Bradley’s Bankruptcy Basics: 5 Significant (if Temporary) Amendments to the Bankruptcy Code Resulting from the COVID-19 Pandemic
As we cross the first anniversary of the COVID-19 pandemic, we reflect on the multiple Bankruptcy Code changes that have been implemented to help curb the effects of the various economic shutdowns and financial hardships caused by the coronavirus. These bankruptcy code changes are only temporary, but Congress is considering expanding them to facilitate continued recovery from the COVID-19 pandemic. Below are five important, albeit temporary, changes to the Bankruptcy Code resulting from the COVID-19 pandemic.
1. The debt limit of sub-chapter V “small business debtors” has been increased to 7.5 million dollars.
Under the Small Business Reorganization Act of 2019 (SBRA), which went into effect in February 2020 (just before the start of the COVID-19 pandemic), only small businesses with secured and unsecured debt are less than or equal to $ 2,725,625 may be considered subchapter V debtors. Businesses with debts exceeding the debt limit of $ 2,725,625 would be required to request relief under regular Chapter 11 or wind up under Chapter 7. However, a month after the SBRA came into effect, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) became law and increased SBRA’s debt limit to $ 7.5 million. Thus, under the CARES Act, small business debtors with debts of $ 7.5 million or less are eligible for bankruptcy action under subchapter V.
2. Government assistance related to COVID-19 is excluded from “current monthly income” and “estate ownership”.
The CARES Act also amended the Bankruptcy Code’s definition of “current monthly income” to exclude “payments made under the Federal Law on National Emergencies Declared by the President under the National Emergencies Law in regarding coronavirus disease 2019 (COVID-19). The concept of ‘current monthly income’ is used in the Chapter 7 means test to determine whether a debtor qualifies for Chapter 7 discharge or instead receives sufficient income to repay some or all of its debts. via a Chapter 13 or Chapter 11 plan. In addition, the current monthly income is the amount that a Chapter 13 debtor must pay to unsecured creditors through a Chapter 13 plan if an unsecured creditor or the trustee of Chapter 13 opposes its plan. This is also the amount that an individual Chapter 11 debtor must pay in their Chapter 11 plan. This amendment to the CARES Act allows debtors to exempt COVID-related income -19 of their current monthly income calculation.On December 21, 2020, Congress passed the Consolidated Appropriations Act 2021 (CAA 2021), which extended the protection of relief payments against coronaviruses by explicitly excluding them from the prop ity of the bankruptcy estate. This ensures that consumers will not need to use an exemption to retain relief payments.
3. Pre-COVID-19 Chapter 13 plans can be changed and extended.
The CARES Act further amended the bankruptcy code to allow pre-Chapter 13 COVID-19 plans to be amended to take into account a debtor’s financial hardship resulting from the pandemic. Additionally, under the CARES Act, Chapter 13 plans that were confirmed prior to the COVID-19 pandemic may be extended from the previous maximum plan period of five years to a period of seven years, resulting in reduced monthly debtors plan payments amounts. .
Recently, the Intermediate District Bankruptcy Court of Alabama authorized two debtors whose Chapter 13 plans were confirmed before March 2020 to modify their plans based on difficulties related to COVID-19. Although one of the debtor’s hardships was only indirectly caused by COVID-19, the debtor was nonetheless allowed to change her plan under the CARES Act. Additionally, the bankruptcy court authorized plan changes despite any pre-pandemic payment default on plan payments. A more in-depth review of these decisions is available here.
4. Courts may grant Chapter 13 discharges to debtors who have not made multiple mortgage payments.
Under CAA 2021, Chapter 13 debtors who have defaulted on residential mortgage payments for up to three months during the pandemic due to COVID-19 may, upon notice and after a hearing, receive a Chapter 13 discharge In addition, CAA 2021 provides that debtors who include residential property in a “remedy and maintain” plan and enter into a qualifying loan modification or forbearance may also receive a Chapter 13 release.
5. Mortgage agents may file late additional proofs of claim for claims amended by the CARES Act and motions to amend Chapter 13 plans to provide for payment of additional proofs of claim.
CAA 2021 further amended the Bankruptcy Code to allow mortgage agents to file additional proofs of claim for claims that are forborne, deferred or otherwise amended under the CARES Act. , even after the expiration of the claim deadline. Likewise, mortgage agents and other interested parties can modify a Chapter 13 plan to allow payment of these additional proofs of claim before the end of the plan period and the Chapter 13 file is closed.
A more detailed analysis of the impact of the CARES law on the Bankruptcy Code can be found here, and more information regarding the changes made by CAA 2021 to the Bankruptcy Code can be found here. While these changes to the Bankruptcy Code are only temporary and are expected to expire in 2021 and 2022, Congress is currently considering extending this relief as the COVID-19 pandemic continues.