Commentary

March 19th, 2020

Summary of CARES Amendments and the Small Business Bankruptcy Act of 2019

With the economic crisis created by COVID-19, Congress has passed the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”).  Along with wide sweeping financial aid, the CARES Act amends the newly created Small Business Reorganization Act of 2019, subchapter 8 of Chapter 11, substantially increasing the financial scope of the streamlined procedures of subchapter 8.

In addition, the CARES act amends Chapter 13.  However, as noted below, each of the amendments can be utilized or applied only to either filings or amendments during the one year period from the date of enactment.  Chapter 13’s can be extended to a 7 year period as a result of the amendments, however, no such extension applies to the small business bankruptcy debtor which is still limited to a 3 to 5 year reorganization term.  

 

CARES Amendment to the Small Business Bankruptcy and Chapter 13

Amendments to Small Business Bankruptcy

  1. The definition of “Debtor” is amended to include a person or affiliated person engaged in business with noncontingent liquidated secured and unsecured debt up to $7,500,000 (excluding insider or affiliate debt). 50% of the debt must arise from business activities.  (Raising the ceiling on the application of subchapter 8 from $2,000,000).  The act or application is not retroactive and may only be applied after the date of enactment.
  2. The amendment is designed as a short term resolution. One year after the date of enactment, the term “Debtor” returns to its original definition under 11 U.S.C. 51(D) to reinstate the $2,000,000 limitation (as adjusted by the Consumer Price Index).
  3. Excluded from monthly income for purposes of determining disposable income are payments made under Federal Law relating to the National Emergencies Act with respect to COVID-19. Thus relief received under other provisions of CARES remains protected.

Amendments to Chapter 13

  1. Confirmation requirements of Chapter 13 plans are also amended to exclude payments received by a Chapter 13 debtor under the National Emergencies Act with respect to COVID-19.
  2. Chapter 13 plans are also subject to modification for a debtor who has experienced “material financial hardship” directly or indirectly related to COVID-19. Thus the amendments are applicable to an existing Chapter 13 debtor.
  3. Chapter 13 plan modifications may provide for the extension of the plan to 7 years after the date the first payment under the plan was due.
  4. The amendments to Chapter 13, like those to the small business bankruptcy are also designed as short term solutions. One year after the date of enactment, each amendment described in paragraphs 4-6 above are deleted and the provisions returned to their original language

 

The Small Business Bankruptcy as Initially Promulgated

In August of 2019, Congress passed the Small Business Reorganization Act of 2019 which was to go into effect on February 20, 2020.  The purpose of the act was to provide a streamlined alternative to facilitate the small business debtor to reorganize.  The act was recognition that Chapter 11 procedures placed too great a financial as well as administrative compliance burden upon the small business debtor.  Balancing streamlined procedures and the reduction of reporting provisions, like a Chapter 13, the Trustee distributes funds.  Adequate protection payments may be required prior to confirmation.

The definition of small business debtor contained initially in section 11 USC 101(51D) limited the applicability of the statute to individuals or business entities with debt initially not exceeding $2,000,000 (excluding debts owed to one or more insides or affiliates).  The $2,000,000 limitation was subject to adjustment to reflect changes in the Consumer Price Index.

Debtor’s were required at the time of filing a petition to state whether they fell within the small business debtor definition.  The U.S. Trustee or a party in interest could object to the designation within 30 days after the 341 meeting or an amendment to the statement.  The small business debtor case proceeds without the appointment of a creditor’s committee and financially more significantly, the employment of an attorney for such a committee, an expense that was born by the Debtor’s estate. 

The most significant change or addition to reorganization in the small business bankruptcy was the appointment of a standing Trustee who performed functions similar although not identical to those of a Chapter 13 Trustee.  The small business bankruptcy Trustee involvement includes any hearing or conference involving property valuation, confirmation, modification, or sale of property, and most importantly the facilitation of the development of the plan of reorganization. Further the Trustee ensures timely payments, may operate the business in question if the debtor ceases to be a debtor-in-possession.  The Trustee’s oversight continues until the plan has been substantially consummated.  That oversight includes the obligation to be accountable for property received, to examine proofs of claims and object if appropriate, to oppose the debtor’s discharge if advisable, to furnish information as requested by a party in interest regarding the estate or its administration, and to make a final report and file a final account of the administration of the estate with court and U.S. Trustee.

The time frame for filing a plan of reorganization is 90 days.  Further, only a debtor may file.  No disclosure statement is required. Plan requirements are fairly simple, all or a portion of future income must be submitted to the supervision and control of the Trustee for the execution of the plan.   Acceptance of the plan by an impaired class is not required.  However, the plan must provide for all of the projected disposable income of the debtor to be received in the 3 to 5 year period to be applied to plan payments.  Liquidation of nonexempt assets must be provided as an alternative if plan payments cannot be made. Assuming plan payments are made, a discharge of pre-petition debts is entered.