By Attorney Tracy L. Updike
The Coronavirus Aid, Relief, and Economic Security Act (Pub.L. 116-136), also known as the CARES Act, was signed into law on March 27, 2020 to address the economic effects of the coronavirus pandemic. While most publicized for its relief to small businesses by way of small business loans under the Paycheck Protection Program (or PPP), the CARES Act actually also provides many forms of relief to individuals.
There have been stimulus checks and expanded unemployment compensation, student loan forbearance and more relaxed retirement withdrawal standards. But one aspect of the CARES Act that is not as publicized is its impact on the Bankruptcy Code (11 U.S.C. §101 et seq.). The CARES Act has had the most substantive effect on the Bankruptcy Code since 2005’s Bankruptcy Abuse Prevention and Consumer Protection Act (Pub.L. 109-8). Discussion of these changes is the purpose of this article.
Section 1113 of the CARES Act addresses bankruptcy. It begins with a revision to the Small Business Reorganization Act of 2019 (“SBRA”) (codified at 11 U.S.C. §1181 et seq.), which created a new scheme under which small businesses could reorganize. The SBRA had the purpose of striking a balance between liquidation and reorganization under Chapter 11 for small business by lowering costs and streamlining the plan confirmation process. The CARES Act modified the SBRA by essentially broadening the scope of the SBRA to reach larger small businesses. In particular, the original SBRA limits debts for a small business to $2 million. Under the CARES Act a business can qualify as a “small business” with debts up to $7.5 million, allowing many more companies to gain the benefit of the streamlined system. This extension, however, will end and revert back to the original amounts one year after the signing of the CARES Act, or after March 26, 2021.
More important to individuals facing financial impacts from the coronavirus or COVID-19, are the changes made to consumer bankruptcies. For individuals in the process of filing bankruptcy or where bankruptcy may be an unfortunate result of the fallout from the pandemic, the CARES Act made clear that the calculation of “currently monthly income” and “disposable income” shall not include coronavirus-related payments made under federal law. This clearly exempts any stimulus funds from the calculations, and there is an argument that it would also exclude any of the extended benefits under unemployment compensation. This means that debtors are not required to pay such funds to their unsecured creditors. This would also apply to current debtors who would propose a modification to their confirmed plan based upon a change of circumstance and offer a new income and expense schedules.
By far, however, the biggest change relates to possible extensions of already approved plans. The CARES Act created 11 U.S.C. §1329(d), which will allow modification of plans that were confirmed before the enactment of the CARES Act (March 27, 2020) upon the request of a debtor who “is experiencing or has experienced a material financial hardship due, directly or indirectly, to the coronavirus disease 2019 (COVID-19) pandemic” for up to 7 years after the time the first payment of the plan was due, following notice and a hearing. Essentially, it allows confirmed plans to be stretched from the 5 year maximum to 7 years. However, like the changes to the SBRA, this opportunity will end and revert back to the maximum 5 year plan one year after the signing of the CARES Act, or after March 26, 2021.
You may be asking “does this apply to me” and “will this help me”? The first step is to examine what “material financial hardship due, directly or indirectly, to the coronavirus disease pandemic” means. This standard is not defined in the CARES Act, and trustee by trustee, and court by court, may make their own case by case decisions on the meaning. However, the CARES Act gives some guidance in its sections on unemployment, where it notes such individuals in that circumstance include those diagnosed with COVID-19 or experiencing symptoms and seeking diagnosis, those with a household member who has been diagnosed, those unable to work because of primary caregiving responsibility for a child unable to attend a school or facility closed due to the pandemic, a person unable to reach work due to a quarantine, a person whose place of employment is closed due to a public health emergency, and an individual who has had to quit as a result of COVID-19.
The next step is to personally determine if you are or will have difficulty making your payments under your plan. If so, you should talk to your attorney about the possibility of availing yourself of an extension up to the 7 years before the chance goes away on March 26, 2021. You do not need to extend it for the entire 7 years if you do not want to, or at all, and you can wait 6 months before making the decision. Just remember the opportunity will expire.