COVID-19 and The CARES Act- Temporary Amendments to Bankruptcy Code

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By Roger Cox *

            The so-called CARES Act, passed in response to the COVID-19 pandemic, includes temporary amendments to the Bankruptcy Code – highlighting, in one case, the potential impact of a relatively new statute designed to provide streamlined relief to small businesses.

            Small Business Reorganization.  The Small Business Reorganization Act of 2019 (“the SBRA”) became effective February 19, 2020.  Codified as a new subchapter V. of Chapter 11 of the Bankruptcy Code, this was originally available to debtors whose obligations were primarily business related, having a debt load of $2,725,625.00 or less. 

            SBRA Debt Limit Increased.  Under the CARES Act, the SBRA eligibility limit has been increased (for a period of one year) to $7,500,000.00.

            SBRA “Streamlines” Small Business Cases. Accordingly, small business debtors who fit this newly expanded eligibility limit may seek Chapter 11 relief without being subject to the extraordinary cost and uncertainty of a Chapter 11.  SBRA debtors, for example, escape the burdensome United States Trustee fees, creditors’ committees are generally not appointed; however, a standing trustee will be appointed in every SBRA case. Only the debtor may file a plan, a disclosure statement may not be required, and a SBRA plan may be confirmed even if all impaired classes vote to reject the plan.  New time limits apply. 

            Effect on Creditors. Generally, creditors who hold fully secured claims may not see much of a difference; however, unsecured creditors (or those whose claims are proportionately secured) will lose what little leverage they may have had in a conventional Chapter 11 given the effective lack of voting and the effective absence of the absolute priority rule at plan confirmation.  In short, all creditors may lose some leverage, but arguably, the cost of SBRA cases may be much less.

            Consumer Cases.  The CARES Act also amends Chapter 7 and 13 in the context of consumer bankruptcies.  Generally, CARES Act and similar stimulus payments will generally not be included in the definition of “income” for eligibility purposes for a consumer Chapter 7, nor will such payments be included in the calculation of “disposable income” for Chapter 13 plan confirmation purposes.  Chapter 13 debtors with existing confirmed plans who have suffered a “material financial hardship” due to the pandemic may be allowed to seek plan modifications – notably, this may include extension of a payment for up to seven years after the first plan payment was due.

Commentary:

            These provisions are generally set to sunset one year after the effective date of the CARES Act.  That said, with additional legislation expected, any deadlines or monetary thresholds remain fluid.  In the meantime, however, creditors of small businesses may see more SBRA filings than originally anticipated now that the limitation has nearly been tripled.

*Roger Cox is the author of Cox’s Texas Creditors Rights Laws Annotated (Thomson Reuters 2018-20), and a former contributor to the SMU Law Review.  He is Board Certified in Business Bankruptcy Law, Commercial Real Estate Law, and Farm & Ranch Real Estate Law by the Texas Board of Legal Specialization.  Underwood has offices in Amarillo, Austin, Fort Worth, Lubbock, and Pampa. This article is for general and academic information only and is not intended as legal advice or as a specific position asserted on behalf of any existing or future client of the firm.

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