CARES Act - Part 1 - Bankruptcy Issues
The CARES Act Makes Major Changes To The Bankruptcy Code
Helping Small Businesses and Small Business Owners
On March 27, 2020, the President signed into law the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), an estimated $2 trillion bailout package designed to mitigate the economic effects of the COVID-19 pandemic currently sweeping the United States. Media coverage of the CARES Act has rightfully focused on expansion of unemployment insurance, loans and grants available to businesses, and direct payments to individuals, which are unquestionably helpful to struggling individuals and businesses. However, the CARES Act also made several important changes to the Bankruptcy Code that make it easier for impacted small businesses and individuals who need to utilize the bankruptcy process to reorganize their debts.
First, the CARES Act amends the recently passed Small Business Debtor Reorganization Act of 2019 (SBRA) to increase the number of companies and individuals who will qualify for a small business Chapter 11 reorganization under Subchapter V of Chapter 11 of the Bankruptcy Code. Subchapter V, which was created by Congress last year, allows debtors to take advantage of a streamlined process and emerge from bankruptcy much faster and with fewer administrative expenses than in a normal Chapter 11 case. It also eliminated the absolute priority rule for qualifying debtors, which previously required full payment to unsecured creditors in order for debtors to retain equity ownership of their assets. The SBRA originally limited Subchapter V to companies with less than $2,725,625 in noncontingent, liquidated secured and unsecured debts, excluding debts owed to affiliates or insiders. The CARES Act increases this limit from $2,725,625 to $7,500,000 for cases filed within a year of its enactment. The increased debt limit means far more financially troubled small businesses will qualify for bankruptcy under the favorable rules of Subchapter V. It is important to note that small businesses or individuals do not need to demonstrate that they have been affected by the COVID-19 pandemic to qualify for Subchapter V.
There are several important qualifiers to this increased Subchapter V debt limit. Debtors cannot participate in Subchapter V bankruptcies and would be limited to regular Chapter 11 cases if they are members of a group of affiliated debtors that has more than $7,500,000 in noncontingent liquidated secured and unsecured debts, excluding debts owed to affiliates or insiders. Similarly, a debtor cannot file a Subchapter V bankruptcy if they are subject to reporting requirements under section 13 or 15(d) of the Securities Exchange Act of 1934; or if they are an affiliate of an issuer as defined by the Securities Exchange Act of 1934.
The CARES Act makes two additional bankruptcy-related changes that are favorable to small business owners who are considering bankruptcy or have already filed bankruptcy under Chapter 7 of Chapter 13 of the Bankruptcy Code. First, the act also excludes any payments received by the Debtor relating to the national emergency declared by the President with respect to COVID-19 from the calculation of monthly income and from the means test. Such payments will be available for debtors’ use notwithstanding the bankruptcy process. Second, the act gives relief to existing Chapter 13 debtors who are unable to make payments under confirmed plans due to material financial hardship due directly or indirectly to the COVID-19 pandemic. At the request of a debtor, the Court may modify a Chapter 13 plan after notice and a hearing to provide for plan payments that stretch over a 7-year period after the time that the first payment under the original confirmed plan was due. Under existing law, play payments were required to be made within over a period of 5 years. This provision will expire one year after the bill become law.
The CARES Act will serve as an important tool for small businesses and their owners who are experiencing financial issues and need to avail themselves of the bankruptcy process.
If you have any questions about the CARES Act or the bankruptcy process, please contact Benjamin S. Klehr at bklehr@smallherrin.com or at 770-857-4792.
Benjamin S. Klehr is a partner at Small Herrin, LLP. Ben focuses his practice on Bankruptcy and Creditors Rights, Commercial Litigation and Higher Education and Accreditation.
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