On March 27, President Joseph Biden signed the COVID-19 Relief Extension Act into law. The Act extends for another full year the provisions of the Coronavirus Aid, Relief and Economic Security Act (CARES Act) that temporarily modified the Bankruptcy Code and the Small Business Reorganization Act of 2019 (SBRA), or subchapter V of chapter 11. The SBRA was enacted to make chapter 11 more accessible and affordable for small businesses.
The newly signed law extends the CARES Act by amending the language in the two sunset provisions of the CARES Act, allowing the bankruptcy-related modifications to be in effect for two years instead of one.[1] As a result, financially distressed small businesses and individuals will be able to enjoy greater access to bankruptcy relief until March 27, 2022. This article provides a summary of the extended provisions.
Increased Debt Limit for Debtor Eligibility under the SBRA
One of the most important changes made by the CARES Act was increasing the aggregate debt limit for debtor eligibility under the SBRA.[2] Originally, the SBRA incorporated § 101(51D) of the Bankruptcy Code to define a “small business debtor,” which capped the debt limit of an eligible debtor at aggregate noncontingent, liquidated, secured and unsecured debt of $2,625,625. The CARES Act redefined a “debtor” under the SBRA and temporarily raised the debt limit to $7,500,000 until March 27, 2021.[3] As a result, it increased access to the SBRA for many small businesses and individuals impacted by the pandemic that were previously ineligible due to the lower debt limit. The newly signed COVID-19 Relief Extension Act extends the temporary increased debt limit to March 27, 2022.[4]
The implications of increased debtor eligibility are significant. It means that more businesses in financial distress will now be able to seek relief and benefit from the full benefits of the SBRA. The SBRA contains many provisions that make traditional chapter 11 more affordable and efficient for small businesses. Some of these major provisions include: automatic appointment of a trustee who will coexist with the debtor, helping the debtor/debtor-in-possession (DIP) make payments on time and develop a reorganization plan;[5]absence of a creditors’ committee unless otherwise appointed for cause, cutting down on administrative costs;[6]debtor’s exclusive power to file a plan;[7]no need to file a separate disclosure statement;[8] and no need to pay administrative expenses in full on the effective date of the plan.[9]
Excluding COVID-19-Related Benefits from a Debtor’s Income
Exclusion from Debtor’s “Current Monthly Income” Under § 101(10A) of the Bankruptcy Code
Another important change brought under the CARES Act was excluding COVID-19-related relief payments[10] from a debtor's “current monthly income.”[11] This has significant implications for both chapter 7 and chapter 13 debtors.
Consumer debtors seeking to file a chapter 7 must complete the “means test.”[12] If current monthly income exceeds a certain threshold, chapter 7 relief may be unavailable and chapter 13 may be the only option. COVID-19-related payments artificially inflate a debtor’s income. Excluding those payments will generate a more realistic picture of the debtor’s income consistent with the purpose of chapter 7 — providing a fresh start to honest but unfortunate debtors.
Excluding COVID-19-related payments can also have a significant impact on chapter 13 debtors. A debtor’s current monthly income is an important factor in determining the length of the plan in chapter 13 plan confirmation. Therefore, excluding COVID-19-related payments ensures that the relief payments do not result in lengthening the term of the chapter 13 plans from three years to five years.[13]
Exclusion from Debtor’s “Disposable Income” Under § 1325 of the Bankruptcy Code
The CARES Act excludes COVID-19-related payments from a debtor's “disposable income” for the purposes of confirming a plan under chapter 13.[14] In order to confirm a plan under chapter 13, the plan must provide for payment of all of the debtor’s disposable income to unsecured creditors.[15]
Excluding COVID-19-related payments from disposable income prevents an artificial increase in the amount of money that a debtor would have to devote to the payment of unsecured creditors. The CARES Act applies to future chapter 13 debtors and pending cases without confirmed plans.
Allowing Modification of a Confirmed Plan Under Chapter 13 for “Material Financial Hardship” Due to COVID-19
The CARES Act added a new provision: § 1329(d)(1). It allows a chapter 13 debtor with a plan that was confirmed before the enactment of the CARES Act (March 27, 2020) to seek modification of the plan if the debtor is “experiencing or has experienced material financial hardships due, directly or indirectly,” to COVID-19.[16] Under this provision, the plan term may be extended up to seven years after the date of the first payment under the original plan. Previously, chapter 13 plans could take up to five years.
The Act is silent as to what amounts to “material financial hardship” or the scope of the term “indirect.” However, case law has developed around the issue of whether a plan default prior to the enactment of CARES Act is a cause for modification under § 1329(d)(1).[17] Courts have held that the only requirements under § 1329(d)(1) are that (1) the plan was confirmed before March 27, 2020 and (2) the debtor experienced or is experiencing a material financial hardship due to COVID-19.[18] Therefore, courts have allowed debtors with pre-CARES Act plan defaults to avail themselves of the seven-year plan modification.[19]
Conclusion
The CARES Act significantly opened the doors to bankruptcy relief for individuals and small businesses in financial distress due to the pandemic. The decision by Congress and the Biden administration to extend these protections for another full year continues this positive step. The effects of the COVID-19 pandemic still linger, and many households and small businesses will continue to suffer financial distress. Given the successes of the SBRA and the CARES Act, Congress should begin the discussion now on making these changes permanent.
[1] CARES Act, §§ 1113(a)(5), 1113(b)(2)(B).
[2] CARES Act, § 1113(a)(1).
[3] Half of the debt must come from business activity, excluding debts owed to affiliates or insiders, and the debtors principal business cannot be owning single-asset real estate. Id.
[4] COVID-19 Bankruptcy Relief Extension Act of 2021, § 2(a)(1).
[5] 11 U.S.C. §§ 1183, 1184.
[6] 11 U.S.C. § 1102(a)(3).
[7] There is no exclusivity period for the debtor, and the debtor has the sole authority to file a plan. 11 U.S.C. § 1189.
[8] However, the plan shall include (1) a brief history of the business of the debtor, (2) a liquidation analysis, and (3) projection on the debtor’s ability to pay under the proposed plan. 11 U.S.C. § 1190.
[9] Administrative expenses may be paid over time throughout the duration of the plan. 11 U.S.C. § 1191(e).
[10] “Payments made under Federal law relating to the national emergency declared by the President under the National Emergencies Act (50 U.S.C. 1601 et seq.) with respect to the coronavirus disease 2019 (COVID-19).” CARES Act § 1113(b)(1)(A)(iii).
[11] 11 U.S.C. § 101(10A).
[12] 11 U.S.C. § 707(b).
[13] 11 U.S.C. § 1325(b)(4).
[14] CARES Act § 1113(b)(1)(B).
[15] 11 U.S.C. § 1325(b)(2).
[16] 11 U.S.C. § 1329(d)(1).
[17] See In re Fowler, 2020 WL 6701366 (Bankr. M.D. Ala. Nov. 13, 2020); In re Gilbert, 622 B.R. 859 (Bankr. E.D. La. 2020).
[18] See In re Fowler at 4.
[19] Id.