COVID-19 Stimulus Bill Temporarily Amends the Bankruptcy Code to Expand Relief for Small Business and Individual Debtors

On March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act or the “CARES Act.”The legislation includes a historic $2 trillion aid package intended to stabilize the U.S. economy and provide disaster relief aid to American citizens and businesses impacted by the COVID-19 pandemic. The emergency aid package, which is by far the largest in American history, contains many provisions focused on providing relief. Among these are certain temporary amendments to Title 11 of the United States Code (the “Bankruptcy Code”). Section 1113 of Title I of the CARES Act – the Keeping American Workers Paid and Employed Act – contains amendments to the Bankruptcy Code affecting both small businesses and individuals.

Small Business Amendments.The CARES Act temporarily amends the recently enacted Small Business Reorganization Act¹(the “SBRA”) to increase the debt threshold for small businesses eligible to file under the SBRA from $2,725,625 to $7,500,000. This temporary eligibility increase sunsets after one year, after which the debt threshold returns to $2,725,625 (subject to any other dollar adjustments imposed by Congress).The SBRA is intended to address many issues that make it difficult for small businesses to otherwise take advantage of the Chapter 11 process, including simplifying the Chapter 11 plan process, allowing small business debtors to retain equity under certain circumstances, shortening certain deadlines in the case, and eliminating committees of unsecured creditors in an effort to reduce costs. The SBRA itself is only a few months old, and given the lack of precedent interpreting the SBRA, courts may employ broad discretion to fashion equitable relief to small business debtors impacted by COVID-19.

Individual Amendments. With respect to individual debtors, the CARES Act temporarily amends certain definitions in Chapter 7 and Chapter 13 cases to exclude COVID-19-related payments from the federal government from being treated as part of a debtor’s income. For example, the amendments exclude COVID-19 related payments both from the definition of “current monthly income” for purposes of determining a debtor’s eligibility for Chapter 7 or Chapter 13 bankruptcy and from the calculation of “disposable income” for purposes of Chapter 13 plan confirmation.Chapter 13 debtors are also now permitted to seek modifications of their confirmed Chapter 13 plans if “the debtor is experiencing or has experienced a material financial hardship due, directly or indirectly, to the coronavirus disease 2019 (COVID-19) pandemic.” The modification can be approved after notice and a hearing.Chapter 13 debtors experiencing such hardships are also permitted to extend their plan payments for up to seven years after the time that the first payment under their original confirmed plan was due. These provisions affecting individual debtors also sunset after one year.

Notes

1. President Trump signed the Small Business Reorganization Act, which is contained in Subchapter V of the Bankruptcy Code, into law in August 2019.