President Donald J. Trump today signed the “Coronavirus Aid, Relief and Economic Security Act” (CARES Act) into law with provisions to provide financially distressed consumers and small businesses greater access to bankruptcy relief.
The legislative package, which quickly passed the House of Representatives on a voice vote earlier today and 96-0 in the Senate on Wednesday, provides a US$2 trillion economic stimulus for U.S. industries and citizens faced with the challenges of the COVID-19 coronavirus, according to the American Bankruptcy Institute (ABI).
“ABI commends Congress and the President for their prompt action on this stimulus package to provide needed financial relief due to the COVID-19 coronavirus pandemic,” said ABI Executive Director Amy Quackenboss. “Consumers and small businesses will have greater access to the financial fresh start of bankruptcy thanks to this important legislation.”
Key bankruptcy provisions within the CARES Act include:
· Amending the Small Business Reorganization Act of 2019 (SBRA) to increase the eligibility threshold for businesses filing under new subchapter V of chapter 11 of the U.S. Bankruptcy Code from US$2,725,625 of debt to US$7,500,000.
· The eligibility threshold will return to US$2,725,625 after one year.
· The increased debt limit for struggling small businesses to access subchapter V reflects recommendations of ABI’s Commission to Study the Reform of Chapter 11.
· Amending the definition of “income” in the Bankruptcy Code for chapters 7 and 13 to exclude coronavirus-related payments from the federal government from being treated as “income” for purposes of filing bankruptcy.
· Clarifying that the calculation of disposable income for purposes of confirming a chapter 13 plan shall not include coronavirus-related payments.
· Explicitly permitting individuals and families currently in chapter 13 to seek payment plan modifications if they are experiencing a material financial hardship due to the coronavirus pandemic, including extending their payments for up to seven years after their initial plan payment was due.
The bankruptcy provisions of the CARES Act listed above sunset within a year.
Additionally, the law provides temporary relief for federal student loan borrowers by requiring the Secretary of Education to defer student loan payments, principal, and interest for six months, through 30 September, 2020, without penalty to the borrower for all federally owned loans. This provides relief for over 95 per cent of student loan borrowers.
“Our members will be sure to utilize these tools to help consumers and small businesses struggling with overwhelming debts due to the economic fallout of the pandemic,” Quackenboss said.
SBRA became effective on 19 February, adding a new section to chapter 11, subchapter V, to provide a better path for small businesses to successfully restructure, reduce liquidations, save jobs and increase recoveries to creditors.
Subchapter V of the new law is based on the recommendations contained in the Final Report of ABI’s Commission to Study the Reform of Chapter 11, a project that was funded by ABI’s Anthony H.N. Schnelling Endowment Fund.
The provision of the CARES Act to temporarily increase the debt limit set forth in SBRA aligns closely with the recommendation of ABI’s Chapter 11 Reform Commission to permanently increase the debt eligibility limit to US$10 million.
Chapter 7 bankruptcy relief, available to consumers and business debtors, involves the sale of a debtor’s nonexempt assets by a chapter 7 trustee, who uses the proceeds of the sales to pay creditors in accordance with the rules outlined in the Bankruptcy Code.
Chapter 13 bankruptcy relief, available only to consumer debtors, enables individuals with regular income to develop a plan to repay all or part of their debts. Under this chapter, debtors propose a repayment plan to make installments to creditors over three to five years.