Bankruptcy Amendments to the CARES law
John Robinson and J. Machir Stull
In March 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The CARES Act contains provisions that affect Chapter 7 and 13 debtors, as well as debtors proceeding under the new form of small business bankruptcy created by the Small Business Reorganization Act of 2019 (“SBRA”). The SBRA, which came into effect in February 2020, created a new, simpler form of Chapter 11 bankruptcy that is more accessible to small businesses. The CARES Act amends both the SBRA and general federal bankruptcy laws in several important ways.
CARES Act stimulus payments are not considered income for Chapter 7 and 13 debtors
For individual Chapter 7 or Chapter 13 bankruptcy debtors who have received a stimulus payment, it is important to note that under the CARES Act, this money is not considered “income” to individuals. purposes of a bankruptcy plan. Therefore, stimulus checks are not subject to claims by creditors. However, outside of bankruptcy protection, that money is still subject to debt collection efforts to satisfy overdue child support or offset bank debts. This could highlight a benefit for people who quickly file for bankruptcy after receiving a stimulus check.
SBRA and CARES Chapter 11 Bankruptcy Changes
Chapter 11 bankruptcy can be complicated and expensive; prohibitive for many small businesses. The aim of the SBRA is to remove some of the complexity and streamline the process so that more small businesses can seek bankruptcy relief through the Chapter 11 reorganization. To achieve this, the SBRA created a new sub-chapter V under chapter 11 of the bankruptcy code. Subchapter V is a simplified version of Chapter 11 bankruptcy that is designed to be more suitable for small businesses.
Generally speaking, the SBRA simplifies Chapter 11 bankruptcy by relaxing certain requirements for confirming a bankruptcy plan and limiting creditors’ control over the confirmation process. The SBRA is also trying to give debtors more control over their plan by changing the top priority rule, which prevents a junior creditor from receiving payment unless all senior creditors are paid in full. Subject to certain exceptions, the application of the first priority rule often results in debtors losing the capital (and ownership) of their business.
Under the SBRA, only companies with a debt of less than $ 2,725,625.00 can proceed under this new subchapter. The CARES Act, however, temporarily increases the Subchapter V debt ceiling to $ 7,500,000.00, making this new form of Chapter 11 bankruptcy accessible to businesses that might otherwise have too much debt to qualify. The debt ceiling increase is available to all Subchapter V depositors for one year from the date of entry into force of the CARES Act, which was enacted on March 27, 2020.
The CARES law offers an extension of the existing plans of chapter 13
Chapter 13 bankruptcy plans are intended to be a reorganization for the individual debtor, whereby the individual debtor repays creditors, to the best of their ability, with their disposable income. Chapter 13 plans can be structured to last between three and five years, during which time the debtor makes monthly payments to their creditors.
The CARES Act allows Chapter 13 debtors to request that their plan be extended to a maximum of seven years. This is a significant benefit for existing Chapter 13 debtors, whose monthly payments would decrease with such an extension.
John Robinson is an attorney in the Litigation Section and Machir Stull is an attorney in the Bankruptcy Section of Cantey Hanger LLP. They can be reached at 817-877-2831 [email protected] or 214-978-4122 [email protected] respectively.