Just in time- The CARES Act Provides Limited Bankruptcy Relief

Just in time- The CARES Act Provides Limited Bankruptcy Relief

On March 27, 2020, the $2 trillion economic stimulus package known as the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law. The CARES Act includes revisions to certain provisions of the U.S. Bankruptcy Code in an effort to provide better and more effective bankruptcy relief to small businesses and individuals during the COVID-19 crisis. 

Amendments Pertaining to Small Business

The relief afforded by the CARES Act requires some context.  When businesses are overwhelmed by debt but still have sustainable income, Chapter 11 of the Bankruptcy Code provides a mechanism for reorganization of debts and continuation of business. However, the costs of a Chapter 11 bankruptcy can be very extensive.  Financially distressed businesses frequently consult a bankruptcy lawyer only to learn that, ironically, they are too poor to reorganize under Chapter 11. The Small Business Reorganization Act of 2019 (the “SBRA”), also known as Subchapter V of Chapter 11 of the Bankruptcy Code, became effective February 2020, providing a less expensive and more streamlined process for small businesses to reorganize through bankruptcy without the constraints of several features of Chapter 11 reorganization. The SBRA is intended to provide for more expedited procedures for businesses and to eliminate some of the costly elements of Chapter 11 relief, such as the filing of a disclosure statement, shortening certain deadlines in the case, and eliminating committees of unsecured creditors in an effort to reduce costs.

As originally enacted, the eligibility threshold under SBRA for debtors was $2,725,625 in debt, including secured and unsecured debt. If a debtor had debt beyond this threshold, the only option was a traditional (time consuming and expensive) Chapter 11.  In relation to Chapter 11 bankruptcies, the CARES Act temporarily amends the SBRA by increasing the debt threshold for small businesses eligible to file under the SBRA from $2,725,625 to $7,500,000. This temporary eligibility increase expires after one year, after which the debt threshold returns to $2,725,625 (subject to any other dollar adjustments imposed by Congress). The increase in the debt limit to $7,500,000 will allow additional financially distressed businesses to qualify for the more efficient reorganization provided under Chapter 11 of the Bankruptcy Code.

Amendments Pertaining to Individuals

With respect to individual debtors, the CARES Act temporarily amends certain definitions in Chapter 7 and Chapter 13 cases to exclude COVID-19-related payments from the federal government from being treated as part of a debtor’s “income” for purposes of determining a debtor’s eligibility for Chapter 7 or Chapter 13 bankruptcy relief. As a result, stimulus checks received by eligible consumers will be exempted income for bankruptcy filing purposes. Additionally, stimulus checks and any other payment made under federal law related to the coronavirus will not be included as disposable income for the purposes of Chapter 13 Plan confirmation. This change is designed to permit consumer debtors to receive the full benefit of stimulus payments. Lastly, the CARES Act provides that debtors with already confirmed plans now have the ability to seek to extend their Chapter 13 Plan repayment period to seven (7) years. Previously, the Bankruptcy Code capped the Chapter 13 repayment period to five (5) years. This change will allow debtors to lower their payments for many obligations by spreading them across an additional 24 months in most cases and even longer if the prior confirmed plan was shorter than a five year plan.

Importantly, the amended provisions of the Bankruptcy Code referenced above are only in effect for a period of one (1) year following the enactment of the CARES Act.  As a result, if debtors, consumers and businesses plan to take advantage of these amended Bankruptcy Code provisions, they will need to do so in the near future.

While the full impact of the COVID-19 crisis is unknown at this time, it is likely that financial institutions can expect to see increased defaults and thus increased bankruptcy filings. 

Farnsworth & vonBerg PLLC is continuing to monitor issues affecting clients and businesses in response to the coronavirus pandemic.  If you have any questions, for more information on the topics mentioned above, or for assistance with addressing insurance issues, supply chain problems, development of best practices and protocols, or other matters affecting your business, please contact any of us here at F&V:  brooke@fvllp.com; fran@fvllp.com; brian@fvllp.com; paul@fvllp.com.

This publication should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer on any specific legal questions you may have concerning your situation.