Relief for Debtors Harmed by Response to Corona Virus
Social distancing is proving to be an effective response to the Corona Virus public health crisis. Unfortunately, those same measures will harm the economy. Most analysts agree that commercial and consumer bankruptcy filings will rise sharply. In response, Congress has acted with temporary Bankruptcy Code revisions. Now, consumer debtors may be able to decrease their monthly payments by extending the terms of their chapter 13 repayment plans. The amendments will also benefit businesses affected by the COVID-19 pandemic. The amendment expands eligibility for the relaxed, “small business debtor” bankruptcy process. The bankruptcy relief provided under the CARES Act could provide meaningful relief to debtors in business and personal bankruptcy cases.
Temporary Revisions to Chapter 13 of the Bankruptcy Code (COVID-19)
Chapter 13 bankruptcy is a voluntary “reorganization” bankruptcy for individuals. Ordinarily, chapter 13 debtors cannot extend their plan payments beyond a term of five years. That five-year maximum can prevent struggling families from saving their homes from mortgage foreclosure. Typically, debtors fund their chapter 13 plans from the income they receive during the term of the plan. Thus, plan duration and debtors’ income impose a limit on plan funding. That limit may prevent debtors from curing mortgage delinquencies through a chapter 13 plan. Bankruptcy lawyers call that problem “infeasibility.”
Bankruptcy Code revisions in the CARES Act permit modification of plans, extending up to seven years. Debtors must have court approval to extend their confirmed plans beyond a 60-month term. Debtors must also have experienced a “material financial hardship due.” The hardship must, “directly or indirectly, to coronavirus disease 2019 (COVID-19) pandemic.”
Protections Related to Stimulus Payments
The CARES Act Bankruptcy Code revisions ensure that stimulus payments won’t affect debtors’ “current monthly income” and “disposable income.” Those calculations have important implications to the chapter 13 process. Current monthly income determines whether a plan term may be three years or must extend to five. Disposable income determines whether a debtor meets the “best efforts” requirement for plan confirmation. Chapter 13 debtors often pay unsecured creditors less than 100% of their claims over the life of the plan. However, such debtors must devote all of their “disposable income” to fund the plan. If disposable income increased as result of payments from the government, they could threaten the viability of chapter 13 for some debtors. Congress wisely avoided that potential problem through its Bankruptcy Code revisions.
Small Business Reorganization Streamlined Process
The CARES Act amends Small Business Reorganization Act of 2019, increasing the debt threshold from $2,725,625 to $7.5 million. Considering the advantages offered under the streamlined “Small Business” bankruptcy, that amendment could provide a cost-effective reorganization option to many more companies.
The chapter 11 process for small businesses may be attractive to financially distressed companies, concerned about the potential cost and delay of a traditional chapter 11 filing. The cost-saving features include the elimination of the requirement of payment of quarterly fees to the United States trustee, and the absence of official appointed committees (e.g., a committee of unsecured creditors). Instead, a standing trustee oversees case administration and ensures Bankruptcy Code compliance.
The time saving characteristics of a small business chapter 11 may also be attractive. Small business debtors do not require a hearing on a disclosure statement. Unlike an ordinary chapter 11 case where parties in interest can file a plan after the debtor’s right to exclusivity expires, only the debtor may file a plan in a small business case.
Small Business Bankruptcy – Additional Advantages
Among the most enticing features of the new small business law are its simplified approach to “cramdown” and the “absolute priority rule.” Here, cramdown refers to confirmation of a plan over creditor objections. The small business process eliminates the requirement of an impaired class of creditors who voted in favor of the plan. In simplified terms, the “absolute priority rule” mandates that lower priority interest holders must not receive any value under the plan while any senior creditors have unpaid claims. Since an owner’s interest in a debtor exists at a lower priority than general unsecured claims, some courts have interpreted the absolute priority rule to prevent debtors from discharging debt without affecting ownership interests.
Bankruptcy Amendments Sunset Provisions
The CARES Act Bankruptcy Code revisions diverge from the existing statutory scheme. For that reason, the Bankruptcy Code revisions are temporary and will terminate after one year. The bankruptcy amendments give individuals and small businesses some advantages in their reorganization bankruptcies. However, only time will tell whether those adjustments will be enough to protect those hit hardest by the economic ripple effects of COVID-19.
Contact Robleto Kuruce if you have questions about the COVID-19 amendments, or simply want to learn about your bankruptcy options. Experienced bankruptcy lawyers will give you answers during a no-contact, free consultation.Call now (412) 925-8194.