In the current challenging times, it is important for consumers and businesses of all sizes to understand their options for financial relief, including bankruptcy.
Recent changes to the U.S. Bankruptcy Code offer small businesses more cost-efficient relief in chapter 11 through procedural modifications of the bankruptcy process. Likewise, the Bankruptcy Code has been modified to provide assistance to consumer debtors by allowing such debtors to avail themselves of the benefits of COVID-19 relief without impacting negatively their bankruptcy options.These changes come via the Small Business Reorganization Act of 2019 (SBRA), effective February 19, 2020, and the Coronavirus Aid, Relief and Economic Security Act (CARES Act), enacted on March 27.
The SBRA and Modifications from the CARES Act
Many small businesses consider traditional chapter 11 restructuring to be cost-prohibitive because the same procedural requirements that apply to large businesses also apply to small businesses.
As a remedy, the SBRA created a new subchapter, Subchapter V, under chapter 11 of the Bankruptcy Code. Subchapter V primarily aims to increase the speed and decrease the cost of the bankruptcy process for “small business debtors” allowing these businesses the best opportunity to restructure.
Who qualifies as a “small business debtor?”
The SBRA initially defined a small business debtor as one who had debts of $2,725,625 or less. However, the CARES Act modified the SBRA’s definition of a small business to include all businesses with debt of $7.5 million or less. At least 50% of that debt must be from commercial or business activities.
This modification to the SBRA will provide access to the streamlined restructuring process afforded by the SBRA to many more small businesses due to the expansion of the definition of a small business. However, the change to the definition of small business only applies to cases filed after the CARES Act was enacted.
Other Impacts of the CARES Act on Chapter 7 and 13 Bankruptcy Provisions
In addition to its modification of the SBRA, the CARES Act includes several other key provisions that impact both chapter 7 and 13 bankruptcies. The primary bankruptcy provisions are found in Section 1113 of the CARES Act and include:
- Excluding coronavirus-related payments from the federal government from the definition of “income” in both chapters 7 and 13, which prevents those payments from being treated as “income” for purposes of filing bankruptcy;
- Excluding coronavirus-related payments from the calculation of disposable income for purposes of confirming a chapter 13 plan; and
- Allowing individuals and families already in chapter 13 to seek modifications to their payment plans if they are experiencing a material financial hardship as a result of coronavirus, including the option to extend their payments up to seven years after their initial plan payment was due.
All of the provisions in the CARES Act sunset one year following the enactment of the legislation.
These are challenging times for consumers and businesses alike. If bankruptcy is an option you would like to consider, contact us for more information.
The Woods Rogers Bankruptcy and Creditors’ Rights group is led by Richard Maxwell and Michael Hastings, veteran chapter 11 bankruptcy lawyers, both of whom have extensive experience representing small and medium-sized businesses in chapter 11.