Recent Stimulus Bill CAA Impact on Bankruptcy
In an effort to resolve conflicting court decisions, the new Consolidated Credit Act gives the Small Business Administration discretion to determine which small debtors and individuals can get PPP loans in bankruptcy.
The CAA allows debtors in all bankruptcy cases to automatically take up to 210 days (thus extending the 90-day legal period) to elect to continue with a non-residential real estate lease and provides an additional grace period on payments for small business debtors after a filing
The new law also provides additional protection against “preference” claims to owners of non-residential real estate and to suppliers of goods and services who have received deferred payments from a debtor.
Among the provisions of the new 2021 Consolidated Finance Law (CAA) are a number of temporary changes Title 11 of the United States Code (the Bankruptcy Code) focused on providing relief to both corporate and individual creditors and debtors.
On December 27, 2020, the president enacted the CAA – a $ 900 billion stimulus bill that amends previous legislation from the CARES Act enacted last spring.
Nine essential aspects of the new provisions of the Bankruptcy Code are summarized below.
PPP loans to debtors or trustees
The CARES Act of March 2020 created the Paycheck Protection Program (PPP), the forgivable loan program administered by the Small Business Administration (SBA). Since the passage of the CARES Act, there has been a debate about whether PPP loans are available to bankrupt businesses. The new stimulus bill amends the Bankruptcy Code to make PPP loans available to debtors only if the SBA administrator sends a letter to the Director of the Executive Office of the United States Trustee authorizing the PPP loans to be available during the bankruptcy.
If the SBA administrator authorizes the PPP loan during bankruptcy, the loans will be available: a) in cases filed after the date the SBA sends the letter to the US Trustee’s office, and b) to certain types of debtors: subchapter V debtors of small businesses, debtors of family farmers of chapter 12 and debtors of chapter 13 of self-employed workers. Commentators observe that this provision does not resolve the uncertainty as it invests significant discretion in the hands of the administrator of the SBA.
These changes expire on December 27, 2022.
Debt release conditions for Chapter 13 debtors
A debt discharge is now available, at the discretion of the bankruptcy court, for a debtor who has failed to make payments under a Chapter 13 plan if: 1) the debtor defaults to make until three monthly residential mortgage payments as of March 13, 2020, due to financial hardship caused by the COVID-19 pandemic, or 2) the Chapter 13 plan provides that the debtor can remedy a default on a loan residential mortgage and the debtor has entered into a qualifying loan modification or forbearance agreement with the lender.
The debtor will not be released from mortgage debt, but the debtor will be eligible for discharge for other debts even if he has not made all mortgage payments when due under the confirmed plan. This provision expires on December 27, 2021.
Protection against discriminatory treatment for companies that go bankrupt
The CAA amends the Bankruptcy Code to provide that a person cannot be denied relief under sections 4011 to 4042 of the CARES Act only because the person is or has been a debtor in a bankruptcy case. The provisions of the CARES Act affected by this amendment are as follows:
Moratorium of foreclosure and right to request forbearance
Forbearance of mortgage payments for multi-family properties
Temporary moratorium on deportation requests
This provision expires on December 27, 2021.
Modifications and confirmation of the plan: individual and family farmers and fishermen)
The CARES Act allows mortgagors of federally guaranteed residential and multi-family mortgages to apply for forbearance due to financial hardship caused by COVID-19. For residential mortgages, the forbearance period can be up to 12 months. At the end of the forbearance period, the mortgagor must pay the deferred mortgage payments in a lump sum. These provisions of the CARE Act have caused complications in Chapter 13 cases, so the CAA allows qualified agents to file proof of claim for deferred payments, even if the deadline for filing claims has passed.
The CAA also allows debtors to modify a confirmed Chapter 13 plan to reflect the deferred payment plan. If a debtor does not change their plan, the bankruptcy court, US trustee, Chapter 13 trustee, or any interested party may request the change. These changes expire on December 27, 2021.
Performance under an unexpired non-residential real estate lease in a sub-chapter V case
The CAA has extended the deadline for subchapter V small business debtors to enforce an unexpired non-residential real estate lease if the debtor is experiencing or has experienced significant financial hardship caused by COVID-19. The debtor can extend execution for up to 60 days after filing and, if the court finds that the debtor continues to experience hardship related to COVID-19, the court can extend the time limit for an additional 60 days.
Any deferred obligation that is not paid on confirmation is an administrative expense, which debtors can repay over time under the confirmed plan. This amendment only applies to Case of subchapter V, and he goes to bed on December 27, 2022.
Acceptance or rejection of enforceable contracts and leases under section 365 (d) (4)
- Subchapter V Small Business Debtors – CAA has extended the time limit for Subchapter V debtors who have been financially affected by the pandemic to assume or reject leases by an additional 60 days, to a total of 210 days after the filing of the motion, reflecting the maximum period generally available in Chapter 11 cases. The amendment further provides that any claim arising from the 60-day extension will be treated as an administrative expense priority under Section 507 (a) (2) of the Bankruptcy Code.
- All Debtors and Trustees in Chapters 7 and 11 – The CAA extended a debtor’s period to assume or reject non-residential leases from 120 days to 210 days after the date of the reorganization order. This modification of the bankruptcy code is effective until December 27, 2022.
Protection preferably for covered payments
The CAA grants additional protection to owners of non-residential real estate and suppliers of goods and services who have received deferred payments from a debtor after March 13, 2020. Section 547 of the Bankruptcy Code now prevents a debtor or a trustee to collect these deferred payments. preferably as long as the debtor and the owner or supplier:
- Signed the lease or enforceable contract before declaring bankruptcy
- Modification of the lease or the enforceable contract after March 13, 2020
- Deferred payments initially due under the lease or enforceable contract
However, the CAA expressly excludes certain fees, penalties, or interest from this exemption from preference protection. This amendment remains active for the next two years and applies to bankruptcy cases filed before the two-year expiration date.
Priority treatment of customs duties
The CAA amends section 507 (d) of the Bankruptcy Code so that entities paying a customs duty to the United States government for the importation of goods are subrogated to government priority status under section 507 (b) ( 8) (F). This modification is effective for one year.
Treatment of utilities
The CAA protects individual debtors under Section 366 of the Bankruptcy Code by prohibiting utility companies from terminating service even if the debtor does not provide adequate insurance for future utility payments, provided the debtor individual (i) makes a utility payment within twenty (20) days of filing for bankruptcy and (ii) continues to make timely payments during the case. This amendment expires in a year.