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Changes to the Bankruptcy Code Under the CARES Act

On March 25, 2020 the Coronavirus Aid, Relief and Economic Security Act (CARES Act) was passed by the Senate. It is expected to pass the House of Representatives today and be immediately signed into law by President Trump. The CARES Act aims to provide emergency assistance and health care response for individuals, families and businesses affected by the 2020 coronavirus pandemic. Surprisingly, the CARES Act makes some important changes to various provisions of the United States Bankruptcy Code. 

In February, the Small Business Reorganization Act (SBRA) became effective. The SBRA created a new subchapter under Chapter 11 of the United States Bankruptcy Code that is commonly referred to as Subchapter 5. Subchapter 5 aims to give businesses with debts that are under a certain threshold a faster and less expensive option for reorganizing under Chapter 11. Legal commentators had long lamented that Chapter 11's high costs and complexities make it too difficult for small businesses to successfully reorganize. 

Under the SBRA, a business qualifies to file a case under Subchapter 5 if its debts are in the amount of $2,725,625 or less. Section 1113 of the CARES Act increases the debt limit from $2,725,625 in debts to $7.5 million in debts. Therefore, businesses with debts of $7.5 million or less will now qualify to file cases under Subchapter 5. This change in the debt limit applies only to cases filed after the CARES Act becomes effective and is applicable for one year after the CARES Act becomes effective. After one year, the debt limit for cases under Subchapter 5 will return to $2,725,625 absent an extension by Congress.

Importantly, the CARES Act will allow many more businesses that may benefit from a Chapter 11 reorganization to take advantage of the new provisions of the United States Bankruptcy Code, namely the relaxed requirements for confirming a plan. Under the provisions of Subchapter 5, a plan of reorganization will generally be confirmed so long as it provides that all disposable income for three to five years will be used to make plan payments. 

The CARES Act also makes some changes to Chapter 7 and Chapter 13 of the United States Bankruptcy Code. First, the CARES Act amends the definition of current monthly income to exclude payments made to the debtor pursuant to the CARES Act from being treated as income in the means test calculation that determines a debtor's eligibility to file a Chapter 7 bankruptcy case.

Next, it excludes payments made to the debtor pursuant to the CARES Act from the calculation of disposable income that is conducted for the purposes of determining whether a Chapter 13 plan of reorganization may be confirmed.

Finally, it permits Chapter 13 debtors with plans that have already been confirmed to modify them based on a material financial hardship related to the coronavirus pandemic, including extending payments under the plan for up to seven years after the initial plan payment was due. All of these changes are applicable in pending Chapter 7 and Chapter 13 cases and will be applicable for one year after the CARES Act becomes effective.

© 2020 Varnum LLP

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About this Author

Brendan G. Best, Varnum, Chapter 11 Bankruptcy Lawyer, Manufacturing Industry Attorney
Partner

Brendan focuses his practice on restructuring, workouts and bankruptcies, representing creditors, debtors and other parties in Chapter 11 bankruptcy cases, out-of-court workouts and restructurings, distressed transactions and general insolvencies. Brendan has a national insolvency practice, serving clients in diverse industries including manufacturing, automotive, building supply and service, energy, oil and gas, health care, food service, gaming, hospitality, construction and real estate.

Brendan serves as outside bankruptcy counsel for clients, advising them on commercial issues...

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