CARES Act Impact on Bankruptcy Laws
Updated: Apr 17
The "Coronavirus Aid, Relief, and Economic Security Act” (CARES Act) is designed to provide many forms of relief to American businesses and individuals struggling with temporary business closures and layoffs due to the coronavirus outbreak. The CARES Act was signed into law on March 27, 2020 and provides specific amendments to the US Bankruptcy Code for consumer bankruptcies under Chapter 7 and 13, as well as businesses under Chapter 11. This blog post summarizes the changes and highlights how the CARES Act benefits businesses and individuals who either have filed or may need to file for bankruptcy in the near future.
How Does the CARES Act Impact Chapter 7 Liquidation Bankruptcy?
The CARES Act modified the Chapter 7 means test to exclude payments received under the CARES Act from the monthly income calculation. This provision benefits individuals who may qualify for a Chapter 7 bankruptcy.
The means test under Chapter 7 is an anti-abuse measure designed to prevent individuals who may be able to pay back more unsecured creditors using a payment plan under Chapter 13 from liquidating under Chapter 7. If a debtor's income is too high, they may not qualify for a Chapter 7 bankruptcy filing.
The means test was incorporated in the bankruptcy code in 2005 and is not new under the CARES Act. The CARES Act updates the Bankruptcy Code to prevent any income or payments received under the CARES Act from limiting individuals' bankruptcy option to a Chapter 13 filing if they otherwise would have qualified for a Chapter 7 filing.
How Does the CARES Act Impact Chapter 13 Consumer Bankruptcy?
The CARES Act updates a couple provisions in the Bankruptcy Code specifically related to Chapter 13 filings. The first update relates to confirmation of a Chapter 13 plan. The second relates to modifying and extending an existing plan that may be at risk of non-completion, which would prevent a debt discharge at the end of five years.
The first benefit is that all payments made to individuals under the CARES Act are not included in the monthly disposable income amount. This is used to calculate the amount of disposable income, after reasonable monthly expenses, that may be used to pay unsecured creditors as part of the Chapter 13 plan. The exclusion of CARES Act payments will provide debtors with additional funds after filing for bankruptcy, including increased unemployment benefits under the CARES Act paid by the federal government both above the standard amount and for an extended duration. Additional payments may include the tax rebate of $1,200 of $2,400, including the child payments of $500 per child.
The second benefit is an extension of plan completion time for debtors who may not be able to complete their plan in the normal five year period. The CARES Act provides that a debtor may modify a previously confirmed plan if the debtor experiences financial hardship directly or indirectly related to the coronavirus or COVID-19 outbreak. A plan may also be modified if it is confirmed after the CARES Act was passed into law. Now, in addition to providing an ability to modify a plan as a result of the economic damage caused by the coronavirus, a plan may be extended to seven years instead of five. For an existing plan, the start of the seven year period is measured from the date the first payment was made under the original plan. This will help to reduce pressure on debtors who find themselves unable to complete a plan due to a job loss or reduction in wages by providing more time to complete the plan.
How Does the CARES Act Impact Chapter 11 Business Reorganization Bankruptcy?
For small business owners who are facing financial hardship resulting from shelter in place rules and the temporary loss of customers, the recently updated small business reorganization rules under Chapter 11 of the Bankruptcy Code may provide an option to reorganize without the delay of a traditional Chapter 11 filing. The CARES Act updates the new law to increase the amount of debt that a business may have and still file as a small business reorganization.
Prior to the CARES Act, the threshold debt amount was limited to of $2,725,625 or less. The CARES Act increases the debt limit to $7,500,000. This important change will exist temporarily for one year from the enactment of this legislation, March 27, 2020, and will expire after this one year period unless extended by Congress.
The small business reorganization provision generally provides more relaxed plan confirmation rules for the business reorganization and is intended to streamline the reorganization process. Similar to Chapter 13, a small business reorganization must provide a plan to use disposable income to pay creditors over a period of 3 to 5 years.
2021 Legislative Updates for Bankruptcy Laws
The above provisions that terminated March 27, 2021 may have been extended by the COVID-19 Bankruptcy Relief Extension Act of 2021 signed into law on March 27, 2021. The first key extension relates to the Chapter 11 small business debt filing limitation of $2,725,625. This limitation was increased to $7,500,000 under the original CARES Act legislation, but only for one year. This limit was further extended to March 27, 2022. This additional year may assistance businesses that are still under financial strain and cannot receive additional PPP funding.
Another key provision of the original CARES Act that was extended is the impact of CARES Act payments on Chapter 13 plans. Now if a plan was confirmed prior to March 27, 2021, that plan may be modified and extended up to seven years if financial hardship results in a need to modify the plan. In addition, COVID related payments are excluded from current monthly income.
Contact Michigan Bankruptcy Attorney Andrew Steiger for More Information
If you have questions about any of these updates, including in conjunction with the CARES Act tax or business relief provisions, contact attorney Andrew Steiger at Steiger Tax Law for a free consultation to discuss your situation and what legal options are available. Contact him at (248) 259-6367 or by email at Andrew.Steiger@SteigerTaxLaw.com.