Changes to the Bankruptcy Code Under the CARES Act

COVID-19 stimulus bill temporarily expands relief for small businesses and individual debtors

On March 27, 2020, the President signed into law the historic Coronavirus Aid, Relief, and Economic Security (CARES) Act, a $2.2 trillion stimulus package designed to mitigate the widespread economic effects of the novel coronavirus (COVID-19). The CARES Act includes temporary modifications to Chapter 7 and Chapter 13 of the United States Bankruptcy Code. However, one of the most remarkable changes is that it has opened the doors to the Bankruptcy Court for many small businesses. Keep reading to learn more.

Small Business Reorganization Act

On February 19, 2020, the Small Business Reorganization Act (SBRA) became effective, which added a new subchapter to the US Bankruptcy Code. Commonly referred to as Subchapter 5, the SBRA was enacted to reduce the cost and expense for small businesses to reorganize under Chapter 11.

To qualify as a debtor under Subchapter 5, the debts of a company must not exceed $2,725,625 (secured and unsecured debts). Section 1113 of the CARES Act increases the debt limit to $7.5 million. The increased debt limit applies to cases filed after the enactment of the CARES Act and is valid for one year after the CARES Act becomes effective. Thereafter, the debt limit will once again be reduced to $2,725,625.

CARES Act on Bankruptcy Code Subchapter 5

Subchapter 5 creates a streamlined process for a debtor to reorganize and confirm a plan. Under Subchapter 5, a debtor must file a Chapter 11 plan within 90 days of filing for bankruptcy. A debtor is not required to file a Disclosure Statement and costs are reduced.

Generally, a plan will be confirmed provided the debtor contributes all disposable income for three to five years to make plan payments. By increasing the debt limit for a debtor to qualify for Subchapter 5, the CARES Act makes a bankruptcy reorganization a viable option for more small businesses.

CARES Act on Chapter 7 and Chapter 13

The CARES Act also provides temporary changes to Chapter 7 and Chapter 13 of the US Bankruptcy Code. The changes are as follows:

  • For purposes of calculating a debtor’s income to determine his or her eligibility for Chapter 7 and Chapter 13, coronavirus-related payments from the federal government are excluded from the analysis.
  • Similarly, coronavirus-related payments are not considered in determining a debtor’s disposable income for a Chapter 13 plan of reorganization.
  • Lastly, the CARES Act allows Chapter 13 debtors who have already confirmed a plan to modify the plan based on a material financial hardship caused by the pandemic, including extending their payments for seven years after their initial plan payment was due.

The changes apply in pending Chapter 7 and Chapter 13 cases and will be applicable for one year from the effective date of the CARES Act.

If you have any questions about this post or any other related matters, please feel free to contact one of our Treasure Coast bankruptcy attorneys at 866-930-6435.

Can I file for bankruptcy even though I can’t leave my house due to COVID-19?

Even though it feels like the entire world is shut down, debt and its collection attempts are not. Whether you were struggling financially before the pandemic, or quarantining has sent you into a state of immediate financial peril, you may need the protections provided by filing bankruptcy.

Our skilled Treasure Coast bankruptcy attorneys can help you with any type of bankruptcy-related matter—and you don’t have to leave your house. We can meet with you over the phone, collect the necessary documents we need via email, and file your case on your behalf.

We understand that no two bankruptcy cases are exactly alike; therefore, our law firm strives to provide individualized attention to every client. We have more than 20 years of experience handling bankruptcy cases, including the most complex. Our goal is to deliver the debt relief you need to move on to the next chapter of your life! We have five office locations along the Treasure Coast: Port St. Lucie, Fort Pierce, Vero Beach, Sebastian and Okeechobee.

Call us today at 866-930-6435.

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