Bankruptcy Implications of New COVID-19 Legislation
The United States Congress has revived the centuries-old tradition of the passing of a lame duck Christmas tree appropriation bill to fund the government and provide a second wave of much needed COVID-19 relief legislation. The nearly 5,600-page bill includes temporary bankruptcy code changes to help those affected by the COVID-19 crisis. Among these temporary changes:
- Bill resolves controversy over whether bankrupt debtors are eligible for loans under the Paycheck Protection Program (a “PPP Loan”) established by the Initial COVID Relief Bill last spring.
- The bill amends the Bankruptcy Code to allow debtors to seek authorization from the bankruptcy court to obtain a PPP loan on an accelerated schedule.
- The bill cancels contractual provisions and applicable non-bankruptcy law that prohibit a debtor from incurring additional debt with respect to PPP loans.
- PPP loans obtained after filing for bankruptcy benefit from administrative payment priority. Administrative claims must generally be paid in full promptly after confirmation of a plan under Chapter 11 of the Bankruptcy Code. However, the bill allows small business debtors under the new Chapter 11 subchapter V, family farmers and fishermen under Chapter 12, and individuals filing Chapter 13 plans to repay loans over time. time depending on the loan conditions.
- The bill prohibits lenders from discriminating against bankrupt debtors when granting PPP loans.
- The recovery rebates are excluded from the assets of the bankruptcy estate.
- Chapter 13 debtors can get a discharge on a residential mortgage at the end of their plan, even if they have missed up to three mortgage payments (provided the missed payments are caused by the COVID-19 crisis).
- Bankruptcy courts are now allowed to grant subchapter V small business debtors additional time to meet post-petition rent obligations related to unmatured leases of non-residential property if the debtor experiences significant financial hardship due to the COVID-19 crisis. Normally, debtors have 60 days of respite after filing for bankruptcy before they are required to resume paying their non-residential rent obligations in a timely manner. The bill allows bankruptcy courts to extend the period from 60 days to 120 days. Debtors who benefit from this extraordinary relief can also repay the administrative rent delayed over time in accordance with their subchapter V plan, rather than repaying it in full upon confirmation of the plan.
- Certain late rent and seller payments made pursuant to forbearance agreements that debtors signed with landlords or sellers after March 13, 2020, for amounts due before March 13, 2020, are now exempt from the cancellation of preferences. However, late fees and interest payments remain subject to cancellation as preferences if they are greater than what a debtor would have incurred had they made all of their payments on time.
- Utility companies are prohibited from terminating service for individual debtors who cannot provide adequate payment insurance if the debtor is current on their debt to the utility company within the first 20 days of the case. bankruptcy and remains current thereafter.
All of these changes to the Bankruptcy Code expire after one year, with the exception of the provisions relating to PPP loans, lease payments by debtors in sub-chapter V and cancellation of preference, which will expire after two years but continue to apply. apply to all cases filed before the second anniversary of the adoption of the bill.