CARES Act Increases Subchapter V Eligibility to Small Business Debtors with Aggregate Debts Up to $7,500,000 and Makes Other Bankruptcy-Related Changes - Articles

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CARES Act Increases Subchapter V Eligibility to Small Business Debtors with Aggregate Debts Up to $7,500,000 and Makes Other Bankruptcy-Related Changes

Posted by: William Brown & Lawrence Ahern on Apr 3, 2020

The "Coronavirus Aid, Relief, and Economic Security Act" (the "CARES Act," H.R. 748), became Public Law No 116-136 on March 27.  All of the provisions highlighted below apply only to cases commenced on and after enactment and would "sunset" one year after enactment.  Of course, Congress has previously enacted “sunset” bankruptcy legislation that was later extended; for example, the Chapter 12 provisions originally had sunset provisions.

  • Section 1113(a) of the CARES Act again amended Bankruptcy Code Chapter 11, as only recently amended by the Small Business Reorganization Act (SBRA), by increasing the eligibility threshold to elect treatment under subchapter V of a small business case.  The new limit covers businesses with debts up to $7,500,000.  Other aspects of the standard for eligibility (such as the requirement that not less than 50 percent of the debt arose from the commercial or business activities of the debtor) would remain unchanged.  After the sunset date, the eligibility amount is to return to $2,725,625.
  • Section 1113(b)(1)(A) of the bill amends Bankruptcy Code Chapters 7 and 13 to exclude federal Coronavirus-related payments from the definition of "current monthly income" ("CMI") for purposes of eligibility to file for bankruptcy relief under Chapter 7.  CMI is defined in 11 U.S.C. § 101(10A) and the means test is set out in 11 U.S.C. § 707(b)(2).  Again, this change has a one-year sunset date.
  • Section 1113(b)(1)(B) of the bill clarifies that the calculation of disposable income for purposes of confirming a chapter 13 plan is not to include coronavirus-related payments.  Again, this provision has a one-year sunset date.
  • Section 1113(b)(1)(C) of the bill explicitly permits 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.  Again, this provision has a one-year sunset date.

There are also provisions in the legislation for suspension of student loan payments and interest accrual, applicable to Direct Loans and FEEL loans owned by the Department of Education, and there are many other provisions in the legislation that may have an impact on consumers.

Lawrence R. Ahern, III is a partner in Brown & Ahern with William Houston Brown, who also contributed to this bulletin.  They limit their practice to bankruptcy, commercial, and real estate issues in mediation, legal consulting with professionals and expert testimony, speaking, teaching, and writing.