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Bankruptcy Changes under CARES Act

Bankruptcy Changes under CARES Act

March 31, 2020

By Jerald S. Enslein

Unfortunately, the current COVID-19 public health circumstances may well result in increased bankruptcy filings for businesses and individuals over the next year. The scope of the relief provided under the new Coronavirus Aid, Relief, and Economic Security Act (CARES Act) does include changes to the Bankruptcy Code beneficial to small business and individual debtors.  However, these changes are temporary, subject to sunset provisions.

For Small Businesses:

The Small Business Debtor Reorganization Act of 2019 (SBRA), which became effective on February 19, 2020, created a new subchapter 5 to chapter 11 of the Bankruptcy Code. It provides a more streamlined opportunity for a qualifying small business to attempt to reorganize. The CARES Act makes more small businesses eligible for this streamlined reorganization by raising the maximum aggregate amount of noncontingent, liquidated secured and unsecured debt which a debtor may have to qualify as a small business debtor from $2,725,625.00 to $7,500,000.00 (excluding debts owed to affiliates or insiders). However, the increase in the debt limitation is only applicable to those cases filed after the CARES Act was enacted (March 27, 2020) and, absent an extension or other action by Congress, will revert back to $2,725,625.00 one year following enactment.  

For Individuals:

For individuals considering bankruptcy relief, a means test based on current monthly income is used to determine whether an individual having primarily consumer debts is eligible for relief under chapter 7 of the Bankruptcy Code. However, the CARES Act provides that National Emergency Act payments for COVID-19 by the President (“Emergency Payments”) received by a debtor are excluded from the definition of current monthly income. The CARES Act also excludes Emergency Payments from the calculation of disposable income used in determining whether a plan under chapter 13 of the Bankruptcy Code may be confirmed.  Additionally, if a plan has been confirmed under chapter 13 prior to the date of enactment of the CARES Act, the debtor may seek to modify the plan based on a material financial hardship due to COVID-19, including an extension of the term for up to 7 years after the initial payment under the plan was due.  However, absent an extension or other action taken by Congress, these changes to chapters 7 and 13 will expire one year after enactment.  

Martin Pringle’s creditor’s rights attorneys are available to work with businesses facing challenges in the current COVID-19-impacted economy, including those who may find themselves as creditors in new bankruptcy cases in the future.

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