The CARES Act, which President Donald Trump signed into law March 27 in response to the COVID-19 pandemic, includes two changes to bankruptcy code that could impact many businesses and individuals.
The first is a significant increase in the amount needed to qualify for the new Subchapter V Debtor Reorganization bankruptcy process, which the Small Business Reorganization Act of 2019 introduced. Under the CARES Act, businesses and some individuals with up to $7.5 million in secured and unsecured debt now qualify to proceed under the streamlined bankruptcy process.
The second significant change affects those with a Chapter 13 plan already in place when the act became law. Should those individuals determine the pandemic has impacted them, they may seek to amend their Chapter 13 plan.
The amendment could extend the repayment period, allowing them to remain in Chapter 13 for up to seven years. This would allow those debtors to lower their payments by spreading them across an additional 24 months.
Steve Barham and Jeffrey Maddux, financial services and litigation attorneys with Chambliss, Bahner & Stophel, explain more about what the CARES Act means for small businessowners and individuals who are either considering bankruptcy or already have a plan in place.
How much of an increase does the CARES Act provide over the streamlined bankruptcy process introduced last year?
Barham: “Last year, Congress passed a change to Chapter 11 bankruptcies designed to allow small businesses to be able to go into bankruptcy. It’s a streamlined process that removes some of the aspects of Chapter 11 that are important for a big business when it tries to reorganize but become expensive and onerous for a smaller business.
“That provision had a limit, though. If your company had secure and unsecure debt totaling more than $2,725,625, then it did not qualify for the new Subchapter V Debtor Reorganization bankruptcy process. The CARES Act increased that amount to $7.5 million worth of assets or debts.
Maddux: “It gives that option to more small business that might be facing financial stress right now.’’
How does the CARES Act help individuals?
Barham: “The CARES Act also recognizes the potential of the pandemic to impact the ability of people currently in Chapter 13 to complete their plan, so it allows them to modify their plan so they don’t have to have their bankruptcy dismissed and then file a new one, which can have a detrimental impact on an individual.
“The CARES Act allows people to add up to two more years to their plan. That will allow them to stretch out their obligations or take into account changes in income that might be occurring because of layoffs or working fewer hours. They just have to show how the pandemic has materially impacted them.’’
Has bankruptcy activity increased since the CARES Act became law?
Barham: “So far, most people appear to be taking a wait-and-see approach. There’s no big reason for many people to immediately jump into the bankruptcy process. I think people are waiting to come out on the other side of the pandemic so they can get a feel for what their creditors are willing to do and not do with regard to reworking any debt they have that’s causing issues because of what will hopefully be a relatively short-term, yet dramatic, drop in our economy.’’
How much bankruptcy activity were you seeing before the pandemic?
Maddux: “On the business side, not a lot. The intent of the Small Business Reorganization Act of 2019 was to make a major reorganization more feasible for small businesses, so we might start seeing more of the small businesses that are being really impacted by what’s taking place try to utilize the increase in the debt limit.
“No one knows what this is going to look like on the back side, though, so I think businesses are going to simply be trying to make the best possible decisions for themselves and their employees.’’
What will drive bankruptcy activity as the pandemic eases and the economy begins to rebound?
Barham: “How quickly people are able to get back to work and whether or not they’re at full employment when they go back. That will also turn a lot on what happens with the Small Business Administration loans and the credit that’s been made available to businesses through the CARES Act. If they’re able to obtain funding that helps them make it through this down period and the economy comes back this summer, then there might not need to be a lot of bankruptcies of businesses that were in good shape prior to all this happening.’’
Will people who are not in a Chapter 13 plan already but might enter one in the near future be able to take advantage of the extension?
Barham: “As I read it, no. However, I do believe any income they receive as a result of the COVID-19 legislation will not be part of the disposable income when they try to confirm the Chapter 13 plan.’’
How is Chambliss responding to the CARES Act in terms of client service?
Maddux: “We have a team that does a lot of work for financial institutions and other creditors in a wide range of bankruptcies. We also do some debtor work, as well. At the end of the day, we want the provisions of the CARES Act to help everyone involved, so we’re open to talking with anyone to see if we would be able to help out.
“But also, there are a lot of good people in this city and in the surrounding area who do a great job. We have a very good bankruptcy bar, and this bar can be a tremendous benefit to small and large businesses.’’
Talk about your firm’s COVID-19 Insights Center.
Barham: “For those small businessowners who are thinking, ‘Gosh, I’m overwhelmed by what’s going on and I might need to file bankruptcy,’ our team here at Chambliss is working hard on a section of our website called the COVID-19 Insights Center. I invite everyone to look at it. We’re doing a lot of work keeping up with the government response to the pandemic and how all of the changes might affect businesses and putting it in terms businessowners can understand.
“This section of our website also provides insight into other people in our firm. There are a lot of folks here who can help somebody navigate all of the issues people are facing, whether it’s the new paid leave requirements, changes to licensing and practice requirements for health care professionals, how you qualify for the stimulus money and more. We have folks that are zeroing in on these things and are prepared to help small businesses navigate them.
“If you learn you’re better off trying to reorganize in a Chapter 11, then we can either help with that, or if we’re conflicted out, try to find some folks who might be able to help.’’
Source: Some information provided by Chambliss, Bahner & Stophel