CARES Act and Changes to Bankruptcy Code

the Coronavirus Aid, Relief and Economic Security Act (CARES) makes significant revisions to the US Bankruptcy Code. The most remarkable change is that it has opened the doors to bankruptcy court for many small businesses.

Small Business Reorganization Act

On February 19, 2020, Small Business Reorganization Act (SBRA) entered into force, which added a new subsection to the United States Bankruptcy Code. Commonly referred to as Subchapter 5, the SBRA was enacted to reduce the costs and expenses of reorganizing small businesses under Chapter 11. To be considered a debtor under Subchapter 5, a company’s debts must not exceed $ 2,725,625 (secured and unsecured debt). Section 1113 of the CARES Act increases the debt limit to $ 7.5. The increased debt limit applies to cases filed after the enactment of the CARES law and is valid for one year after the CARES law comes into force. Thereafter, the debt limit will be reduced again to $ 2,725,625.

CARES Law on the Bankruptcy Code Subchapter 5

Subchapter 5 creates a simplified process for a debtor to reorganize and a simpler standard for a debtor to confirm a plan. Under subchapter 5, a debtor must file a chapter 11 plan within ninety days of filing for bankruptcy. The costs are reduced according to this schedule and as there is no obligation for a debtor to file a disclosure statement and no formal committee of unsecured creditors. Typically, a plan will be confirmed on the condition that the debtor contributes all of the disposable income for three to five years to make the plan payments. By increasing a debtor’s debt limit to qualify for subchapter 5, the CARES Act makes bankruptcy reorganization a viable option for more small businesses.

CARES Act on Chapters 7 and 13

The CARES Act also makes temporary changes to Chapters 7 and 13 of the United States Bankruptcy Code. The changes are as follows:

  • For the purposes of calculating a debtor’s income to determine eligibility for Chapters 7 and 13, federal government coronavirus payments are excluded from the analysis.
  • Likewise, payments related to the coronavirus are not taken into account in determining a debtor’s disposable income for a Chapter 13 reorganization plan.
  • Finally, the CARES Act allows Chapter 13 debtors who have already confirmed a plan to change the plan based on significant financial hardship caused by the pandemic, including extending their payments for seven years after their plan’s initial payment is due. .

The changes apply to the pending cases of chapters 7 and 13 and will be applicable for one year from the date of entry into force of the CARES law.

© 2021 Norris McLaughlin PA, All rights reservedRevue nationale de droit, volume X, number 89

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