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The Senate included key provisions in the “Coronavirus Aid, Relief and Economic Security Act” (CARES Act) to provide financially distressed consumers and small businesses greater access to bankruptcy relief. The legislative package, which yesterday passed the Senate 96-0, provides a $2 trillion economic stimulus for U.S. industries and citizens faced with the challenges of the COVID-19 coronavirus. The legislation now goes to the House, where it is anticipated to be considered on Friday and signed shortly after by President Trump.

“Consumers and small businesses in dire need of financial relief due to the COVID-19 coronavirus pandemic will have greater access to the financial fresh start of bankruptcy thanks to this important legislation,” said ABI Executive Director Amy Quackenboss. “ABI commends the Senate’s expedited work, and we look forward to swift enactment of this important bipartisan legislation.”

Key bankruptcy provisions within Sect. 1113 of the CARES Act include:

• Amending the Small Business Reorganization Act of 2019 (SBRA) to increase the eligibility threshold for businesses filing under new subchapter V of chapter 11 of the U.S. Bankruptcy Code from $2,725,625 of debt to $7,500,000. The eligibility threshold will return to $2,725,625 after one year. The increased debt limit for struggling small businesses to access subchapter V reflects recommendations of ABI’s Commission to Study the Reform of Chapter 11.
• Amending the definition of “income” in the Bankruptcy Code for chapters 7 and 13 to exclude coronavirus-related payments from the federal government from being treated as “income” for purposes of filing bankruptcy.
• Clarifying that the calculation of disposable income for purposes of confirming a chapter 13 plan shall not include coronavirus-related payments.
• Explicitly permitting individuals and families currently in chapter 13 to seek payment plan modifications if they are experiencing a material financial hardship due to the coronavirus pandemic, including extending their payments for up to seven years after their initial plan payment was due.

The bankruptcy provisions of the CARES Act listed above sunset within a year of the legislation being enacted.

Additionally, Sect. 3513 of the legislative package provides temporary relief for federal student loan borrowers by requiring the Secretary of Education to defer student loan payments, principal, and interest for 6 months, through September 30, 2020, without penalty to the borrower for all federally owned loans. This provides relief for over 95 percent of student loan borrowers.

“ABI members are ready to utilize these tools to help consumers and small businesses struggling with overwhelming debts due to the economic fallout of the pandemic,” Quackenboss said.

SBRA became effective on Feb. 19, adding a new section to chapter 11, subchapter V, to provide a better path for small businesses to successfully restructure, reduce liquidations, save jobs and increase recoveries to creditors. Subchapter V of the new law is based on the recommendations contained in the Final Report of ABI’s Commission to Study the Reform of Chapter 11, a project that was funded by ABI’s Anthony H.N. Schnelling Endowment Fund. The provision of the CARES Act to temporarily increase to the debt limit set forth in SBRA aligns closely with the recommendation of ABI’s Chapter 11 Reform Commission to permanently increase the debt eligibility limit to $10 million. For more information and resources on SBRA, please visit www.abi.org/sbra.

Chapter 7 bankruptcy relief, available to consumers and business debtors, involves the sale of a debtor’s nonexempt assets by a chapter 7 trustee, who uses the proceeds of the sales to pay creditors in accordance with the rules outlined in the Bankruptcy Code.

Chapter 13 bankruptcy relief, available only to consumer debtors, enables individuals with regular income to develop a plan to repay all or part of their debts. Under this chapter, debtors propose a repayment plan to make installments to creditors over three to five years.

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ABI is the largest multi-disciplinary, nonpartisan organization dedicated to research and education on matters related to insolvency. ABI was founded in 1982 to provide Congress and the public with unbiased analysis of bankruptcy issues. The ABI membership includes nearly 11,000 attorneys, accountants, bankers, judges, professors, lenders, turnaround specialists and other bankruptcy professionals, providing a forum for the exchange of ideas and information. For additional information on ABI, visit www.abiworld.org.

The National Bankruptcy Conference (NBC) said that bankruptcy protections should be broadened for consumers and businesses to help ameliorate the financial damage stemming from the coronavirus, WSJ Pro Bankruptcy reported. To blunt the economic fallout from the pandemic, special bankruptcy protections should be made available to more small businesses and bankruptcy courts should have more leeway to aid struggling consumers, according to the NBC, an advisory body made up of scholars, lawyers and judges. The NBC’s recommendations, made in a letter on Sunday to top congressional leaders, is an acknowledgment from leading bankruptcy professionals that current restructuring laws aren’t equipped to handle the current pandemic. The letter comes as the Senate debates a rescue package of at least $1.6 trillion to help businesses and the public. A version of the legislation that failed on Sunday would provide $350 billion for small business loans that may be forgiven if companies use the money to keep workers on payroll, as well as direct payments to households that an outside group has estimated could cost $300 billion. The letter conceded that “even at its best,” U.S. bankruptcy law won’t prevent the loss of jobs and investments for borrowers and creditors stemming from the Covid-19 disease. The pandemic inevitably “will cause many bankruptcies,” despite extraordinary government measures, the letter said. The NBC recommended that Congress provide individuals and small businesses relief from financial obligations, at least temporarily, “to avoid massive numbers of both bankruptcies and economically untenable foreclosures.” A streamlined reorganization process designed to make bankruptcy easier and quicker for small businesses went into effect last month but only covers companies with no more than $2,725,625 in debt. The NBC recommended that increasing the debt threshold to $7.5 million or higher would bring relief to the “many thousands” of small businesses that will likely seek to reorganize and their owners, suppliers, employees and lenders. The NBC said the bankruptcy code’s chapter 13, which applies to individuals, should be modified to provide more than just allowing consumers to save their homes and motor vehicles from foreclosure. Consumer bankruptcy laws should allow for repayment plans to be modified “if a Covid-19 dislocation affects their income and ability to perform,” according to the letter. Read more.

Click here to view a full copy of the NBC letter. 

The coronavirus is threatening to destroy businesses large and small — and that’s got bankruptcy lawyers’ phones ringing off the hook, Bloomberg News reported. The economic shock of the social isolation measures being taken across the U.S. to mitigate the pandemic threatens to put millions of Americans out of work and leaves companies across a range of industries wondering how they’ll make payroll. Even as bankruptcy lawyers themselves adjust to the new routine of working from home, many are seeing a spike in business they haven’t experienced since the September 2001 terrorist attacks and the 2008 global financial crisis. “I think that at some level this process is going to rewrite the rules of restructuring,” Squire Patton Boggs attorney Karol Denniston said. With a sudden collapse of demand in the airline, restaurant, hotel, oil and gas, and retail industries caused by widespread calls for home quarantines and social distancing, companies are desperately looking for financial strategies. The phones started ringing nonstop over the past week, much as they did in 2008, said Jessica Boelter of Sidley Austin. “This has created emergencies that we have not specifically dealt with before,” Boelter said. In 2008, “everyone learned what mortgage-backed securities were,” said Dan Lowenthal of Patterson Belknap said. Now, he said, “everyone is going to learn what zombie companies are.”