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March 30, 2020
COVID – 19: CARES Act and the Bankruptcy Code

On Friday, President Donald Trump signed the “Coronavirus Aid, Relief and Economic Security Act” (CARES Act). While it has been broadly reported that the Act will provide funds to individuals and families that do not exceed certain income limits, what was not widely known were the temporary changes that would be made to the Bankruptcy Code (the Code). Section 1113 of the Act provides several interim amendments to the Code and makes clear that all such changes are temporary and will expire one year after the legislation’s enactment.

First, the Small Business Reorganization Act of 2019 (SBRA) is amended to increase the threshold for filing. When the SBRA was enacted, the threshold for a small business seeking bankruptcy protection was set at $2,725,625 with the overall intention of the SBRA to make Chapter 11 filings less cumbersome and more cost effective for debtors that did not exceed the debt threshold. Clearly believing there will be a significant rise in the number of commercial bankruptcies, Congress nearly tripled that threshold to $7,500,000. The Act makes clear, however, that interim threshold does not apply to any case pending before the Act’s enactment. Next, the Act allows Chapter 13 debtors to amend their previously confirmed plans to extend their payments for up to seven years after the first plan payment under the original confirmed plan was due. Such an amendment is subject to the debtor having experienced or is still experiencing a “material financial hardship due, directly or indirectly, to the coronavirus disease 2019 (COVID) pandemic.” All modifications are still subject to court approval. Lastly, any calculation of income for the purposes of filing a Chapter 7 or Chapter 13 case shall exclude any payments “made under Federal law relating to the national emergency declared by the President … with respect to the coronavirus disease 2019.” Moreover, such payments under the Act shall not be considered disposable income for purposes of confirming a Chapter 13 Plan.

As stated above, the amendments will sunset after one year. Only time will tell the impact of the amendments on current and future bankruptcy filings and whether such amendments will be extended or become permanent provisions of the Code.

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Michael S. Wrona
Bankruptcy, Creditors' Rights and Restructuring