The Impact of the Bankruptcy Relief Act and Other Recent Bankruptcy Code Changes | Miller Canfield
Bankruptcy law has seen many changes in 2020 and 2021. Some of them were enacted in response to COVID, but many other changes were included in the Bankruptcy Code before the pandemic. This article highlights some of these changes and their impact on the rights of lenders, commercial creditors, suppliers, landlords, tenants and debtors.
The Small Business Reorganization Act (“SBRA”), which came into force on February 19, 2020, was passed to help “small business debtors” with debts not exceeding $ 2,725,625 (along with other criteria and requirements) . The CARES Act temporarily increased the debt ceiling to $ 7,500,000. While this limit was set to expire on March 27, 2021, last week, March 27, 2021, the COVID-19 Bankruptcy Relief Act of 2021 was enacted, maintaining the SBRA debt eligibility limit at $ 7,500,000 until as of March 27, 2022. Other the bankruptcy provisions of the CARES Act have also been extended for one year, for example by excluding coronavirus-related payments from income for the purposes of Chapters 7 and 13 and allowing certain debtors from Chapter 13 to change their plans if they encounter significant financial difficulties related to coronavirus.
The Consolidated Appropriations Act, 2021 (“CAA”), enacted late last year, contained additional changes to bankruptcy law. After filing a petition, debtors are required to perform their obligations under unexpired non-residential leases, usually by paying post-petition rent. A bankruptcy court may give a debtor an additional time, up to 60 days from the start of the bankruptcy case, to pay the rent owed during the first 60 days from the date of the petition. Under the CAA, SBRA debtors can request up to an additional 60 days to pay if they experience hardship related to the COVID pandemic. In addition, the time limit for tenants to decide whether to accept or reject a non-residential lease has been increased to 210 days, instead of 120 days. These provisions will expire on December 27, 2022.
To encourage landlords, their tenants and their suppliers and customers to work together to ease financial strains related to COVID, the CAA enacted a temporary provision affecting preference requests. Typically, if a debtor pays off old debts or significantly changes their payment methods (especially in response to pressure from creditors) and then files for bankruptcy within 90 days, the debtor’s estate can sue. legal action to recover these payments as “preferences”. To mitigate this risk, Congress defined two new terms: “covered payment of rent arrears” and “covered payment of supplier arrears”. To be eligible, payments must be made under an agreement or arrangement entered into on or after March 13, 2020. For leases, the agreement must defer “rent or other periodic charges under a lease of a non-residential building ”. For suppliers’ customers, the agreement should defer “amounts due under a binding contract for goods or services”. The agreement cannot include any fees, penalties or interest that exceed the amounts that would have been due or paid under the original lease or contract. However, if an agreement and its corresponding payments qualify as a “covered payment of rent arrears” or “covered payment of supplier arrears”, the payments are immune from collection as preferences in the event that the tenant or the supplier would later file for bankruptcy. This removes significant uncertainty for homeowners or suppliers who are considering helping their financially troubled customers.
Bankruptcy and other laws are evolving as the United States tries to help individuals and businesses cope with the financial and other stresses of COVID.