either “honest people who pay their bills” or “people who skip out on their debts.” There wasn’t any room to talk about rising health care costs or lost jobs that pushed working families to the brink. I knew that those hundreds of changes in the industry-backed bill would make it harder for struggling families to get relief.And I knew I needed help. I was lucky to pick up some terrific allies in the Senate. Senator Ted Kennedy, who led the fight for years. Senators Paul Wellstone, Russ Feingold, and Dick Durbin all enthusiastically jumped in. For the next three years, we fought off the industry as best we could. Ultimately, however, the Senate and House passed the industry-backed bill by wide margins. But President Clinton, in the last days of his presidency, upended the industry plan and vetoed its bill.The financial industry lost that round — but it didn’t quit. Eventually, it rallied its allies in Congress again and managed to push through another version of its bill in 2005 with overwhelming Republican support and some Democratic support.The banking industry spent more than $100 million to turn that bill into a law because they knew it would be worth much more than that to their bottom lines. And they were right — by squeezing families harder, they managed to rake in giant profits.But it was terrible for families in need. After the bill passed, bankruptcy filings went down permanently by 50%, and the number of insolvent people went up permanently by 25%. By making it harder for people to discharge their debts and keep current on their house payments, the 2005 bill made the 2008 financial crisis significantly worse:… Read More
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