Bankruptcy Changes in the CARES Act

In March 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”).  The CARES Act contains provisions which affect Chapter 7 and 13 bankruptcy debtors, as well as debtors proceeding under the new form of small business bankruptcy created by the Small Business Reorganization Act of 2019 (“SBRA”).  SBRA, which took effect in February 2020, created a new, simpler form of Chapter 11 bankruptcy which is more accessible for small businesses.  The CARES Act modifies both SBRA and the general federal bankruptcy statutes in a few important ways.

CARES Act stimulus payments are not considered income for Chapter 7 and 13 debtors

For individual bankruptcy debtors under Chapter 7 or Chapter 13 that received a stimulus payment, it is important to note that under the CARES Act, such money is not counted as “income” for the purpose of a bankruptcy plan.  Therefore, stimulus checks are not subject to claims by creditors.  However, outside of bankruptcy protection, such money is still subject to being pursued through private debt collection efforts to satisfy outstanding child support or offset bank debts.  This could highlight an advantage for individuals who promptly file for bankruptcy protection after receiving a stimulus check.

Changes to Chapter 11 bankruptcy under SBRA & CARES Act

Chapter 11 bankruptcy can be complicated and expensive; prohibitively so for many small businesses.  The purpose of SBRA is to eliminate some of the complexity and streamline the process so more small businesses can pursue bankruptcy relief through Chapter 11 reorganization.  To achieve this, SBRA created a new Subchapter V under Chapter 11 of the bankruptcy code.  Subchapter V is a simplified version of Chapter 11 bankruptcy which is designed to better suit smaller businesses.

Generally speaking, SBRA simplifies Chapter 11 bankruptcy by relaxing some requirements to confirm a bankruptcy plan and limiting creditors’ control over the confirmation process.  SBRA also tries to give debtors more control over their plan by modifying the absolute priority rule, which precludes a junior creditor from receiving any payment unless all senior creditors are paid in full.  Subject to some exceptions, application of the absolute priority rule often results in debtors losing equity (and ownership) of their business.

Under SBRA, only businesses with less than $2,725,625.00 in debt can proceed under this new subchapter.  The CARES Act, however, temporarily raises the debt ceiling for Subchapter V to $7,500,000.00, making this new form of Chapter 11 bankruptcy accessible to businesses that may otherwise have too much debt to qualify.  The debt ceiling increase is available for all Subchapter V filers for one year from the effective date of the CARES Act, which was signed into law on March 27, 2020.

The CARES Act offers an extension of existing Chapter 13 plans

Chapter 13 bankruptcy plans are intended to be a reorganization for the individual debtor, through which the individual debtor repays creditors, to the extent they are able, with their available disposable income.  Chapter 13 plans may be structured to last between three and five years, during which time the debtor makes monthly payments to their creditors.

The CARES Act allows Chapter 13 debtors to request their plan be extended to a maximum of seven years.  This is a significant benefit to existing Chapter 13 debtors, whose monthly payments would decrease with such an extension.

John Robinson is an attorney in the Litigation Section and Machir Stull is an attorney in the Bankruptcy Section at Cantey Hanger LLP.  They can be reached at 817-877-2831 or 214-978-4122 respectively.