Roy: Good afternoon, everyone. This is Roy Oppenheim, and I want to thank you all for joining us for our second Zoom at Noon as we all try and work together through this crazy, crazy time of dealing with this pandemic. I want to first of all introduce you all to Zach Shelomith who you may be able to see in the screen, I hope, and he’s going to be joining us as a special guest today. Zach and I’ve known each other for 12 years since we started defending people in foreclosure and he’s been helping people with bankruptcy for many years. He’s a top bankruptcy lawyer. And unlike last time when we were working together, but not that close, we’re going to be working much closer together and almost be tied at the hip and we formed somewhat of a confederation so we could help our clients through this crazy process. Zach is board certified in both business and consumer bankruptcy law and is the immediate past president of the Bankruptcy Bar of The Southern District of Florida. But importantly, he’s a friend and a colleague and someone who I tremendously respect.
Today, we’re going to be trying to cover a lot of ground. We’re gonna be talking about society and our social fabric and its needs and how we’ve gotten to where we are. We’re goona talk about the economy and how it is, effectively, rapidly, rapidly changing and shedding and in so many ways collapsing. We’re going to be talking about property loss mitigation, how we as individuals can get through this individually and together. We’re going to be talking about property loss mitigation, what to do with your mortgages or your leases and rents. And then Zach, particularly, is going to assist me in discussing bankruptcy options and how to pre-plan for bankruptcy and the things that we need to do in the event we need to go bankrupt. And then business loss mitigation, we’ll also be talking about businesses and what they need to do.
One thing that we found from the last crisis is that those people who addressed head on their economic situation were the first to come out of the crisis. And by being able to come out of the crisis first, they were able to rebuild and get strong. Just no one expected that it would only be a 12-year run and that we would be in a situation that, in some ways, is much more severe and dire.
For those of us who know our firm, we were at the forefront of the crisis last time around. We started our blog called “In the Trenches” where we literally were describing, from the ground, what people were experiencing. Obviously, South Florida was ground zero for this last crisis. Hopefully, this time it may not be ground zero, but it looks like it’s going to be something close to ground zero again. And more importantly, we want to explain to people what we learned from our experiences from the last 10 to 12 years of helping people get through their personal situations to make sure that we all can get out of this situation and be better and stronger individually and as a society at the end of the day.
Our firm was founded in 1991 by Ellen Pilelsky becoming my wife and myself. We now have…we can go to the next slide. We have a total of five lawyers. And Zach and this firm is going to be working with us. And so we’re bringing on more and more lawyers as we have to deal with this highly, highly unusual situation. I want to thank Paola Vergara for assisting me in preparing this presentation. As much as Lance doesn’t want to have me thank him, I do want to thank my son for also assisting specifically because he hasn’t been home years and we love to have him here. And it is one of those unusual circumstances where we all have our children at home, our older children at home, our grandchildren, our dogs, and we’re all working from home. And if you haven’t noticed, I am not in the office. And we have literally transformed our entire house into a work environment. And it’s the most unusual thing that I’ve ever experienced in my life. But we’re going to embrace it and we’re going to go with it. And here we are.
I want to start with Hippocrates. I was really unaware so we did a research that the term “desperate times requires desperate measures,” and it’s been translated a few times over the last few hundred years. But it literally, it means extreme bad to extreme remedies. But in fact, he is the one who created the Hippocratic Oath. And in fact, it is these extreme bads and extreme measures, Latin saying meaning that at some times, we need to take extreme measures including what we’re doing right now to deal with health issues. Great ironies, back then, they had very little in the area of antibiotics and other things that we’ve become so accustomed to. And in this particular situation, we feel like we’re back in the Stone Ages in terms of health. But in any event, we’re going to get through this.
Our last discussion dealt with how we’re all adapting. And there have been so many changes in terms of our society, just in the past few weeks and months. And of course, the real question is going to be in terms of real estate. Will we get back to the old normal or will we have a new normal when things resolve? Will students still fly away to college as far away from home or will parents want to keep their kids closer because they’re not sure if these universities are going to be able to really take care of them if there’s an emergency? And then the other thing is offices, are people going to still have huge offices or are they going to be like our firms, which both have become virtual firms? Law firm had the capacity for years but the title company never envisioned that we would be able, through remote online notarization, to actually function and operate, albeit maybe just slightly slower for the time being, but ultimately, we will be faster and more efficient by not all working in the same office. And it’s strange and it’s something that we’re all still trying to wrap our heads around. But yes, we are closing transactions. We’re doing them with as little personal contact as possible. We’re switching to remote online notarization, which means that documents don’t get printed, documents don’t get gets saved in file cabinets. Documents get electronically recorded. Everyone gets an electronic copy. And more importantly, the notarization process occurs through an online huddle where everyone gets together like today. And you have witnesses and notary online and the deal gets done. And so we are all changing and evolving at warp speed.
You know, in terms of schools, kids are home right now. Some schools are canceling the rest of the year, otherwise people are learning from home and it’s becoming just a remarkable virtual world. Supposedly, China, things are getting a little better. I don’t know. New York, it looks pretty grim right now. And the Governor, just in the state of Florida, has asked the President to declare the entire state of Florida a state of emergency. And with that, there will be legal implications for what we all do and how we practice our respective crafts.
In terms of the economy, the Bank of America, according to “The Wall Street Journal” has now officially said that we are indeed already in a recession. And that while last time, there were 2 million jobs that were shed from the economy, it is anticipated that there will be probably 3.5 million jobs lost. The thought is that the economy will contract not by 1%, 2%, or 3%, which is what economists are always talking about, but by 20%. So that is a huge, huge number. And what’s kind of interesting is that last time around, there was seen to be this desire to pin fault on the homeowners, on the mortgage brokers and parts of the government for helping allow the real estate bubble to get so large and then to burst. And of course, there was subsequent criticism about the government’s response, which at the time seemed to be rather slow and certainly not helping the people that were most in need, the homeowners. This time around, I don’t think there’s a fault. There’s not a blame game in terms of who in the economy is responsible for this. And so that’s a good thing.
The other thing is, is that this time, it seems that the help that comes along eventually will be the type of help that will try and help everyone. But as I warned people 12 years ago, do not expect the cavalry to come and bail you out. There may be some assistance, there may be $1,000 check or a $1,200 check to some people, how long will that money really last? And so our job is to say, “Hey, we got a job to do. Let’s get the job done. Let’s figure out what our strategy is going to be. How do we reinvent ourselves? And how do we deal with our old debts so that we can shed our debts and still contribute to society and remain relevant and enjoy our lives?”
Obviously, the most important thing during this next few weeks and maybe months is that we take care of ourselves and that we have shelter and that we’re able to distance ourselves. But that affects a lot of the real estate questions that we’re going to address in a little while. What happens to contracts that are in the middle of closing, that people have just entered into, lease agreements, banks are walking away from obligations, Airbnb that is willy-nilly canceling reservations without really talking to the property owners and in violation, apparently, of their own policies and procedures? And so it’s going to be a crazy time. And it’s also a crazy time because the courts really aren’t functioning at full capacity. And with that, people are going to have to figure out how to help themselves using the legal system but in a way that doesn’t necessarily involve the court system.
In terms of the markets, the stock market is continuing to go in a way that is affecting people in a very negative way, but in some ways could have some impact on the real estate market. While most people are thinking the real estate market will take a tumble, there are those including, I believe, it was Shiller, who was very involved with the prediction of the bubble last time around, [inaudible 00:09:49] economist, who had suggested that that asset of a single family home may be a very, very important asset to those people who realize that they may need to shelter in place. I’ve seen some off-color jokes on the internet from realtors who are saying that when they’re going to show a home, they’re going to say, instead of saying, “Isn’t this a wonderful view? Aren’t those palm trees beautiful? I’ve never seen so many palm trees in a view before,” they’re going to say, “Wouldn’t this be a wonderful home to stay in if you had to hibernate for a period of time or if you were under quarantine?” And so there are homes that people are going to prefer to be in rather than multifamily homes, condos or structures where you have to worry about touching the elevator buttons and things of that nature. o it’s kind of a very interesting situation.
I do want to talk about small businesses in particular. And by the way, there are two things that I want to have happen here. One is I need for you all to start asking questions. And I need for you all to participate in our polling questions. And so Lance, why don’t we pull up the first polling question here, if we can. Okay. Our first polling question is, “Do you think the crisis is worse, the same, or not as bad as 2008 during the Great Recession or do you think it is too soon to tell?” And it’s a multiple choice question. And obviously, there is no right or wrong answer. But I’d be curious for…I think, how many people do we have on? We have probably around 75 people or so.
Roy: Eighty six? About 86 people on the call right now. So I’d like to see what you all say. And there’s some other questions. And it’s really important that we answer this so we feel like we’re all in the same boat together. Okay, we’re getting answers here. It looks like the winners are going to be “too soon to tell if it’s going to be worse” and “worse.” And I would personally agree that those…it’s how I feel. In my gut, if things go in the direction of Italy or China, this is going to be something much worse than we’ve dealt with last time. It’s already much worse because last time, we weren’t just dealing… We were just dealing with an economic situation and it was a bad situation and people did get thrown out of the house. They got displaced. There was improprieties in the legal system. The foreclosure crisis hit because of the real estate crisis, because of the debt crisis. This time, it’s more complicated because we have a health overlay. And that is that even if we did foreclose someone, we could create a massive, massive health crisis. if we have someone who’s infected who ends up having to move into another home with other people, or God forbid, was homeless. And so for that reason, the governments already, in those areas that have been affected, have put moratoriums on evictions and on final foreclosures. It doesn’t mean you can’t get foreclosed, it just means you can’t get kicked out of the house until the health crisis, not the economic crisis, until the health crisis end. And we’ll talk a little bit about what that really means.
Let’s go the next slide. The government has already started one program. Obviously, the second program that everyone is waiting for hasn’t…it’s still stuck in committee and people and the respective chambers of Congress are obviously feuding, and then, of course the issue is can members of Congress vote remotely? Which has never happened in the history of the United States. But since so many members of the Senate are already self-quarantining or actually have the virus, this is something that’s going to evolve. So there’s free testing, paid sick leave, expansions on the Family Leave Act. The stimulus project is still in the works. And the individual checks that people are supposed to get, if they get, is also something that hasn’t happened and, of course, the tax credits and bailouts is something that’s being discussed.
In terms of the bailouts, a lot of folks are hoping that banks do get bailed out, that that money will specifically be used to do modifications and work [inaudible 00:13:35] for homeowners and not be used to buy back stock and do other things that some of the companies did last time around that pissed a lot of people off.
Next slide. Or is there a question?
Lance: Let me pull up. One second. Let’s see. Hang on. Okay, here we go.
Roy: I’m not gonna mention who the question is. “If banks were bailed out again, it would be important to have legislation to really help the homeowners this time. As in the last crisis of 2008, the government bailed out the banks, but the most affected were the homeowners losing their homes.” I absolutely agree 100%. And I think a lot of that has to do with moral hazard, that had to do with the idea that some people should have had personal accountability and responsibility for taking out too much debt, for being irresponsible. I don’t believe that that was in fact what happened. I think a lot of people got duped. A lot of people believed in a system that did not work properly. This time, it’s not like that. And so I’m hopeful that, at the end of the day, the homeowners and the individual consumers will in fact be the ones that will survive.
One of the things that they’re looking at is trying to preserve small businesses. Small businesses are the backbone of the U.S. economy. They are the folks who actually are part of the American dream. Part of the American dream is to own your own home and to have your own business and to be your own boss. And if we lose that small business, the engine of new ideas, the engine of growth, the engine of jobs, then I think our economy will not just be in a great recession, this could end up being a depression and it could ultimately be the Great Depression, greater than the Great Depression. And so hopefully the bailout this time around will be targeted to those parts of the economy.
I mean, I want to give you an example. In terms of restaurant, the National Restaurant Association is suggesting that probably 75% of most family-owned restaurants in the United States will not survive. Let me repeat that, 75% will not survive. Most of them are mom-and-pops. They have a high overhead. They have very low margins. They rely on daily cash flow to survive and pay their employees, many of whose employees survive on tips. They sometimes have a high debt load and sometimes don’t have any debt at all. It’s kind of an interesting situation, may have a high debt but they don’t have credit lines that they can tap. Many of them did not devise a no-take-out environment. Most of them will lose all their employees. And they will also, you know, when the economy comes back, not be available to use their employees because employees will have moved on.
We have a question here. “I read your blog last night on force majeure.” Okay, we’re gonna hold off on that question. Okay, both these questions we’re going to ask but I want to keep going down this list here but thank you.
And the most important thing is if they don’t hang on to their employees, those employees may not be available to the restaurateur, the owners of the restaurants, because many of them will have moved on and they will move on probably to different industries, that will probably move on to Publix, to Amazon, those parts of the economy that are going to continue to grow.
Let’s go to the next polling question, Lance, if we can. “If you own a business, are you currently able to stay in business or are you unfortunately having to close your business?” It’s a multiple choise. The choices are, “Trying to stay in business, closed or having a closed business, don’t know what to do yet.” This is great. Almost 85% of the folks on the phone are trying to keep the business and keep their employees and I commend all of you for doing that. A few, 2%, have had to try and close your business. And of course, 16% are not sure what they’re going to end up doing. When you make that decision, you will need to speak to a lawyer, whether it’s Zach or myself or someone else, but you will need to do that. Because there are implications, tax implications. There will be implications in terms of credits that you would be entitled to if you kept your employees, and they’ll, of course, be bankruptcy implications if you decide to close your business.
There are going to be winners and losers in this economy. And I’m talking about the new reality economy. Obviously, the grocery stores, as we talked about, the phone guys who are installing all the remote telephone stuff were just going crazy, including the internet providers, and the network specialists. Lawyers and accountants will always be needed when the economy is doing poorly or when the economy is doing well. And so they won’t be big losers here. And realtors, I think at the end of the day, while they may go on some sort of hiatus or sabbatical for a brief period of time because people don’t want to have strangers coming through their house and doing open houses and they themselves don’t want to bring germs back to their family, there will be a period of time that there will be less activity, but then there will be remarkable new activity because of so many changes that will occur in people’s lifestyles. And those changes always create transactional activity for real estate. I will mention that Compass just announced that, which was an up-and-coming real estate organization, that they’re massively laying off people right now. And so that’s very unfortunate.
Next slide. Okay. Let’s talk about foreclosures. In particular, right now, there may be foreclosures filed, but in all likelihood the government is going to limit any foreclosures being filed if they’re backed by any government entity like Fannie or Freddie, which means that people who file foreclosures right now are probably going to be looked upon rather poorly. So there’s probably going to be a 60 or 90-day moratorium, but I will tell you that the foreclosure mills are ramping up right now and they will be fast and furious when they start filing those foreclosures. When they do, folks like us who were previously involved in foreclosure defense will have to, once again, bear our armor and do what we have to do to keep folks in place. But there will be other opportunities because I think banks realize that they ending up with a bunch of real estate may not be the best thing.
The alternative to that argument is that you do have large institutional buyers of real estate out there, backed with lots of money from sovereign wealth funds and also from from Wall Street money that may want to buy up those homes so that they can then rent them out. And while the United States right now has about 10% of its housing stock owned by commercial enterprises, before the foreclosure crisis last time, that number was only around 2% or 3%. So it grew around 500% over the past 10 or 12 years. It is conceivable that if this foreclosure wave came through, that it won’t be homeowners and mom-and-pops that are going to end up buying back those foreclosures, but rather, it’s going to be institutions that are then going to rent them out. After the crisis, there will clearly be a rush. But the question is who is going to buy those homes?
Short sales, what are they? They are sales that are subject to lender’s approval usually because the property’s value is upside down. Right now, it’s unclear if the values are upside down or not, for the simple reason that the values haven’t been repainted to the new reality. Historically, the lenders have been waving their deficiencies and a lot of times, they have gotten that money back as part of the bailout. So then the last question said that, you know, did the banks get the bailout or did the homeowners? If, in fact, you don’t get hit with a deficiency judgment and the bank is taking the hit on the difference between the value of the property and how much you owe, meaning that you owe more than the value of the home, so if the value of the home is only worth 200,000, and you owe 300,000, the bank is losing $100,000. A lot of times, that $100,000 was absorbed by the government. So part of the bailout occurred through that way.
The other question is going to be is will the IRS waive what is called income from deficiency, a deficiency income? So if you are getting a waiver of deficiency in the past, that has been deemed as income that you would actually have to pay, but during both the Bush and the Obama administrations, those provisions had changed. And more recently, under the Trump administration, loan forgiveness income was deemed income. I fully believe that that will change again and go back to the way it was during Obama and the Bush administration. Thanks.
Modifications. We do believe that the loans…that the banks, this time around, are going to be I think more hospitable to modifications. I think they may have a fund to fund those modifications, depending on how this bailout looks. And so I think, in most cases, if the economy can come back quickly, that in all likelihood, we would be able to modify many, many loans and avoid foreclosure.
Next. Reinstatements, that’s going to be tough. That means that you’re going to have to have a cash reserve, you ended up not paying the mortgage for a few months, and then you’re going to reinstate all the back payments, presumably, penalty may be waived, maybe some interest will be waived, but certainly the principal will not be waived that you were supposed to pay back. But that is something certainly that we think is a possibility.
Okay, there’s a question. Okay, let’s see what the questions are. We have a lot of questions here.
Excuse me, “Roy, the amount of $2 trillion coming in the USA economy may have a positive impact.” Yeah, I think you’re looking at what may be called helicopter money. I mean, this is kind of money that just comes down and pours down and we have to be able to spend it. But if the stores aren’t open, if you can’t travel, if the airlines are grounded, which by the way they may be, if you haven’t heard that, if they’re grounded, because if they don’t get grounded, all the airlines are going to go bankrupt because they can’t keep operating with no one in their seats. It’s like ridiculous. So assuming the airlines get grounded, and we can all go out and socialize again, it could be an unbelievable recover.
That is a big if and that’s a big but, and the big but is do we have enough money to at least keep people so they’re not going to starve in their homes, that there’s not gonna be insurrection, that we’re going to maintain social harmony during this crisis? And all you have to do is watch some of these what were supposedly science fiction movies about these kinds of crises, when in fact they weren’t science fiction. What they were, they were docu-future movies. They were movies about what could happen and was going to happen, and in fact did happen.
And so let’s go the next question. “How much do you estimate the value of the properties will go down?” You know, I don’t have a crystal ball but I think some people are suggesting that different segments may go down in different amounts but I would venture to guess 10% to 20%. If the economy is gonna collapse 20% or if it makes sense that it would go down 20%, we could argue the stock market’s down 30%, that maybe house values will go down 30%, then you can make an argument that money…people are gonna pull money out of the stock market, put into real estate because at least they can enjoy it and it can keep their families safe when they have a home. So I don’t know the answer.
“How far can residential and business tenants leverage force majeure to negotiate the rental?” Okay, we’re going to respond to that at the end because we had a section of force majeure that we talked about in the outline.
Okay. “No evictions. My husband and I own 20 rental properties. We’ve owned them 30 years. This is our sole source of income. We went through our savings in 2008. If we cannot evict people that stopped paying rent, how are we supposed to survive? These are our lower-end rentals. Most of the tenants will take advantage of the no eviction ruling. We have seniors ready to retire in the next two to three years. How can we navigate this new crisis and survive?” That is a fantastic question. And I am not an oracle and I don’t have the answer to that. I think there’s going to have to be shared, I think pain that has to occur here. Obviously, from a human perspective, you cannot kick these people out on the street right now if they have lost their jobs and they are going to be a public health risk to you, your family, and especially if you’re older, you know, your friends, and your immediate family members. On the other side, if we destroy our property rights as we have known them since the founding of this nation, and remember, the reason capital influx came to this country more than any other country in the world is for one reason and that is because we have upheld property rights since this country was founded. And if we’re unable to continue to do that, that could have a massive problem as it relates to capital formation and capital aggregation going forward. And so I grapple with that and I and literally…that is the issue that that worries me the most, to what extent are we going to somehow undermine property rights in this country and start to resemble other countries that we claim we are different from?
Next. “How do you feel about providing relief via massive cash distribution to many millions without regard to recipients’ financial situation and income [inaudible 00:26:24]?” Okay, so this is what…what’s his name? What was the presidential candidate, Lance, who offered $1,000 [inaudible 00:26:30]
Lance: Andrew Yang.
Roy: What was that?
Lance: Andrew Yang.
Roy: Andrew Yang. And everyone thought he was kind of crazy. You know, I did some research on that and that concept has been around for 400 years. It is not a novel idea that by giving people money, you stimulate the economy. The question is what will people do with that money? Will they use it for food or will they save it? Will they invest it? And so the real question is, what do they do? If everyone saves it, that’s probably not correct. If everyone spends it, that’s probably okay because it stimulates the economy. But at the end of the day…I’m being told to speed up here. Okay, keep going. Okay. Anyway. So the answer to the questions, I think it’s something that the government is considering. They’re considering to give people 1,200 bucks. And that is something that, you know, just a few months ago, would have been thought of as ludicrous and ridiculous and unfair. But if it’s that what it takes to keep people and keep their children fed and keep stability, you know, we’re going to have to go for it.
Next. Do you want me to go on? Wait. Okay, we have to keep going here because I want to get this accurate. Keep going.
Lance: And we’ll come back to these questions at the end of the presentation. So keep filling them out, people.
Roy: Yeah, this is great. Okay. Okay, so we’ve talked about reinstatement.
Personal loss mitigation. Let’s keep moving here. Okay, this slide is important and there’s nothing on it. What you should consider to continue paying and what you may decide not to pay right now. And it’s a tough question but I think you have to follow your gut and you have to follow and do what you need to do, both for short term and ultimately for long term. You know, if you’re in a comfortable position where you can pay all your bills, obviously you should do that. But if you think that this crisis is going to last, as long as it might, not just two or three weeks, but maybe two or three months, or maybe six months, then you have to say to yourself, “Do you need to keep your powder dry, and only pay those things that you must pay?” And what are those things that you must pay? You’re going to pay your food bill because that’s going to keep you alive. Your mortgage and your rent is a questionable thing because there are going to be people out there, they’re going to say, “Well, I’m not going to worry about that right now because the courts really aren’t proceeding. And I have to make sure that my family has enough food.”
So I think at the end, if you have enough money to pay for your food, you should pay your mortgage and you should pay rent. But ultimately, you should probably be calling your mortgage company right now and asking them for a 60 or 90-day abatement which they are giving if in fact you call. And so that doesn’t mean you’re not going to owe the money, it just means that you don’t have to pay it right now. And so I would recommend that if you don’t want to do that yourself, that you call one of our lawyers, and we’re actually going to assist people in getting mortgage abatements. And in terms of your landlord, you may want to call your landlord without a lawyer initially. But if that doesn’t work, then yes, you should call us to see what kind of workouts you can do. Now these are for residential.
Now, if you’re a commercial landlord, like the retiree, you have to decide how you can stay in business. And more importantly, do you have mortgages? It sounds like you don’t have mortgages. So the question is can you live with half the rent right now and have them pay at the end if they get some money from the government? I don’t know. But if you try and evict them right now, I think that could be very difficult from a time perspective. And I think it is best that we all try and work together.
The other thing is the courts are going to be clogged, alternative dispute resolution, doing workouts, working things out, having lawyers that, on both sides, know that it’s in everyone’s interest to get something done is probably the way that’s going to go. If we’re going to rely on the courts, we had people who’ve been in foreclosure for 10 years who are still in their homes. I think even 12 years. So my point is, is that that may not necessarily be the way to go if you’re a bank or a financial institution.
Okay, next page. Ah, we get to Zach, finally. Zach, I’m going to turn this over to you, if I may, okay?
Zach: All right. Thank you, Roy. Hopefully everyone can hear me.
Roy: Right. Got it.
Zach: First of all, Roy, thank you very much for having me and thank you for the kind words at the beginning. So far so good.
So I’m going to talk a little bit about bankruptcy and how bankruptcy could help people get through this crisis. And bankruptcy is just another tool that we have to get us through this. And we talked about financial triage and that’s really what this is right now is timing is very important. So everyone has to consider what to pay now, what can wait a little bit, and what can wait a longer time period. And, you know, we don’t know when this crisis is going to end. So as far as people who are contemplating to file bankruptcy, the big question is when to file bankruptcy. And we’re going to talk a little bit about what types of bankruptcies are out there. And really, it’s not a one-size-fits-all. It’s going to depend on what your particular situation is.
But, you know, going back to the timing, just so everyone knows, the bankruptcy courts are open. We’ve been filing bankruptcy cases electronically for 15 years now. So that continues. What the bankruptcy courts are doing is all hearings are taking place telephonically. Really the only change is that we don’t have any bankruptcy trials right now, but trials in bankruptcy court is very rare. So for the most part, bankruptcy court is open and operating and we can take advantage of all the tools that we have in bankruptcy.
So on this slide, some of the things that I’m going to talk about is the different chapters. What is bankruptcy? So bankruptcy is a legal proceeding. It’s a proceeding that, again, is one of the tools that we have, where we can eliminate or reorganize your debt. There’s Chapter 7, which I’m going to talk about in a few moments, so liquidation proceeding where you keep all of your protected property that is called exempt property and a trustee administers your non-exempt property. Then we have Chapter 13, which is a personal reorganization where you keep your property and propose a repayment plan to creditors. And Roy is going to talk a little bit about Chapter 11 in the new Chapter 11, which is called Subchapter 5, which I think is going to help a lot of people who are currently struggling.
So going to the next slide, which is Chapter 7, Chapter 7 is the most common type of bankruptcy. So Chapter 7 is a liquidation. It’s called a straight bankruptcy. It usually takes three to six months. And it’s best for discharging unsecured debt. So going back to the situation where you have a mortgage, if you want to modify your mortgage or if you want to cure the arrearages on your mortgage, Chapter 13 might be better for you. So Chapter 7 will get rid of unsecured debt — credit cards, medical bills, and business debts that you personally guaranteed. So how is this relevant now? Again, once we’re on the other side, and people have been doing their own financial triage and paying what’s important to them to keep themselves healthy and secure, there’s going to be debts that are not going to be paid. And when you’re on the other side of this crisis, and you’re working, there’s going to be a lot of people and businesses that have debts that they can’t pay.
So for individuals, specifically, Chapter 7 bankruptcy is a tool that can discharge that debt. For a business, what Roy’s poll…it was very good. Hopefully, many small businesses can hang in there. A lot of businesses are closed temporarily with the intention of reopening. For businesses that can’t make it, Chapter 7 liquidation is an option. There’s also a proceeding called an assignment for the benefit of creditors. And for those of you who are in Florida, that’s something that is state by state, and in Florida, we do have assignments for the benefit of creditors. And that’s another option as an alternative to Chapter 7. But hopefully we can withstand this crisis and businesses don’t have to close.
Roy: Zach, I want to go to another poll question because it’ll help you in terms of what your focus is.
Zach: Okay, great.
Roy: Oh, this is a good one. “If you’re laid off from work, would you change occupations, yes or no?” Unsure is probably the right answer because unsure is we don’t know where this is going. But I think if you’re, you know, in a market or in a business where you know that you’re not going to be working for a period of time, you may end up doing a temporary switch and then coming back to what you were previously doing.
Let’s go to the next slide. But I think that’s kind of interesting.
Zach: Yeah, that’s a great point. I mean…
Roy: I hate to interrupt you but I think this is a critical question for you, Zach. We’re asking people, “How much cash do you have on reserve?” And you and I talked about this before we went on air here. “Less than two weeks, less than four weeks, less than six weeks, don’t have a cash reserves, or more than six weeks.” So it looks like about two-thirds of us have more than six weeks. But that leaves a third of us that have less than six weeks. And we have folks who have really less than two weeks, less than four weeks. So we have 15% that have less than 6 weeks. And if you include those…if less than six weeks is actually is about 30% who have less than 6 weeks. And so what we’re really looking is that this crisis has to be managed. We have to get money into the people’s hands quickly or we’re going to see a meltdown of our social fabric.
Zach: Right. And a lot of those people who don’t have cash reserves of six weeks or longer, they’re going to have to start using credit. They’re gonna have to start using their credit cards or other credit options and that, you know, who knows how long this crisis is going to last? And when we’re on the other side of the crisis, what’s going to happen to that debt? And that’s something that could potentially be managed in a bankruptcy.
Roy: I’m going to put you on the spot, Zach. Should people tap into their IRAs and 401(k)s or should they go bankrupt not to have to pay that debt? What is your thought?
Zach: You know, generally speaking, it’s not a good idea to tap into your 401(k)s and IRAs because those assets are exempt. If you were to file bankruptcy and discharge your debt, those are assets that you would keep in a bankruptcy. So I generally advise against tapping into your 401(k)s and IRAs. But if you’re in a situation where you don’t have money to put food on your table, I mean, then you have to make that choice.
Roy: That’s right. So it really is becomes a decision of what you do to survive versus what you do later on for your retirement. And assuming the economy gets better, you still could work or do something. It also depends how old you are, right? At certain age, yeah, you should be tapping in retirement because that’s what it was there for. But if you’re kind of young and you’ve saved some money, the question is do you use that money because you have to? And the answer is you do what you have to do in these sircumstances. I mean, we are in dire circumstances. It is a highly unusual set of circumstances. And we have to consider things in a different in a different way. Continue on. I’m sorry, Zach.
Zach: Right. No, you’re absolutely right. Where we are today, again, everyone has to do what they have to do to stay healthy and stay alive. And we just don’t know how long this is going to take and we don’t know what the other side is going to look like. But for right now, I think people’s decisions are based on, first and foremost, health and safety.
All right, so the next slide is Chapter 13 Bankruptcy. So Chapter 13 is available only to individuals. So some people don’t qualify for Chapter 7 because they either make too much money. That’s called the means test. And there’s exceptions and then there’s exceptions upon exceptions. So for those folks who don’t qualify for Chapter 7, Chapter 13 is available for people who have a substantial amount of non-exempt assets that they will lose in a Chapter 7, a Chapter 13 or a Chapter 11 that we’ll talk about shortly is a potential option. But also Chapter 13 is…it’s most powerful in assisting with the restructure of debt on mortgages or vehicles. It stops foreclosure actions and other collection activities. So, again, timing is important. Usually, there’s a trigger as to when we file a bankruptcy. Since there’s no foreclosures happening right now, now, if you’re filing a bankruptcy to stop the foreclosure, filing it now would not help. Filing now would not be the right idea. But at some point, like Roy said, when the floodgates are open, Chapter 13 might help.
Now there’s an anti-modification clause in bankruptcy where you cannot modify the first mortgage or any mortgage that’s in the money in the Chapter 13 if it’s your home mortgage. That’s the current state of the law right now. But that doesn’t mean you can’t seek to modify. And it doesn’t mean that you can’t seek to share the arrearages and maintain them in regular payments. So those are some of the things that we can do in a Chapter 13. There are debt limitations, however, little bit over a million dollars of secured debt and a little bit more than $400,000 insecured debt.
So now we’re on to Chapter 11 Bankruptcy. So unlike Chapter 13, which is available to only individuals, Chapter 11 is available to individuals and businesses both. We actually file quite a bit of individual Chapter 11 cases in our district. It is really good for individuals who exceed the debt limitations of Chapter 13 or who might be within those debt limitations but need to extend payments beyond the limitations of Chapter 13. It’s an option for businesses who are able to restructure their finances. Again, this is all going to depend on how long the crisis last that businesses can withstand. We have a lot of clients that are temporarily closed, that are waiting for this to end, before filing their Chapter 11s. And part of, I guess, foreshadowing for what we’re going to talk about when we talk about the new Subchapter 5 Bankruptcy, debtor proposes a plan. It’s voted on by creditors and we need a certain number of votes to get the plan approved.
Roy: Can I say one thing here? I want to add something here. This is a strategy that both individuals and families have to consider. And that is, even as a family, you want to stay in business, as a business, you want to stay in business, and you need to raise cash, and you can raise cash from lots of sources. One of the sources is obviously equity lines and credit lines that you haven’t tapped. Last time around, those sources seized up during the crisis. And I recall that banks were actually pulling equity lines, either because they wanted to, they felt they could or they weren’t supposed to and they did anyway, or the alternative, people had lost their jobs and the banks felt they were no longer creditworthy.
So one of the things you all need to consider is whether or not you should be pulling any cash that you have that may not be available to you and put it in a different bank so that that can’t happen again. I recall that that was one of the most bitter pills that, as an individual and as a lawyer, I had to swallow is that banks were doing that. I’m hopeful that that won’t happen this time. But I just, in my gut, just don’t want that to happen.
Zach: Yeah, that’s a very good point.
Roy: Stay in business, raise cash. And you got to learn from what the big boys are doing. What is the very first thing that all the S&P 500, the Fortune 500, the Dow companies, they hit their credit lines and they pulled the cash out, whether they’re using it or not, because they know the cash is king in a crisis. And, you know, so if you’re saying what you should be doing, you stay in business, you raise cash, you hit your equity line. And then the last thing that you do is you stay in business. It is so much harder to start over when you’ve develop goodwill in a community for 5, 10, 20, 30 years, than to close down and start over again. And so if you’ve developed a reputation, you have a name in the community, you want to be able to build on that so that you can rebuild the business and keep as many people as employed as possible. Even if you have to furlough them, even if have to cut down hours, you want to somehow stay in business. I mean, even FedEx has cut their hours down. You know, they used to be open like 12, 18 hours a day, they’re opened like 6 or 8 hours a day now. So we need to learn from the folks who are doing this kind of stuff.
Okay, gotta move on. I know we have about 12 or 14 questions and hopefully, Zach will be over in about five minutes in and then we’ll have 10 minutes or 15 minutes to go through the questions again.
Zach: Perfect. Okay, yeah. So now, we’re up to what is called the Small Business Reorganization Act. And it actually went into effect February 19th of this year. So before, really, the crisis truly hit the United States, this new law came into effect. So what this is, it’s a Subchapter of Chapter 11 Bankruptcy. It’s available for individuals and corporations, businesses, and it has a lot of benefits that are a lot more substantial than the current Chapter 11. So some of those benefits are it’s less expensive than a Chapter 11. Traditional Chapter 11 can be very expensive, time consuming. The second benefit, greater leverage from debtors in that accepting votes from creditors is not necessary. I think this is the largest benefit of the new law. Under traditional Chapter 11, like I said, we needed a certain requirement of votes. And if we don’t get the votes, then we can’t confirm the plan. In some cases, we’ve been hanging it on for one vote, and then if we don’t get that one vote, then the plan cannot be confirmed. Under the new law, if no one votes for the plan and we abide by all of the other rules of Chapter 11, we can get the plan confirmed. This part is huge. Streamlined procedures, and like I said, faster process than traditional Chapter 11.
Going on to the next slide.
Roy: Let me interrupt you for a second. But to do that, you have to have a plan that can suggest what your growth sales are going to be, what your business plan is going to be on the back-end of this crisis. So if you went in now, you couldn’t, in good faith, say that you’re going to sell X widgets when no one is buying any widgets from you right now. Isn’t that correct?
Zach: That’s an excellent point. And when we talked about this before, we actually have a few clients who we were about to file Subchapter 5 Bankruptcy for and for that exact reason, we held off because, again, bankruptcy is about triggers. You know, why do we need to file right now? In some instances, if we have an eviction, that’s not going to happen right now, or foreclosure or other court action, that’s not going to happen right now, we don’t need to file right now. And the reason why we shouldn’t file right now is exactly what you said. As part of the Subchapter 5 Bankruptcy, you have to come up with a budget. And in some bankruptcy cases, you have to come up with a budget right from the gate, right when we file, we have to come up with a budget if there are certain issues. And how can we come up with a budget right now? Some of these businesses are closed temporarily and the budget is zero income. So I think it’s gonna be real tough to tell what the income is.
Roy: But what we may want to do is, in some cases, have a prepackaged bankruptcy ready to go. So that when the crisis is over, we’re first in line. Because, as I began this seminar, those people who embraced the soup and got in the soup, got out of the soup first. And that’s something that we really learned. The ones who got in got out first. So if you, at some point, may have to file, you don’t have to file but at least you may want to consider that as one of your options. And so you need to have a plan saying, “If this lasts for 6 weeks, 8 weeks, 10 weeks, what am I going to do? If this last for three, four, six, God forbid, you know, a year, what am I going to do?” And so we’re here to basically absorb some of that pain and do the thinking that needs to be done. And ironically, it is an experience that we had from last decade that is coming back here. Never in a million years did I think we’d be doing this. Last time we did these seminars, we did them in person. Now, look at me, I’m doing this from my house. Keep going, Zach.
Zach: Yeah. No. And, Roy, that’s an excellent point. It’s, you know, filing a bankruptcy, especially filing a Chapter 11 bankruptcy, is not as easy as someone comes in the office one day and we file it all in that day. It doesn’t work that way. So while it may make sense and it will probably make sense to wait if you’re a business to actually file a Chapter 11, especially a Subbhapter 5, Chapter 11, it does not make sense to wait until then to start planning. And it’s important to talk to an attorney now and start planning. Those two cases that I told you about that we’re hitting the pause button on, they were, you know, for lack of a better word, fully cooked, completely ready to go, so that when those clients come back to me and the crisis is, you know, over, hopefully sooner than later, all we essentially have to do is hit the button, and those clients, they’re…away they go in bankruptcy, but it takes some time.
Roy: And I just want to add to [inaudible 00:47:53] and that is that as part of the American way, the idea of success, the bus to success is part of that our genre, it’s part of our ethos, and it’s also part of the narratives of some people who’ve been elected to high office.
Zach: That’s right. That’s right. You know, back when we had the last crisis 10 years ago, I think that really de-stigmatized bankruptcy to a large degree. So many people had to file. The statistics were sky high. And, you know, people who never thought in a million years that they’d have to file a bankruptcy found themselves filing the bankruptcy. And they found out that, you know, again, going back to the very beginning, it’s a tool, it’s a legal procedure, and it’s not the end of the world. It’s what you need to do, if you need to do it.
Okay, so I’ll finish up this slide. I know we’re running out of time. Again, I think the biggest thing to take from this is there is a debt requirements, that limitation, you must have no more than $2,725,625 of secured and unsecured debt to qualify. And there’s been some chatter about, because of this crisis, increasing that limitation to either $7.5 million or $10 million, which is going to really help businesses. It’s going to mean that the majority of people who would be filing Chapter 11 will be able to qualify under this act.
The other thing I want to mention before you move on, Roy, is I know that your firm is, I suppose, you’re doing consultations on a video basis. We are as well. And I think in this in this day and age, when we talk about planning and planning for loss mitigation, bankruptcy and everything else that we’re talking about, people should not be afraid of reaching out to us now. Because we have the ability to do that via Zoom, via all types of video conferencing platforms.
Roy: Absolutely. And I do encourage people to be proactive here and not put your head in the sand here, because we’re all going to be in in the same boat. Zach, if you don’t mind, I want to take some more questions from the folks online.
Roy: Okay. Great. Okay, here we go. “Would you recommend to refinance your loan [inaudible 00:50:21]?” I would highly recommend refinancing today as quickly as possible. I talked about, at the last lecture, that you’re still employed, if you still have income, you are a prime candidate to refinance. I would do it as soon as possible. Bring your interest rate down, get the best deal possible, rates are lower. You got to do it now because God forbid you become unemployed, no one’s gonna want to talk to you.
Next. Okay. “Have you heard that the federal government is considering structuring the bailout TARP-style with the government taking equity in the companies they infused with cash?” Yeah, I think they may do that. I mean, they did that with I think General Motors last time around and they did take stock and eventually the government did buy back or did sell their stock up when the crisis averted.
Next one, “We have a Section 8 rental properties, do you expect the housing government to continue to pay their part of the rent?” You know, that’s a great question. I bet they do because if not, it could cause a crisis. So I think the government will do that. Maybe they’ll renegotiate their rent, but I do expect them to keep paying but I’m not the government.
“Hardship letters have been used with lenders and landlords with few good reaction or whatever. Do you think having legal representation to negotiate the hardship?” Yeah, I think, you know, in terms of your lenders, it is always helpful to have a lawyer prepare the hardship letter because there are certain buzzwords that we like to use and know at this point what the banks respond to because we’ve been doing this now for so long.
“Is there any financial help for realtors?” Wow. You know, not yet. Not yet. There’s so many groups that are going to need help. Whether you’re in the cruise industry, the restaurant industry, the tourism industry, the hotel industry. I mean, you know, I think we’re all in the same boat and I’m not sure what the answer to that is, but I haven’t heard it.
This is for Zach, “What should someone do who is in act of Chapter 13 and is currently unable to make the plan payment due to a reduction in income?” So if someone’s in a plan and they’re not gonna be able to meet it, Zach, what do they do?
Zach: That’s an excellent question. Pay something. Pay whatever you can. If you’re in a paid plan payment of $200 a month and all you can afford is $10, pay the $10 to the trustee. That’s going to delay things. Have your attorney or if you don’t have an attorney, you’re Chapter 13, contact the trustees’ office. But pay something. Pay whatever you can and that that should delay things a little bit. The trustees understand what’s going on.
Roy: Next question for you, Zach. “How successful are involuntary bankruptcies against the business?” I would bet they’re not going to be very successful right now, but what do you think?
Zach: No. Well, in general, involuntary bankruptcies are very difficult. There’s certain requirements that a creditor must meet to be able to file an involuntary bankruptcy. And if you file one improperly, there can be damages for the creditor who institutes the involuntary.
Roy: I’m gonna ask one more question. Here. “What type of bankruptcy were available to Sub Ss?” Let me try and give this an answer. The answer is that you’d have typically an 11. The new Sub 5 would be applicable and possibly in some cases, I guess a liquidation which would be a 7 I guess, right? But typically…
Zach: That’s right. Yeah. Chapter 7, Chapter 11. Chapter 7 being the liquidation, Chapter 11 being the reorganization, assignment for the benefit of creditors, really, there’s no differentiation between Sub S or any other type of company when it comes to business bankruptcies.
Roy: Okay. We had a great question here, which I want to answer about force majeure. “How far can residential and businesses go to…at leverage of force majeure?” And I want to go to the next slide. There are addendums that are circulating in real estate, on the residential side about trying to get extensions if certain service providers are unable to meet their obligations currently in both the commercial farbar and the residential farbar contracts. There’s a typical 30-day provision that states that if there’s force majeure, you can adjourn for 7 days. And then if after a total of 30 days from the closing date, you’re unable to close, under those circumstances either party can walk away. The question is what is force majeure? You know, acts of God typically fall into that. I think once the state is under a true emergency declared by the governor and by the president as a disaster area, I think under those circumstances, you’ve got to really leverage the force majeure. There’s going to be lots of disputes there. There are numerous contracts that we’re dealing with where we’ve had buyers who were in the middle of buying and the banks pulled the plug. We have sellers who now can’t proceed because maybe their next deal fell through, and you have these daisy chain chain reactions of someone buying, renting, selling, and the whole thing, like I said, dominoes is all collapsing.
I mean, one of the things we’re suggesting under this emergency is that everyone just stay in place and we call a timeout. And then everything resets when the economy is working again. But you know, if people don’t want to cooperate and do that, it’s going to be hard for the courts to enforce any of this when they’re basically working remote like we are.
I do want to talk about the next slide here, which is about renegotiating leases. We’re getting, from some major retailers for our clients who own commercial property, requests. They’re called requests but they’re probably demands from major retailers who’s saying that they’re looking for a rent holiday. They’re looking for a rent holiday for several months, maybe 90 days or 120 days, until the situation resolves itself. The landlords, I think, can’t really respond until they talk to their banks because they have mortgages and see what their banks want them to respond because they’re not getting this major income in from a major retailer, then how are they going to be able to pay their mortgages. So this is a calamity because it is a house of cards with a set of dominoes, and it sets off a chain reaction that, frankly, is so much more complicated and more crazy than what we’ve ever had to deal with in our professional lives. And I’ve been practicing now, you know, for 33 years as a lawyer and this is something I never envisioned.
Lance, were there any more questions we have? I think we have a few minutes left. Once you’re done with polls.
Okay, we did the four questions. We do have some more questions. Okay. “If realtors will be out of work temporarily, we don’t have sellers to show properties or allow people in their homes and don’t have enough buyers due to the uncertainty in their jobs.” I agree. You’re going to have to figure out how to survive over this next several weeks, several-month period because then you will come back fast and furious. There will be people who have to move, who are going to relocate. There’ll be dislocation. Families will change. There will be unfortunate circumstances that require people to make different moves. And from that, you will be very busy because when there is change, realtors do very well, as do lawyer sometimes.
“What if you can’t pay your rent?” I guess is the question. Well, if you can’t pay your rent, I mean, you’re not moving out and you’re not being evicted. So the first thing you do is you call your landlord, you call your landlord and say, “Hey, you know, I’m an Uber driver and I’m now making 20% of what I used to make. Or I worked in the hotel industry or I worked in the cruise industry,” and you just be absolutely candid with them about your predicament. And if they try and throw you out, you call our office because legally, they cannot do that right now.
And so, ultimately, when the health crisis averts, the economic crisis will not avert, but at least you will be able to go out and you will be able to find other work. There’ll be so many companies that are growing because they’re part of a new economy. And there, you will have to retool, and at that point, you will be able to either move in with someone or you will be able to find a place yourself. The problem now is you can’t move in with someone. And the government, as a matter of public health, does not want you to move in with someone. And so you’re sheltering in place. And that is something that is more important than the landlord, unfortunately, collecting this month’s rent is also more important than the bank collecting their mortgage payment. And because of that, we all have to work together as a community to figure this out. But it has a ripple effect. And it is a domino effect. And it affects everyone that I know and it’s something that we’ve just never had to deal with before.
Let me see if there any more questions. I think we have two or three more questions. Oh, great. Are there any more questions, Lance? I saw there were… Okay, okay, I’m being told I’m done. Anyway, I want you all to first of all think about how we can work together as a community and how we all can get through this together. What we’re doing at this firm is to provide this community service. Obviously, it’s an opportunity for you to ask questions. Obviously, we’re not providing specific legal input for any of you. But we’re more than available to talk to you about your personal situation.
Next week at noon, Tuesday next week at noon, Zoom at Noon, we will be talking about strategic default. How it will be different from last time, strategies to renegotiate debts, including unsecured credit card debt, and other loans. And Zach, if you’re available, you’re going to be more than welcome to join us again.
Zach: Thank you so much and thank you for having me.
Roy: It is our pleasure. And Roy Oppenheim from the trenches. Thank you very much for joining us today and sharing your time with us. Have a great day and Godspeed and may you all stay healthy.