H.R. Bill 748, referred to as the Coronavirus Aid, Relief, and Economic Security Act or the “CARES Act,” contains special provisions to help people who are currently in bankruptcy, or who file for bankruptcy, during this national emergency. These proposed changes would have a significant impact on the ability of debtors to either obtain a Chapter 7 discharge, to sustain the viability of a Chapter 13 repayment plan, or to qualify as a debtor under the Chapter 11 Small Business Reorganization Act.
Chapter 11 – Small Business Reorganization Act of 2019 Changes
Prior to the enactment of the Coronavirus Aid, Relief, and Economic Security Act, in order to qualify as a debtor under the Small Business Reorganization Act of 2019, the debtor could not have more than $2,725,625 in liabilities. If the debtor had more than $2,725,625 in liabilities, it would have to file under the regular Chapter 11 provisions. The CARES act would increase this limit to $7,500,000, which almost triples the amount of debt a Small Business Reorganization Act of debtor would be able to have. These SBRA increased debt limits would only apply to SBRA cases commenced after the enactment of the CARES Act. In theory, this would allow more small business debtors to file under the Small Business Reorganization Act, and also would encourage the SBRA’s use by both practitioners and debtors alike.
Chapter 7 and Chapter 13 – Changes to the Definition of Income
In Chapter 7, the Means Test is used to determine whether or not a presumption of abuse of bankruptcy process exists, and was enacted to encourage more debtors to file under Chapter 13. The Means Test looks at “current monthly income” over the 6 months prior to the filing of the bankruptcy case, and compares the result to the median income for the household size in the jurisdiction in which the case is filed. If the current monthly income is higher than the median, the debtor is presumed to abuse the bankruptcy process if the debtor files under Chapter 7.
As part of the CARES act, many Americans would receive stimulus checks in amounts typically between $1,200.00 and $2,400.00. Without special treatment, these checks would be considered current monthly income under several bankruptcy code sections, including the Means Test provisions. The Coronavirus Aid, Relief, and Economic Security Act would address this inequity by providing that these checks are excluded from the definition of “current monthly income,” which means that these funds would not be factored into the calculations of whether a debtor can file under Chapter 7.
Current Monthly Income also affects the dollar amount of Chapter 13 repayment plan payments. Chapter 13 debtors must use all of their “disposable income” to pay back their creditors over a Chapter 13 payment plan. Under the proposed CARES act, disposable income in Chapter 13 would not include the stimulus checks sent to Americans to assist during the coronavirus disaster, which means that debtors would be able to use these fund for the welfare of their families, and not to put in the pockets of creditors.
These change to Current Monthly Income would apply to cases commenced before, on or after the date of the enactment of the CARES Act, which means that if a debtor had already filed under Chapter 7, for example, and receives a stimulus check after filing, the Chapter 7 trustee would be unable to take those funds to distribute to creditors.
Chapter 13 – Plan Duration
Generally, a Chapter 13 repayment plan cannot be longer than 5 years. However, the Coronavirus Aid, Relief, and Economic Security Act would allow debtors to extend the duration of already confirmed plans to 7 years. This would allow Debtors in confirmed Chapter 13 plans a high degree of flexibility in restructuring plan payments in lieu of the COVID-19 disaster. In order to modify a plan under the CARES Act, the debtor would have to demonstrate that “the debtor is experiencing or has experienced a material financial hardship due, directly or indirectly, to the coronavirus disease 2019 (COVID–19) pandemic,” and the Court would be able approve the modified plan after notice and a hearing.
CARES Act Duration
As proposed, the Coronavirus Aid, Relief, and Economic Security Act would be effective for a period of 1 year after its enactment.
Under the proposed Coronavirus Aid, Relief, and Economic Security Act, Debtors who are looking to file for bankruptcy, or who have already filed for bankruptcy, would be able to use stimulus checks to care for their families, and not have to worry that those funds will be paid into the pockets of creditors. Chapter 13 debtors in confirmed plans would be able to extend their plans to 7 years, which would provide a high degree of flexibility to ensure that existing Chapter 13 plans would succeed. If you have questions about bankruptcy, please call Steiner Law Group at (410) 670-7060.