CARES Act 2020

Short-Term Relief to Individual and Small Business Debtors Under Chapter 7, Chapter 11, and Chapter 13 of the Bankruptcy Code

What is the CARES Act?

On March 27, 2020 Congress enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) in direct response to the COVID-19 pandemic. Among other bankruptcy-related relief measures, the Act provides short-term relief to individual debtors under Chapter 7 and Chapter 13 of the Bankruptcy Code. For small businesses and individuals in business, the CARES Act provides short-term relief for debtors under Chapter 11 and Chapter 11, Subchapter V of the Bankruptcy Code. At present, relief measures will expire on March 27, 2021.

What impact will your one-time economic stimulus payment have in regards to filing for Chapter 7 or Chapter 13 bankruptcy?

The CARES Act prevents government-issued economic stimulus payments from affecting a debtor’s eligibility to file for Chapter 7 or Chapter 13 bankruptcy. Under Sec. 1113(b)(1)(B) of the Act, “payments made under Federal Law relating to the national emergency declared by the President under the National Emergencies Act (50 U.S.C. § 1601 et seq.) with respect to the coronavirus disease 2019 (COVID-19)” are excluded from the statutory definitions of current monthly income and disposable income. Individual debtors filing for Chapter 7 bankruptcy will not have to include economic stimulus payments when determining their filing eligibility. In Chapter 13 bankruptcy filings, the economic stimulus payments will not factor into determining a debtor’s disposable income.

How does the CARES Act impact Chapter 13 debtors operating under a confirmed plan?

For qualifying Chapter 13 debtors operating under a confirmed plan as of March 27, 2020, the CARES Act allows debtors to extend their plan for up to seven (7) years from when the first payment was due under the confirmed plan. To qualify for the plan extension, the debtor must have suffered “material financial hardship” as a direct or indirect result of COVID-19. If this qualification is met, the plan extension must be approved after notice and a hearing before the bankruptcy court. Given the scope of the COVID-19 coronavirus pandemic, most Chapter 13 debtors would qualify for the plan extension.

How does the CARES Act impact small businesses and individuals in business under Chapter 11 and Chapter 11, Subchapter V of the Bankruptcy Code?

The Bankruptcy Code provides special rules and procedure for “small business debtors” as defined in 11 U.S.C. § 101(51D). The CARES Act raises the debt threshold for small businesses and individuals in business, allowing them to take advantage of the newly-enacted Small Business Reorganization Act (SBRA), found within Chapter 11, Subchapter V of the Bankruptcy Code. SBRA was created to streamline small business bankruptcies, reduce legal expenses in such cases, establish an expedited schedule for the debtor to reorganize, and set forth more debtor-friendly plan requirements and confirmation standards.

Raising the debt threshold from $2,725,625 to $7,500,000 (excluding insider and affiliate debt) will allow many small businesses to qualify for Chapter 11 bankruptcy. This only applies to cases filed up to March 27, 2021, at which time the debt threshold will return to $2.7 million. In addition, the CARES Act provides that no affiliate of a public company is eligible for Chapter 11 bankruptcy pursuant to SBRA.

Are you a potential client considering filing for bankruptcy during the COVID-19 pandemic?

The COVID-19 pandemic has changed many aspects of all of our daily lives. During these difficult times, Wolff & Orenstein, LLC remains committed to assisting individuals and businesses facing financial hardship. Our firm has implemented remote operations and stands ready to provide experienced insight that you can trust whether you are weighing the possibility of bankruptcy or considering your options.

Please call us at 301-250-7232 or contact us online to schedule an initial consultation by phone or Zoom video conference. We are here to help.