CARES Act: Revised Sections of the Bankruptcy Code to Mitigate Effects of COVID-19 | Practical Law

CARES Act: Revised Sections of the Bankruptcy Code to Mitigate Effects of COVID-19 | Practical Law

On March 27, 2020, Congress passed and President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) (Pub. L. No. 116-136 (H.R. 748)), which is the third major piece of legislation enacted in response to the COVID-19 outbreak in the US. The CARES Act is intended to provide economic relief to individuals and businesses facing economic hardship due to the outbreak. As part of the relief, the CARES Act temporarily amends the Bankruptcy Code by raising the debt threshold for small businesses under the Small Business Reorganization Act (SBRA), and modifying certain provisions of Chapters 7 and 13.

CARES Act: Revised Sections of the Bankruptcy Code to Mitigate Effects of COVID-19

Practical Law Legal Update w-024-7141 (Approx. 5 pages)

CARES Act: Revised Sections of the Bankruptcy Code to Mitigate Effects of COVID-19

by Practical Law Bankruptcy & Restructuring
Published on 01 Apr 2020 • USA (National/Federal)
On March 27, 2020, Congress passed and President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) (Pub. L. No. 116-136 (H.R. 748)), which is the third major piece of legislation enacted in response to the COVID-19 outbreak in the US. The CARES Act is intended to provide economic relief to individuals and businesses facing economic hardship due to the outbreak. As part of the relief, the CARES Act temporarily amends the Bankruptcy Code by raising the debt threshold for small businesses under the Small Business Reorganization Act (SBRA), and modifying certain provisions of Chapters 7 and 13.
On March 27, 2020, the Congress passed and President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), effective immediately. The CARES Act provides a $2 trillion economic stimulus for US businesses and individuals in response to the financial distress caused by the 2019 novel coronavirus disease (COVID-19) pandemic. Among other things, the CARES Act temporarily amends the Bankruptcy Code to expand access for small businesses and individuals with business debt by raising the debt threshold for small businesses under the Small Business Reorganization Act (SBRA), and modifying certain provisions of Chapters 7 and 13.

Key Bankruptcy Code Amendments of the CARES Act

Section 1113 of the 880 page CARES Act covers changes to the Bankruptcy Code, which are in effect for one year from enactment of the CARES Act. These changes include:
  • Increasing the maximum debt threshold for a debtor to qualify under Subchapter V of Chapter 11 under the SBRA (Subchapter V). Section 1113 of the CARES Act revises the definition of debtor in section 1182 of Subchapter V of the Bankruptcy Code by increasing the maximum debt threshold for a debtor to qualify as a Subchapter V debtor from $2,725,625 to $7,500,000. Therefore, for a period of one year from the effective date of the CARES Act, the maximum amount of noncontingent, liquidated, secured and unsecured non-insider debt that a debtor may have to file a Subchapter V case may be $7,500,000. For more information on the SBRA, see Practice Note, Small Business Bankruptcy Under The SBRA: Overview.
  • Adding section 1329(d) to the Bankruptcy Code to permit Chapter 13 debtors to modify a confirmed plan based on a showing of material financial hardship caused by the COVID-19 pandemic, including extending plan payments for seven years after the initial plan payment was due. For more information on Chapter 13, see Chapter 13 Bankruptcy Toolkit.
  • Amending the definition of current monthly income in section 101(10A)(B)(ii) of the Bankruptcy Code to exclude COVID-19 related payments from the federal government in determining means test eligibility for Chapters 7 and 13 debtors. For more information on Chapter 7, see Individual Chapter 7 Bankruptcy Toolkit.
  • Clarifying that the disposable income a Chapter 13 debtor commits to a plan under section 1325(b)(2) of the Bankruptcy Code excludes COVID-19 related payments from the federal government.

Student Loan Modifications of the CARES Act

Although not Bankruptcy Code amendments, the CARES Act provides the following relief for federal student loan borrowers:
  • Student Loan Payments Suspended. Section 3513 of the CARES Act provides that all federally subsidized student loan payments and interest accruing on the loans must be suspended through September 30, 2020.
  • Notice to Resume Payments. Beginning August 1, 2020, the Department of Education must notify borrowers of the date that payment obligations resume.
  • Credit Reporting. Payments will be reported to credit reporting agencies as if the student loan borrower had made current payments.
  • No Collection or Garnishment. Collection and garnishment of student loan payments from social security and tax refunds ceases until September 30, 2020.
  • Credit for Suspended Payments. The six-month suspended payment period counts toward the 120 required payments under the Public Service Loan Forgiveness Program.
This legislative change affects an estimated nine million student loan borrowers. The six-month suspension of student loans in the CARES Act may help Chapter 13 debtors who typically do not make student loan payments while in Chapter 13, but interest continues to accrue. For a Chapter 7 debtor, the moratorium may further facilitate the debtor's fresh start. The CARES Act suspension only applies to federally subsidized student loans. It remains to be seen whether state-funded student loans will follow with a similar moratorium.

Practical Considerations

For a debtor to qualify under the SBRA, at least 50 percent of debt must be business related. The CARES Act expanded debt limits for Subchapter V debtors allows many more individuals and businesses to qualify for expedited bankruptcy relief under the SBRA.
For individuals, the stimulus package provided certain relief, including:
  • Employer tax credits to keep employees on payroll and covered by health insurance.
  • Expanded and increased unemployment benefits and eligibility.
  • Individual payments of $1,200 to all taxpayers with income less than $75,000.
  • Up to one-year forbearance for federally backed mortgage loans, and six-month forbearance for federal student loans.
With the expanded bankruptcy access and relief for individuals and businesses, the stimulus legislation may provide needed assistance in restoring financial health due to the unprecedented crisis.