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COVID-19 Bankruptcy Relief

Posted Tuesday, March 31, 2020 by Kim Sandher

Alternative TextThe Coronavirus Aid, Relief, and Economic Security (CARES) Act enacted March 27, 2020 in response to COVID-19 makes important revisions to the Bankruptcy Code. One of these is that it opens the door to bankruptcy for many small businesses to allow them to reorganize and stay open.

Small Business Relief

On February 19, 2020 (unrelated to COVID-19), the Small Business Reoganization Act (SBRA) went into effect. The SBRA was enacted to reduce the cost and expense for small businesses to reorganize under Chapter 11. It creates a streamlined process for a debtor to reorganize and sets a simpler standard for a debtor to confirm a plan. Chapter 11 bankruptcy is typically expensive and long so prior to SBRA many businesses that could not afford to file Chapter 11 did not have bankruptcy as an option if they wanted to stay open.

To qualify under the SBRA, the debt limit cannot exceed $2,725,625.00.

However, due to the CARES Act, the debt limit is increased to $7.5 million. It applies to all cases filed after the enactment of the CARES Act and is valid for one year. After the one year period, the debt limit will be reduced to $2,725,625.00 again. 

Changes to Chapter 7 and 13

The CARES Act changes for Chapter 7 and Chapter 13 apply to pending cases as well and will be applicable for one year from the effective date of the CARES Act.

The changes are as follows:

  • COVID-19 related payments are not considered in calculating disposable income for Chapter 13 plan payments

  • COVID-19 related payments from the federal government are not included for purposes of calculating a debtor's income to determine eligibility for Chapter 7 or 13 Alternative Text

  • Chapter 13 debtors who have already confirmed a plan may modify the plan based on a material financial hardship caused by the pandemic. This includes extending their payments for seven years after their initial plan payment was due. Without the CARES Act, Chapter 13 plans are 3-5 years in length. The CARES Act allows debtors a longer time period to complete their plan.

The information provided here is changing rapidly due to the pandemic and may change after this posting. If you have questions, please contact Kim Sandher at (206) 805-1490 or KSandher@PivotalLawGroup.com.