On March 27, 2020 the Coronavirus Aid, Relief and Economic Security Act (CARES Act) was signed into law by President Trump. In addition to providing emergency assistance and health care responses to those affected by the 2020 coronavirus (COVID-19) pandemic, the CARES Act makes some important changes to provisions of the Bankruptcy Code.
Subchapter 5 Small Business Bankruptcy
The Small Business Reorganization Act (SBRA), effective in February 2020, created a new subchapter under Chapter 11 of the Bankruptcy Code called Subchapter 5. Subchapter 5 is intended to give businesses with lower debt totals a less expensive and faster option for restructuring under Chapter 11 bankruptcy. Under the SBRA, a business qualifies to file a case under Subchapter 5 if its debts are in the amount of $2,725,625 or less.
Section 1113 of the CARES Act increases the debt limit from $2,725,625 under the SBRA to $7.5 million. Therefore, a business with debts of less than $7.5M can now qualify to file a Chapter 11 case under Subchapter 5.
The change in the Subchapter 5 bankruptcy debt limit only applies to cases filed within one year after after the CARES Act becomes effective. Thus, unless Congress extends the expanded debt limits under the CARES Act, the debt limits for cases under Subchapter 5 will revert to $2,725,625.
This is a significant development for small businesses considering a Chapter 11 reorganization. More businesses may be able to to take advantage of the SBRA and Subchapter 5.
Importantly, this includes the reduced requirements to confirm a Chapter 11 plan. Under Subchapter 5, a business can generally confirm a chapter 11 bankruptcy plan so long as it provides that all disposable income for three to five years will be used to make plan payments.
CARES Act and Chapter 7 Bankruptcy
The CARES Act also makes important changes to Chapter 7 Bankruptcy cases. The most important change under the CARES Act is the amendment to the definition of “current monthly income”.
In order to qualify for a Chapter 7 bankruptcy, an individual or married couple must determine their “current monthly income” (“CMI”). The CMI calculation – commonly known as the means test – includes income from all sources and compares that amount to the median income for the debtor’s household size.
The CARES Act excludes from CMI any payments which an individual or family may receive under the CARES ACT. This would include any of the payments proposed under the stimulus such as direct payments to taxpayers or benefits to be paid for unemployed workers. Typically, unemployment benefits are included in the definition of current monthly income.
CARES ACT AND CHAPTER 13 BANKRUPTCY
Similar to Chapter 7, the CARES ACT amends the definition of current monthly income to exclude payments made to the debtor pursuant to the CARES Act from “disposable income” in a Chapter 13 bankruptcy case. By excluding this income, a Debtor who receives payments under the CARES Act does not have to include these payments to confirm a Chapter 13 Plan.
The CARES Act amendments to the Bankruptcy Code also allow Chapter 13 bankruptcy debtors with confirmed plans to modify their plans due to material financial hardship related to the Coronavirus pandemic. A Debtor may modify the plan to extend payments under the plan for up to seven years after their initial Chapter 13 plan payment – or “trustee payment” – was due.
Like the changes to the Subchapter 5 bankruptcy debt limit, the changes to Chapter 7 and Chapter 13 bankruptcy cases are applicable for one year after the CARES Act becomes effective.