On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), a $2.2 trillion stimulus package intended to help stabilize the U.S. economy in connection with the shutdown caused by the COVID-19 virus. The CARES Act includes certain temporary amendments to the Bankruptcy Code that impact both individuals and small businesses.
With respect to individual debtors, the CARES Act amends the definition of income in Chapter 7 and Chapter 13 cases to exclude COVID-19-related payments from the federal government. The amendments, which sunset after one year from March 27, 2020, exclude COVID-19 related payments from the definition of “current monthly income” under 11 U.S.C. §101(10A)(B)(ii) for purposes of determining an individual’s eligibility for either a Chapter 7 or Chapter 13 filing. COVID-19 payments are also excluded from the “disposable income” calculation under 11 U.S.C. §1325(b)(2) for plan confirmation under Chapter 13. Pursuant to the addition of 11 U.S.C. §1329(d)(1), Chapter 13 debtors can also seek a plan modification of a confirmed plan if the debtor is experiencing or has experienced a “material financial hardship due, directly or indirectly,” to the COVID-19 pandemic. Pursuant to 11 U.S.C. §1329(d)(2), this includes extending plan payments for up to seven years after the time that the initial payment was due under the confirmed plan. The CARES act does not define the terms “direct” or “indirect” and does not indicate what type of “material financial hardship” will be sufficient to justify a plan modification. How narrowly or broadly bankruptcy courts interpret these provisions remains to be seen.
With respect to small businesses, the CARES Act also uses the same one-year sunset provision to temporarily amend the recently enacted Small Business Reorganization Act (“SBRA”) to increase the debt threshold for eligibility from $2,725,625 to $7,500,000. The SBRA, set forth in Subchapter V of Chapter 11 of the Bankruptcy Code, only became effective on February 19, 2020, and very few companies have invoked its provisions. The SBRA generally allows smaller businesses to confirm a plan without the necessity of preparing and filing a disclosure statement, and the plan confirmation process is streamlined. Additionally, an unsecured creditors’ committee will generally not be appointed, and each case will have a trustee (similar to a Chapter 13 trustee) who can assist the debtor in formulating a consensual plan and who is responsible for administering plan payments. The temporary expansion of the SBRA’s eligibility requirements opens the door to a wider pool of eligible small business debtors and provides an important and much-needed tool to help them address issues relating to the severe economic downturn occasioned by the COVID-19 pandemic.
Bankruptcy Court Remains Remotely Open
While the Hale Boggs Building is currently closed to the public, the United States Bankruptcy Court for the Eastern District of Louisiana remains open to the extent set forth in the Court’s recently issued procedures. On April 3, 2020, the Court entered an order adopting protocols for emergency health and safety conditions where governmental orders preclude normal court operations. The Court’s protocols allow certain hearings to be conducted telephonically or via video conference as follows:
The protocols provide that non-evidentiary hearings may be conducted by telephone and evidentiary hearings by video conference (join me).
The local rules relating to self-calendaring and emergency requests for hearings remain in effect.
Please consult the Court’s website for updates on the status of the Court and its operations. The protocols can be found at https://www.laeb.uscourts.gov/file/amendedgeneralorderonemergencyprotocolspdf
An Onslaught of Bankruptcy Filings?
Many predict that the economic consequences of COVID-19 will precipitate a flood of bankruptcy filings. Clearly certain sectors of our economy have been devasted. Restaurants, bars, hotels, hair salons, and many other businesses whose operations are not “essential” or who cannot easily pivot to remote operations may struggle to survive. At this time, the length of the pandemic, the success of the CARES Act and other government stimulus programs, and the availability of capital to businesses to resume operations are hard to predict. We also do not know how much flexibility lenders will be able to afford borrowers in the aftermath of this pandemic (which may depend upon whether your lender is a local, regional or national bank, a hedge fund, or a CMBS servicer). The economic consequences of the pandemic are just as difficult to predict as its other impacts.
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