As the coronavirus (“COVID-19”) pandemic continues to cause disruption to our everyday lives, Congress recently passed the CARES Act, which has altered, at least for one year from the effective date of the CARES Act, some aspects of Chapter 7, 13, and 11 bankruptcies.
Chapter 7 & 13
For those individuals who have already filed for Chapter 7 or Chapter 13 bankruptcy protection, the CARES Act excludes payments from COVID-19 federal government assistance programs from the definition of Current Monthly Income. This means, that for purposes of determining eligibility to file under Chapter 7, any payments a debtor receives from federal COVID-19 payment programs is not included in the calculation of the six-month monthly income average. For those Debtors on the verge of eligibility, this exclusion can make a big difference.
For Chapter 13 filers, the CARES Act makes a couple important alterations that expire in about a year. First, like Chapter 7, federal COVID-19 assistance payments are excluded from the calculation of disposable monthly income. This will generally result in a reduction in the amount of a required monthly plan payment. Second, for those filers who have a confirmed Chapter 13 Plan, the CARES Act allows them to amend their plan, after notice and court acceptance, if COVID-19 has caused a material hardship. Finally, the CARES Act allows for plan modifications that extend plan payments past 60 months from the date of original filing to as much as 84 months. These measures are generally designed to assist debtors with successfully completing their plans in the face of unforeseen financial hardships brough on by COVID-19.
In February 2020, the Small Business Reorganization Act (“SBRA”) took effect and generally created a new small business subchapter to Chapter 11 bankruptcies. The SBRA is designed to allow a small business, defined as a business with $2,725,625 or less in unsecured debts, to obtain the benefits of a Chapter 11 reorganization without the excessive cost and time involved in a traditional Chapter 11. Generally, the SBRA accomplishes this goal by:
- Allowing only the debtor to propose a reorganization plan within 90 days of filing;
- Allows confirmation of a plan without the approval of a separate disclosure statement or solicitation of votes;
- There is no official committee of unsecured creditors;
- A district standing trustee is appointed to assist in shepherding the reorganization along the process, similar to a Chapter 13 trustee; and
- Equity holders do not need to provide “new value” to retain their ownership interest and can pay creditors over a longer period of time.
These changes made Chapter 11 more accessible to small businesses. The CARES Act temporarily raised the unsecured debt limit to $7,500,000. Time will tell if these alterations to Chapter 11 will actually make it a useful tool to reorganize a small business or if Chapter 7 liquidation will remain the primary tool for small business owners to get out from under small business debt.