The COVID-19 crises recently prompted the passage of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) which, in part, includes changes to the Bankruptcy Code of which financial institutions should be made aware concerning existing debtors, consumers, and small businesses facing financial distress.

In relation to Chapter 11 bankruptcies, the CARES Act amends the Small Business Reorganization Act of 2019 by increasing the debt limit for businesses filing for bankruptcy relief under the new subchapter V of Chapter 11 of the Bankruptcy Code from $2,725,625 to $7,500,000. The Small Business Reorganization Act of 2019 was enacted, in part, to provide more expedited procedures for eligible businesses and to eliminate some of the costly elements of Chapter 11 relief, such as the filing of a disclosure statement. The increase in the debt limit will allow additional financially distressed businesses to qualify for the more efficient reorganization provided under subchapter V of Chapter 11 of the Bankruptcy Code.

As for its impact on Chapter 7 and 13 bankruptcy cases, the CARES Act provides that “current monthly income,” as defined in the Bankruptcy Code, shall not include payments made under federal law relating to COVID-19. As a result, stimulus checks received by eligible consumers will be exempted income for bankruptcy filing purposes. Additionally, stimulus checks and any other payment made under federal law related to the coronavirus will not be included as disposable income for the purposes of Chapter 13 Plan confirmation.

Furthermore, the CARES Act provides that debtors with already confirmed plans now have the ability to seek to extend their Chapter 13 Plan repayment period to seven years. Previously, the Bankruptcy Code capped the Chapter 13 repayment period to five years. Specifically, Chapter 13 debtors with confirmed Chapter 13 Plans who are experiencing or have experienced a “material financial hardship due, directly or indirectly,” as a result of the COVID-19 pandemic, may seek a Chapter 13 Plan modification after notice and a hearing. The CARES Act allows debtors seeking said modification to extend Chapter 13 Plans for up to seven (7) years after the first payment due under the confirmed Chapter 13 Plan.

Importantly, the amended provisions of the Bankruptcy Code referenced above are only in effect for a period of one (1) year following the enactment of the CARES Act. As a result, if debtors, consumers and businesses plan to take advantage of these amended Bankruptcy Code provisions, they will need to do so in the near future.

While the overall impact of the COVID-19 crisis is unknown, it is likely that financial institutions can expect to see increased defaults and thus increased bankruptcy filings and modifications of previously confirmed Chapter 13 Plans. Harris Beach PLLC will continue to monitor and provide updates as new orders, directives, laws and guidelines are implemented.