CARES Act and the Bankruptcy Code

by Danielle Kaiser and Brent W. Houston 

The Coronavirus Aid, Relief and Economic Security Act (CARES Act), enacted on March 27, 2020, provides emergency assistance to individuals, families, and businesses affected by the coronavirus pandemic.  The CARES Act also made changes to the United States Bankruptcy Code, including changes to the Small Business Reorganization Act (SBRA).  The SBRA, enacted in February of this year, is a new Subchapter under Chapter 11 of the Bankruptcy Code.  The SBRA is intended to give qualifying businesses a more expedient, less expensive route to filing for Chapter 11 bankruptcy.

The CARES Act increased the debt ceiling for a business to qualify under the SBRA from $2,725,625 to $7.5 million, significantly increasing the number of business eligible for protection under the SBRA.  This debt ceiling increase applies only to cases filed after the CARES Act became effective on March 27, 2020 and will expire when the CARES Act sunsets on March 27, 2021, unless extended.

The SBRA also relaxes plan confirmation requirements under Chapter 11.  Generally, a plan will be approved if it provides that all disposable income of the business will be applied to plan payments for a period between 3 and 5 years.  This is in contrast to normal Chapter 11 requirements that take months to establish and are expensive to provide.

The CARES Act made changes to Chapter 7 and Chapter 13 procedures as well.  First, for purposes of calculating income for the means test in a Chapter 7 proceeding, the CARES Act amends the definition of current monthly income to exclude stimulus payments made to the debtor as part of the CARES Act.  Second, for purposes of calculating what amount may be put toward Chapter 13 plan payments, payments to the debtor as part of the CARES ACT are excluded from disposable income.  Lastly, Chapter 13 debtors with plans that were confirmed prior to the enactment of the CARES Act may modify their plans to extend over 7 years, instead of 5, if the debtor can show that he or she was affected by the pandemic.  The Chapter 7 and Chapter 13 changes will also sunset on March 27, 2021, unless extended.

©2020 Montgomery, Little & Soran, P.C. has prepared this advisory to provide general information on recent legal developments that may be of interest. This advisory does not provide legal advice for any specific situation and does not create an attorney-client relationship between any reader and the firm.