Client Alert – CARES Act Contains Several Key Bankruptcy-Related Provisions Aimed at Helping Consumers & Small Businesses
On March 27, 2020, the much-anticipated Coronavirus Aid, Relief and Economic Security Act (CARES Act) was signed into law. In addition to a myriad of other economic relief measures aimed at avoiding bankruptcy filings, the Act contains several provisions specific to debtors in bankruptcy. As summarized by the American Bankruptcy Institute, those provisions are as follows:
- Amending the Small Business Reorganization Act of 2019 (SBRA) to increase the eligibility threshold for businesses filing under new subchapter V of chapter 11 of the U.S. Bankruptcy Code from $2,725,625 of debt to $7,500,000. The eligibility threshold will return to $2,725,625 after one year.
- Amending the definition of “income” in the Bankruptcy Code for chapters 7 and 13 to exclude coronavirus-related payments from the federal government from being treated as “income” for purposes of filing bankruptcy.
- Clarifying that the calculation of disposable income for purposes of confirming a chapter 13 plan shall not include coronavirus-related payments.
- Explicitly permitting individuals and families currently in chapter 13 to seek payment plan modifications if they are experiencing a material financial hardship due to the coronavirus pandemic, including extending their payments for up to seven years after their initial plan payment was due.
See Senate Passes Coronavirus Stimulation Bill with Provisions Proving Greater Access to Bankruptcy Relief For Distressed Consumers and Small Business, ABI.org., Mar. 26, 2020, available at: https://www.abi.org/newsroom/press-releases/senate-passes-coronavirus-stimulus-bill-with-provisions-providing-greater.
According to the Wall Street Journal, these provisions were pushed by several legal advocacy groups, including the National Association of Consumer Bankruptcy Attorneys, the National Bankruptcy Conference and the National Consumer Law Center. See Bankrupt Borrowers Won’t Forfeit Coronavirus Aid Payments to Creditors Under Stimulus Package, WSJ.com, Mar. 27, 2020, available at: https://www.wsj.com/articles/bankrupt-borrowers-wont-forfeit-coronavirus-aid-payments-to-creditors-under-stimulus-package-11585224513.
The SBRA was intended as a mechanism to allow small businesses to take advantage of bankruptcy protection by making the process less expensive and faster. Many industry professionals have been calling for the expansion of the debt limits since the Act was passed. If successful, perhaps this amendment will survive the temporal limitations placed upon it by the CARES Act.
Despite the SBRA incentives and the amendments contained in the CARES Act, many small businesses whose revenue stream has been reduced and/or whose expenses have increased as a result of the COVID-19 pandemic, will find chapter 11 untenable and may be facing liquidation. Not only are chapter 11 debtors faced with substantial additional costs associated with a reorganization for such things as United States Trustee fees, professionals, and increased operating costs, but being in bankruptcy itself presents struggles with businesses’ relationships with its vendors and lenders, financing opinions, bonding availability, and the like.
For more information regarding options for your business, including bankruptcy, or relating to creditors’ rights during this unprecedented time, please contact Stephen Falanga at firstname.lastname@example.org or (973) 757-1107, Christopher Hemrick at email@example.com or (973) 757-1033, or Sydney Darling at firstname.lastname@example.org or (973) 757-1034.
Walsh Pizzi O’Reilly Falanga LLP has prepared the content of this alert for general informational purposes. The content should not be considered advice, recommendations, or an offer to perform services. You should not act upon any information provided in this alert without seeking professional legal counsel from an attorney licensed to practice law in your jurisdiction. No representations are being made as to the completeness or accuracy of the information contained herein.