Stimulus Package Includes Bankruptcy Updates

The Coronavirus Aid, Relief, and Economic Security Act(CARES Act), signed by President Trump on March 27, 2020, contains key changes to the Bankruptcy Code. The CARES Act and the previously enacted Small Business Reorganization Act (SBRA) will impact consumers and small businesses that have filed, or may be faced with filing, for bankruptcy relief in light of the current economic climate.

The SBRA, which went into effect in February 2020, amends Chapter 11 of the Bankruptcy Code to include subchapter V, which applies to small business debtors (both companies and individuals). To be eligible to file for bankruptcy under the SBRA, the statute previously established a limitation on a debtor’s debts of $2,725,625. However, the CARES Act contains a provision that increases this debt limitation, for one year, to $7.5 million, allowing more small businesses to qualify to file bankruptcy as a “small business debtor” under the SBRA.

In the consumer bankruptcy arena, the CARES Act contains a provision that amends the definition of “income” in the Bankruptcy Code for Chapters 7 and 13 so that coronavirus-related payments from the federal government will be excluded from being treated as income for purposes of a recipient’s future bankruptcy filing, allowing consumers to retain their stimulus payments. In addition, coronavirus-related payments made by the federal government under the CARES Act will be excluded from the disposable income calculation for purposes of confirming a Chapter 13 Plan. Debtors who currently have Chapter 13 cases pending and are making payments under their Chapter 13 plan may seek plan modifications under the CARES Act’s Bankruptcy Code amendments if they are experiencing a material financial hardship due to the coronavirus. Significantly, debtors may now extend their Chapter 13 plan payments for up to seven years after their initial plan payment was due, whereas prior to the amendment, debtors were only permitted to make their plan payments for up to five years.

In addition, the CARES Act includes a provision that allows federal student loan borrowers to defer their loan payments (including principal and interest) for six months through September 30, 2020, without penalty to the borrower for all federally backed student loans.