The COVID-19 pandemic is, first and foremost, a human tragedy, but one compounded by job losses and business closures. To help relieve the profound economic side effects of social distancing and stay-at-home orders, the U.S. Government enacted the Coronavirus Aid, Relief and Economic Security (CARES) Act.
In such an uncertain economic environment, it is natural for individuals and businesses that are suffering from financial hardship to contemplate the protections offered by the bankruptcy process. The CARES Act includes provisions to increase the access of individuals and small businesses to the relief granted by the bankruptcy process.
The CARES Act, the SBRA and Small Business Bankruptcy
The Small Business Reorganization Act (SBRA) was signed on August 23, 2019, and took effect on February 19, 2020. The SBRA created Subchapter V in Chapter 11 of the Bankruptcy Code in an effort to streamline the restructuring process for small businesses filing for bankruptcy under Chapter 11. The SBRA, which applies to businesses with debts under $2,725,626, makes it easier for small businesses to survive bankruptcy and retain control over their operations.
Passed a month after SBRA took effect, the CARES Act broadens which businesses can benefit from the SBRA, more than doubling the Subchapter V debt threshold to $7,500,000. This provision only applies to cases filed after the CARES Act was signed into law on March 27, 2020, and is only in effect for one year.
The debt threshold under Subchapter V includes secured and unsecured debts combined, but excludes debts owed to insiders or affiliates. At least half the debt must be derived from the debtor’s business activities in order to qualify under the SBRA. A member of a group of affiliates with debts above the $7.5 million threshold is not eligible.
The SBRA makes it more difficult for creditors to contest small business Chapter 11 proceedings. It eliminates the Absolute Priority Rule (APR) for unsecured creditors, which previously prevented debtors from retaining ownership of their businesses without full payment to unsecured creditors or acceptance of their restructuring plan by the class of creditors. The APR results in many Chapter 11 bankruptcy cases being transferred to Chapter 7 bankruptcy liquidation proceedings. Now, with the APR eliminated for unsecured creditors, debtors that qualify are more likely to be successful in their Chapter 11 restructuring efforts. In addition, because a creditor’s committee is not formed, the debtor’s bankruptcy estate is not burdened by its costs.
The CARES Act and Consumer Bankruptcy
Under a Chapter 13 bankruptcy, individuals generally enter into a payment plan lasting three to five years, depending on their income. The CARES Act which offers relief on payments received that would normally have counted as income, also provides that all payments related to COVID-19 pandemic relief are excluded from the definition of an individual’s disposable income under Chapter 13. Therefore, COVID-19 pandemic relief payments will not be a factor that could extend a three-year plan to a five-year plan. At the same time, this provision of the CARES Act increases the amount of money a Chapter 13 debtor can keep rather than paying it out to unsecured creditors.
Finally, for Chapter 13 bankruptcy payment plans that were filed before the enactment of the CARES Act, a debtor facing financial hardship as a result of the pandemic can apply for an extension of their payment plan from three or five years to seven years. This can substantially reduce their monthly payment obligation.
All bankruptcy-related provisions in the CARES Act are available for one-year from the date it was enacted, expiring on March 27, 2021.
If you are considering bankruptcy, either personally or for your business, you should consult an experienced bankruptcy attorney.
Weaver professionals who provide Restructuring and Turnaround Services and CFO Advisory Services have extensive experience helping clients assess their current financial situation, as well as assisting with the restructuring and bankruptcy process. In addition, our Forensic and Litigation Services practice works with many law firms that are highly experienced in these matters. For more information, contact us.
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