CARES Act Modifies U.S. Bankruptcy Code

April 1, 2020 Posted in Legislative Update

On March 27, 2020, President Donald Trump signed the Coronavirus Aid, Relief and Economic Security (CARES) Act into law. Among other things, the CARES Act made some important changes to the U.S. Bankruptcy Code.

  • The CARES Act expands the availability of the Small Business Reorganization Act of 2019 (“SBRA”). The SBRA added a new section to Chapter 11 of the Bankruptcy Code that gives small businesses a meaningful opportunity of reorganizing their financial affairs. As originally enacted under the SBRA, eligibility for a small business Chapter 11 was limited to a business with less than $2,725,625 in debt. The CARES Act temporarily increases the debt limit for a small business to qualify to $7,500,000. This increased debt limit will remain in effect from the date of enactment of the CARES Act for a period of one year, at which point the debt limit will revert to $2,725,625. This is a significant amendment to the Bankruptcy Code because it means more businesses will be able to take advantage of the benefits of SBRA. Specifically, more businesses will be able to take advantage of the relaxed Chapter 11 requirements and continue to operate their business while they develop a plan to repay their debts.   
  • The CARES Act also modifies Chapter 7 and Chapter 13 bankruptcy proceedings. Payments from the federal government related to COVID-19 are excluded for the purposes of calculating a debtor’s income in determining eligibility under Chapter 7 and Chapter 13. The CARES Act also excludes such payments in determining a debtor’s disposable income for a Chapter 13 plan of reorganization. This will allow debtors to keep their federal payment rather than apply it to their debt repayment plan.

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