CARES Act Bankruptcy Update

April 10, 2020

By: Lindsey Emerson Raines and Harry A. Light

The Coronavirus Aid, Relief, and Economic Security Act (CARES) includes several changes to bankruptcy law, including an amendment to the Small Business Reorganization Act (SBRA), which took effect earlier this year. (Read full article here) These temporary modifications are designed to benefit small businesses and individuals who have sought, or plan to seek, relief under the provisions of the U.S. Bankruptcy Code. As many debtors seek payment deferments, these provisions will be important in evaluating the rights and benefits of debtors and creditors this year. 

Small Businesses – Subchapter V of Chapter 11 

A business may only seek relief under the SBRA if it meets certain requirements. Through the CARES Act, Congress expanded the eligibility for small businesses by increasing the maximum indebtedness for a “small business debtor” to $7.5 million in debt, which is a significant increase from the prior limit of approximately $2.7 million. The new, increased limit will only be applicable to cases filed on or after March 27, 2020, and should revert to the existing limit of $2.7 million for cases filed on or after March 27, 2021.

Individuals – Chapters 7 and 13

For cases filed under Chapter 7 or 13 of the Bankruptcy Code, the CARES Act provides that any payments made by the Federal government relating to the national emergency declared pursuant to the National Emergencies Act due to COVID-19 are exempt from the calculation of “current monthly income.” “Current monthly income” is used, among other things, to determine whether debtors are eligible for relief under certain chapters of the Bankruptcy Code. Additionally, these payments do not constitute “disposable income,” which is required to be committed to a Chapter 13 debtor’s plan. This means that debtors who already have confirmed Chapter 13 plans, as well as those that file Chapter 13 cases in the coming year, will not have to commit any COVID-19 payments to their plan.

Additionally, a Chapter 13 debtor can, subject to court approval, amend his or her confirmed plan if he or she is “experiencing or has experienced a material financial hardship due, directly or indirectly, to the coronavirus disease 2019 (COVID-19) pandemic.” Specifically, the CARES Act provisions permit a Chapter 13 confirmed plan to be modified, subject to court approval, to extend the plan length for up to a total of seven (7) years (compared to the existing maximum period of five (5) years) from the date of the first plan payment under the initially confirmed plan. What constitutes a “material financial hardship” is not defined in the CARES Act and will likely be developed on a case-by-case basis.

The changes to the Bankruptcy Code under the CARES Act will automatically expire on March 27, 2021, if not extended.

Lindsey Emerson Raines is an associate in the firm’s Litigation Practice Group. Her practice focuses on business litigation, creditors’ rights and bankruptcy.

Harry A. Light practices in the areas of bankruptcy, creditors’ rights, commercial litigation and trademark/copyright applications.

Disclaimer: The information included here is provided for general informational purposes only and should not be a substitute for legal advice nor is it intended to be a substitute for legal counsel. For more information or if you have further questions, please contact one of our Attorneys.