The CARES Act recently passed by Congress and signed by President Trump has provisions that extend bankruptcy relief to individuals and small businesses.
The Act directly affects Chapter 13 debtors in two ways. The first is for new filers. The Act provides that no payments related to Covid-19, such as the lump sum payments being sent to individuals and families, will be counted as part of an individual’s Current Monthly Income (“CMI”). The CMI calculation is key to both Chapter 7 and Chapter 13. At the outset, the calculation of CMI determines whether a person can file Chapter 7 or must file under Chapter 13. And once in Chapter 13, CMI plays a key role in calculating the debtor’s monthly payment under the Plan. By excluding Covid-19 relief payments from the calculation of CMI, the Act assures that debtors who must file bankruptcy do so without being penalized for accepting the relief payments.
Secondly, the Act allows those who are already in Chapter 13 plans to extend their plans up to seven years from the date of filing. The maximum length of time is ordinarily five years (60 months). This modification allows debtors to potentially amend their plans, reduce monthly payments and stretch the plan out two more years.
Small Business Reorganization Act and Chapter 11
In 2019, before coronavirus hit, Congress responded to criticism that Chapter 11 was too burdensome for small businesses; they couldn’t qualify for Chapter 12 or 13; and they wanted to remain open rather than liquidate under Chapter 7. Under the existing Bankruptcy Code, small businesses had no options. To rectify that, Congress enacted the Small Business Reorganization Act (“SBRA”) as a sub-chapter of Chapter 11.
The SBRA made these modifications to Chapter 11:
• Appointment of a Trustee. As with Chapter 12 for farmers and fishermen, the Act provides that a standing trustee will serve as the trustee for the small business’s bankruptcy estate. The trustee facilitates the small business debtor’s reorganization and monitors the debtor’s consummation of its plan of reorganization. This removes the huge administrative burden that Chapter 11 imposes on debtors.
• Streamlining the Reorganization Process. The act streamlines small business reorganizations and removes procedural burdens and costs associated with typical corporate reorganizations. Only the debtor can propose a plan of reorganization, as in Chapter 13. Small business debtors do not have to obtain approval of a separate disclosure statement or solicit votes to confirm a plan. Unless the court orders otherwise, there are no unsecured creditors’ committees. The act further requires that the court hold a status conference within 60 days of the petition date and that the debtor file its plan within 90 days of the petition date. This strikes a balance between the Chapter 13 requirement of filing a plan within 14 days of filing the petition, and Chapter 11, which allows up to 120 days to file a plan.
• Elimination of the New Value Rule. Under Chapter 11, if equity holders want to retain their position, the plan must pay creditors in full. Now, for plan confirmation, the Act instead only requires that the plan does not discriminate unfairly, is fair and equitable, and, similar to Chapter 13, provides that all of the debtor’s projected disposable income will be applied to payments under the plan or the value of property to be distributed under the plan is not less than the projected disposable income of the debtor.
• Modification of Certain Residential Mortgages. In Chapter 13, residential mortgages cannot be modified. The Act allows a small business debtor to modify a mortgage secured by a residence if the underlying loan was not used to acquire the residence and was primarily used in connection with the small business of the debtor. Otherwise, secured lenders have the same protections as in other Chapter 11 cases.
• Delayed Payment of Administrative Expense Claims. The act removes the requirement that the debtor pay administrative expense claims – including those claims incurred by the debtor for post-petition goods and services – on the effective date of the plan. Unlike a typical Chapter 11, a small business debtor may now stretch payment of administrative expense claims out over the term of the plan.
• Discharge Limitations. The court must grant the debtor a discharge after completion of all payments due within the first three years of the plan, or such longer period as the court may fix (not to exceed five years). The discharge relieves the debtor of personal liability for all debts provided under the plan except any debt: (1) on which the last payment is due after the first three years of the plan, or such other time as fixed by the court (not to exceed five years); or (2) that is otherwise non-dischargeable. All exceptions to discharge in Section 523(a) of the Bankruptcy Code apply to the small business debtor. This is a departure from a typical corporate Chapter 11 which has limited exceptions to discharge set forth in section 1141.
The SBRA became effective barely a month ago, on February 20, 2020. Initially it was limited to debtors with under $2,725,625 in debt. However the CARES Act has raised that limitation temporarily to $7,500,000.
Finally the CARES Act helps student loan borrowers by authorizing the Secretary of Education to suspend loan repayments until September 20, 2020; and provides that interest will not accrue during this time. Collection of student loans is also suspended.