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Apr 2020
02
April 02, 2020

CARES Act Temporarily Modifies Provisions of the Bankruptcy Code

The Coronavirus Aid, Relief and Economic Security Act (CARES Act), which was signed into law on March 27, 2020, temporarily modifies the Bankruptcy Code to provide: (i) a temporary expansion of the debt limitations under the new Subchapter V small business Chapter 11 provisions of the Bankruptcy Code; and (ii) filing and plan payment relief to Chapter 7 and 13 debtors. These provisions all have a sunset provision which is one year from the enactment of the CARES Act.

Eligibility Expansion of Subchapter V of the Small Business Restructuring Act of 2019

In 2019, the President signed the Small Business Restructuring Act of 2019 (SBRA) into law. The SBRA created a new Subchapter V to the small business provisions of Chapter 11 of the Bankruptcy Code. These provisions are designed to provide a more streamlined and cost-effective process for small businesses by eliminating creditors’ committees, simplifying procedures, limiting disclosure requirements and providing a better opportunity for the business owner to retain equity after the Chapter 11 plan is confirmed. Unfortunately, the debt limits for eligibility were very small. Under the SBRA, as enacted, the small business must have total debt, both secured and unsecured, of less than $2,725,625. The CARES Act temporarily increases the debt eligibility requirements to $7,500,000 for a period of one year after enactment of the CARES Act. This will expand the opportunity for many more small businesses to file streamlined relief in the face of the COVID-19 pandemic. While the election to proceed under Subchapter V is totally voluntary, it is expected that many companies which are newly eligible will elect to do so.

Bankruptcy Chapter 7 and 13 Relief Provided by the CARES Act

The CARES Act, for a period of one year from enactment, modifies Chapter 13 and Chapter 7 as follows:
 
  • Federal coronavirus-related payments are excluded from the definition of “income” under Chapter 7 and 13 of the Bankruptcy Code for purposes of filing bankruptcy.
  • Federal coronavirus-related payments are excluded from the calculation of disposable income for purposes of confirming a Chapter 13 plan.
  • Individuals and families currently in Chapter 13 may seek the modification plan payments if they are experiencing a material financial hardship due to the coronavirus pandemic. This may include extending payments for up to seven years after the original plan payment was due.

If you have any questions regarding these modified provisions, please contact Susan Cook, Rozanne Giunta, Rodney Martin or your Warner attorney.

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