In the wake of the COVID-19 pandemic, more and more businesses are finding themselves in distress. These challenges are especially felt by small businesses who may have limited access to funding or investors, particularly those whose owners have made personal guarantees on business loans. Small businesses in distress have various options available to help rehabilitate their capital structure and move toward profitability.
Legal Developments & Trends During Covid-19
There are some recent financial trends and solutions that creditors should be aware of.
Debt Restructuring (both from debtor and creditor side): There are certain non-bankruptcy debt restructuring options when a business faces a threatened bankruptcy. This includes debt modifications, but there is a huge potential federal income tax liability for both lenders and borrowers for a debt modification.
Responding to Bankruptcies: Creditors should particularly be aware that a debtor’s bankruptcy will automatically stay a collection action. They should also be prepared to deal with bankruptcy trustees post-filing.
Oregon’s Guidelines for Creditor’s During Covid-19
Oregon’s Department of Consumer and Business Services has issued guidance for collection agencies, debt buyers, lenders, and loan servicers with recommended steps for these types of creditors collecting untimely payments during the pandemic.
- The guidance for collection agencies and debt buyers encourages them to accommodate debtors experiencing financial hardships from COVID-19 by allowing deferments, extending due dates, waiving fees, and suspending collection activities.
- The guidance for lenders and loan servicers encourages them to “take active measures to help borrowers economically affected by the COVID-19 pandemic” and suggest offering forbearance plans, fee waivers, and deferred payment options.
Creditor Protections under the Consolidated Appropriations Act of 2021
On Dec. 27, 2020, President Donald Trump signed the Consolidated Appropriations Act of 2021 (CAA), a $2.3 trillion spending package with provisions meant to respond to the ongoing economic fallout from the COVID-19 pandemic. The CAA included a bright spot for some creditors who have accommodated distressed tenants and customers who have been unable to make timely payments on their bills, including preferences during bankruptcy proceedings, and possibly rights to arrearages on unpaid bills.
- Preferences: A preference is a payment made to a creditor before bankruptcy, generally within 90 days before filing, on a pre-existing debt. The existing Bankruptcy Code does not clearly protect creditors who have entered into agreements to defer payments with tenants or customers who have been adversely impacted by the COVID-19 pandemic. Fortunately, the CAA created an exception to preference liability for some creditors who accommodate distressed tenants and customers during the pandemic.
- Supplier arrearages: “Covered supplier arrearages” are payments made “in connection with an agreement or arrangement” to defer or postpone payments between a debtor and a “supplier of goods or services . . . under an executory contract for goods or services” entered into on or after March 13, 2020. The CAA provides that to qualify as a covered payment of supplier arrearages, the payments may not exceed the amount the debtor would owe if it had made all of the payments on time and in full before March 13, 2020. However, payments for ad hoc purchases of goods and services are not protected under the new legislation, even if a creditor agrees to defer payment and does not exercise its collection remedies.
Creditor Best Practices for Recovering Payments under the CAA
- Document Your Agreements: Suppliers should document their agreements with distressed tenants and customers through written agreements. Although the CAA does not require a written agreement, responding to a preference demand is more efficient when armed with clear documentation, rather than relying on archived email strings and the recollections of employees, many of whom may have left a company by the time the preference action is filed.
- Avoid Charging Fees or Interest: To ensure protection under the new legislation, creditors who are willing to defer or postpone payments should avoid charging fees, interest or charges that would not have been owed if the payments were made on time
- Bottom Line: Creditors may be able to benefit from the new legislation if they are willing to accommodate distressed tenants and customers.
If you’re a creditor seeking payment for unpaid bills or loan repayments from businesses impacted by the pandemic, working with an experienced attorney can help you identify all possible options and best practices for recovering repayment.