How COVID-19 + The CARES Act Affects Bankruptcy Filing

Filing for bankruptcy is never a fun process. Even considering whether or not bankruptcy is the best option for you may cause a certain level of anxiety. Not to mention: add the stress of the current pandemic on top of the stress surrounding a bankruptcy filing, and it’s not a surprise why you may feel bummed.

However, the process of filing for Chapter 7 Bankruptcy, Chapter 13 Bankruptcy, or any form of bankruptcy during the COVID outbreak doesn’t need to be overwhelming. When taken step by step and with sufficient guidance, the process can be completed swiftly and as painlessly as possible.

Unknown to many Americans are the changes currently made to bankruptcy law, as stated in the recently enforced CARES Act (the Coronavirus Aid, Relief, and Economic Security Act). There are important revisions to the bankruptcy code in the U.S. that may affect your potential bankruptcy filing.

What is the CARES Act anyway?

The CARES Act was signed into effect on March 27th 2020 and includes $2.2 trillion worth of relief to individuals, families, and business suffering from the economic consequences of the current pandemic. Nestled into the changes alongside the stimulus, unemployment benefits, and small business relief are changes to the Chapter 7 and Chapter 13 Bankruptcy filings.

Changes to Bankruptcy Laws: Small Business Reorganization Act (SBRA)

As part of the CARES Act, a new portion of Subchapter 5 was added to the Small Business Reorganization Act (SBRA) to lower the cost and expense for small businesses that are reorganizing under Chapter 11 filing. Originally, if a small business wished to qualify under SBRA, the total of their secured and unsecured debts could not exceed $2,725,625. However, section 113 was added to the CARES Act to increase the debt limit to $7.5 million.

This increased debt limit applies to cases filed after the CARES Act went into effect and is valid for up to one year after the CARES Act becomes effective. After that point, the debt limit will return to its previous cap.

This change is very important due to its ability to allow for more businesses to qualify for a potential Chapter 11 Bankruptcy filing. The increased potential to qualify is likely to be warmly welcomed, given the currently difficult economic situation many businesses are facing due to the COVID pandemic.

Other Key Provisions in the SBRA

• The U.S. Trustee will now be required to appoint a trustee in each and every small business Chapter 11 case, and this trustee’s role will be to assist the debtor in developing a viable plan of reorganization. The trustee will then be held responsible for disbursing payments under the plan.
• The aforementioned trustee will serve in a supervisory role and will not be involved in the operational aspects of the business which he/she is supervising.
• An unsecured creditors’ committee will not be appointed except for circumstances in which such committee has been ordered by the court.
  To avoid delays in the filing process, by no later than 60 days of the date of the petition, a status conference must be held; during this conference, a conversation must be had regarding how to proceed with the case.
• To further avoid delays, no later than 90 days after the petition date, a plan of reorganization must be filed by the debtor; no disclosure statement is required, though the plan must include information regarding liquidation analysis and the projection of the debtor’s ability to make payments under the proposed plan.
• The plan may modify the rights of a secured lender with a lien on the principal residence of the debtor if the “new value” received from the loan was not used primarily to acquire the residence and was used primarily in connection with the small business.
• It is now easier for a debtor to confirm a plan while maintaining ownership of his/her business; in Chapter 11 cases of the past, the “absolute priority rule” was set to ensure that business owners could not retain equity in a business unless creditors are fully paid by the Chapter 11 plan. However, the SBRA revoked this rule and allows for business owners to retain full ownership without providing “new value” if and only if the plan provides for the debtor to distribute all of its projected disposable income over a minimum of three years and a maximum of five years from the date the first payment is due, as per the plan.
• In Chapter 11 cases of the past, debtors had to pay administrative expense claims for goods and services incurred during the post-petition period; these needed to be paid on the effective date of a reorganization plan. However, the SBRA now allows small business debtors to stretch payments of administrative expense claims out over the term of the plan.

Other, subtle and important changes have also been made to bankruptcy laws; if more information is needed – or if clarification on the existing information is needed, it’s best to speak with a qualified Bankruptcy Attorney who can help walk you through the process and determine what the best options are for you!

More in the HEALS Act?

The Health, Economic Assistance, Liability Protection and Schools (HEALS) Act was recently unveiled, yet continues to be argued over (rather than passed) by members of both the Republican and Democratic parties.
Some elements of the proposed HEALS Act include: another round of stimulus checks, continuing unemployment benefits, aiding schools, and helping out the United States Postal Service. Stay tuned for how the HEALS Act may affect your own financial situation.