How the CARES Act Impacts Bankruptcy Proceedings

The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law on March 27, 2020 making some

very significant changes to the United States Bankruptcy Code. Below we have highlighted some of these changes, all of which apply only to cases filed on or after the enactment of the CARES Act, and all of which will expire after one year:

Impact on Chapter 7 Debtors:

A major factor when determining if an individual qualifies to file a Chapter 7 bankruptcy is an analysis of their income during the six-month period before they file their case. Income received by the debtor during this timeframe is called the debtor’s Current Monthly Income.  The Cares Act includes a provision which excludes Coronavirus-related payments from this Current Monthly Income analysis.  This is important and ensures that those individuals who would otherwise qualify for a Chapter 7 do not become ineligible solely because they have received Coronavirus related payments from the federal government.

Impact on Chapter 13 Debtors:

For those debtors filing Chapter 13 cases, the CARES Act provides some similar relief in that Coronavirus-related payments from the federal government will not be included in a debtor’s income for purposes of determining a debtor’s disposable income.  This is very significant for a Chapter 13 debtor because a debtor’s disposable income is often what determines the debtor’s monthly Chapter 13 Plan payment. The lower a debtor’s disposable income, the lower their monthly Plan payment.  Additionally, the CARES Act permits individuals currently in a Chapter 13 case to modify their Chapter13 Plan if they can demonstrate a material financial hardship caused by the Coronavirus pandemic.  This provision even allows a Chapter 13 debtor the ability to extend their Plan payments from 60 months to 84 months.

Impact on Businesses:

On February 19, 2020, the Small Business Reorganization Act became effective. The intent of the Small Business Act was to reduce the cost and expense for small businesses to reorganize under Chapter 11.  One important provision of the Small Business Reorganization Act is the limit placed on the amount of debt a business can have in order to qualify. Initially, the debt of a small business debtor could not exceed $2,725,625. However, section 1113(a) of the CARES Act increases this debt limit to $7,500,000.00.  Accordingly, now that the debt limit has been temporarily raised by the CARES Act, many more businesses will have the option of exploring the benefits associated with qualifying as a small business debtor.