Small Businesses and Consumers will benefit from the changes in the bankruptcy code under the CARES Act

A number of changes in the bankruptcy code will benefit Businesses and consumers under the CARES Act making it easier and more beneficial for some to avoid or reorganize debts. See the SBA website here.

How the changes in the bankruptcy code under the CARES Act will benefit consumers.

The CARES Act amends certain provisions under Chapters 7 and 13 of the U.S. Bankruptcy Code to help consumers who will be or have been financially harmed by the COVID-19 pandemic.

The key changes that consumers should be aware of are as follows:

• Chapter 13 filers with existing confirmed plans who have suffered a “material financial hardship” due to COVID-19 will be allowed to seek plan modifications, including extending their payments for up to seven years after their first plan payment was due, thereby reducing their monthly payment obligation.
• Payments received from the federal government will not be included in the definition of “income” when determining eligibility.
• Payments will not be included in the calculation of “disposable income” for confirmation. This change is designed to permit consumers to receive the full benefit of stimulus payments.

The key changes that small businesses should be aware of are as follows:

The CARES Act amends the Small Business Reorganization Act of 2019 (the “SBRA”), which became effective February 19, 2020, to temporarily increase the debt threshold under the new Subchapter V of Chapter 11 of the Bankruptcy Code from $2,725,625 of debt to $7,500,000.

The SBRA is designed to enable small businesses to reorganize their financial affairs in a more efficient and cost-effective manner while also maintaining more control over their businesses. For small businesses, Chapter 11 reorganization has not been a viable option due to the length and high cost of the process.

Some of the key features of the SBRA are as follows:

• Businesses or individuals with at least 50% of their debts being commercial debt totaling not more than $7.5 million are eligible.
• The bankruptcy process will be quicker with shortened timelines. For example: the deadline for filing a plan is just 90 days shortened from 120 days.
• Filers are not required to pay quarterly U.S. Trustee’s fees (often costly)
• Creditors committees will not be appointed minimizing disputes and distractions.
• A standing trustee will be appointed who will: (i) help to formulate a plan; (ii) report fraud or misconduct, and (iii) monitor plan distributions.
• Unlike a trustee that might be appointed in a Chapter 11 case, a SBRA trustee does not take part in operating business. The trustee’s goal is to help resolve issues with creditors and move the case along.
• Only the small business filing bankruptcy can file a plan of reorganization. This eliminates risk of competing plans filed by creditors.
• A disclosure statement is not required, unless the Court orders otherwise.
• The plan may be confirmed even if all impaired classes vote to reject the plan.
• Payments of administrative expense claims may be stretched out over the term of the plan.
• Equity holders may be able to keep their equity interests in the business without the need to contribute new value because there is no “absolute priority rule”. This means that business owners can keep their interests in the company even if unsecured creditors will not be paid in full under the plan.

See other important updates and resources on our Coronavirus Resource Page here.

For full text of the CARES Act go here.