Three years ago Jane quit her job as an event specialist for a local venue here in Phoenix and used her savings to say goodbye to a bad boss and become the proud owner of Jane Doe’s Weddings and Events. Jane had already received many 5 star reviews while at the venue so she just knew she’d make it.
With meticulous planning, an extensive email list, and a ten page business plan, Jane hit the ground running and soon her phone was buzzing with brides-to-be.
Shayla, a typical bride-to-be, found Jane through social media and after reading Jane’s numerous 5 star reviews, contacted Jane.
Jane, a great believer in preparation, already had seventy-three Pinterest boards with a variety of themes, concepts, and colors, for a variety of projected venues, locations, and moods. Jane put together several proposals and sent them over to Shayla: one of them clicked, and Shayla hired Jane. Shayla signed the contract and gave Jane a 50% deposit for the wedding, with the remainder due on the day of the wedding.
Jane got to work contacting vendors–many of whom Jane had met out networking—and reserved their services. Some expenses Jane paid for Shayla’s wedding were the guitarist for the ceremony (who was paid-in-full per his contract), the caterer who received a 50% deposit for the reception (with the remaining 50% due the day of the wedding), and the officiant (who would be paid-in-full on the day of the day of wedding).
Shayla and Jane were busy exchanging text messages and finalizing details for Shayla’s wedding when COVID-19 hit.
Not only was Shayla’s wedding canceled, but so were all of the others. Suddenly, Jane found herself without any weddings. While some of the brides-to-be were able to reschedule, others cancelled, and many others cancelled after rescheduling.
Jane found herself owing her clients refunds, but she had no money coming in, plus some of her vendors were refusing to refund their deposits to her. What was Jane going to do?
After hearing about the Coronavirus Aid, Relief, and Economic Security (CARES) Act and the Pandemic Unemployment Assistance (PUA), Jane filed for unemployment and a Paycheck Protection Program (PPP) loan.
First, Jane received her $1200 stimulus check, and then several weeks later she received her PUA benefits. Jane even received a $20,000 a Payroll Protection Program (PPP) loan.
However, 6 months later, Jane is no longer receiving any CARES Act or PUA money. Jane is only getting $240 weekly from the Arizona State Department of Economic Security, which is not enough to cover all of her monthly bills.
Also, Jane has only booked two new weddings for 2021 and interest on her PPP loan has been accruing since day 1.
Jane is worried about her financial future and is wondering how she is going to pay all of her bills, which include rent, car payment, her credit card bills, and maybe even her PPP loan with interest.
Jane decided to contact Bona Fide Bankruptcy Attorneys for her FREE Consultation to get more information about her available options.
First, the attorney at Bona Fide Bankruptcy explained to Jane that none of the CARES Act and PUA money is included in the “means test” for Chapter 7 bankruptcy. Because Jane had little to no other income (other than her CARES Act and PUA benefits) during the past six months, Jane will likely qualify for a Chapter 7 Bankruptcy.
If Jane decides to file for a Chapter 7 bankruptcy, generally all her contracts will be voided and an automatic stay will be put into place, which means that Jane can’t be sued while her bankruptcy is pending and she will no longer be further obligated to perform services. In the absence of fraud, the brides-to-be will have little recourse. However, if after filing the bankruptcy, Jane wishes to fulfill her obligations under the contracts (in order to maintain her business reputation in the community) she is free to do so.
The only complicating factor for Jane will be the “means test” which will determine whether she qualifies for a complete liquidation. If Jane accepted wedding deposits for events in the future, and those deposits were “earned on receipt,” then any deposits she received may be deemed “income” under the “means test.” The size of the deposit(s) collected within the six (6) month look-back period may crucially impact Jane’s Chapter 7 eligibility.
Evaluation of these situations can become detailed and fact dependent based upon the wording of the contracts signed, norms in the industry, and the parties’ reasonable expectations.
Jane’s situation becomes a bit trickier if she wishes to explore Chapter 13 reorganization where she keeps most of her important possessions, possessions secured by loans, leases, or other “stuff” associated with moving her business forward. If Jane has made more than the median income for her family size during the prior six months (remember PPP money, enhanced unemployment benefits, disaster loans, or other CARES ACT benefits or loans likely does not go into the income equation) then she may need to explore an option that also looks forward and not just backwards. In this scenario, Jane may be in a position to enter a reorganization plan where she keeps most of her important assets but pays a significantly reduced rate to both secured and unsecured creditors.
Regarding Jane’s PPP loan, the entire loan with interest is dischargeable in bankruptcy as long as Jane did not commit any fraud when applying. For example, if Jane is self-employed, then she can qualify for loan forgiveness up to 2 ½ months worth of her 2019 net profit to replace her lost pay. The remainder of her PPP loan (the unforgiven portion) has to be paid back with interest, unless it is discharged through bankruptcy. (Although, there is no personal guarantee on any PPP loan.)
As far as forgiveness is concerned, if Jane is an employee of her business and receives a salary, then Jane must devote at least 60% of her PPP loan proceeds to payroll costs before she can receive complete PPP loan forgiveness. Other significant factors impacting PPP forgiveness have to do with Jane’s payroll payment period of either eight (8) or twenty-four (24) weeks, when Jane received her PPP funds, and what other qualifying expenses upon which Jane spent her PPP loan funds. Guidance on these issues continues to evolve as banks prepare to accept forgiveness applications. If ultimately Jane does not receive complete PPP loan forgiveness, then she will be obligated to pay the remainder of her loan with interest. But again, there is no personal guarantee on any PPP loan and the remainder of any non-forgiven PPP loan can be discharged in bankruptcy.
Finally, if Jane needs to move after the eviction moratorium is lifted, she can discharge any back rent, interest, and penalties in bankruptcy. She can also keep up to $6,000 of equity in her vehicle and she can likely discharge her credit card debt in a Chapter 7 bankruptcy.
Jane is glad she decided to consult with Bona Fide Bankruptcy Attorneys, PLLC, sooner rather than later, and because she anticipates her wedding business rebounding soon, she decided to file her Chapter 7 bankruptcy now. After the pandemic, Jane is looking forward to a Fresh Start.
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