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Bankruptcy Law Changes - 2020 Recap And What To Expect In 2021

Client Alert

In a year of health challenges and financial distress to many individuals and businesses affected by the pandemic, the year 2020 brought some significant changes to bankruptcy laws. Some of these changes were in place prior to the pandemic; others were a direct response to the pandemic with the goal of helping struggling businesses and individuals. Ahead, we can likely expect further changes to the Bankruptcy Code with the incoming Congress.

Small Business Reorganization Act of 2019 (SBRA)

SBRA was a new bankruptcy law in August 2019 that went into effect on February 19, 2020. Under this new law, small businesses that have debts under $2,725,625 can take advantage of a new and “easier” Chapter 11 bankruptcy reorganization process. A new “Subchapter V” component of the Chapter 11 reorganization process was added to the Bankruptcy Code. The goal of Subchapter V is to reduce the time and expense of small business reorganizations. A number of components in a typical Chapter 11 bankruptcy filings have been eliminated under Subchapter V including US Trustee fees, a separate disclosure statement, and a creditor’s committee. One new addition is a Subchapter V Trustee, a person with business expertise who shall “facilitate the development of a consensual plan of reorganization.”

Coronavirus Aid, Relief and Economic Security (CARES) Act

Enacted on March 27, 2020 as part of the $2T economic stimulus program for economic relief for businesses and individuals, the CARES Act expanded the debt limit under SBRA from $2,725,625 to $7,500,000. This component of the CARES Act expires in one year on March 27, 2021. These changes were intended to temporarily expand the number of businesses that could take advantage of the Subchapter V type of bankruptcy reorganization.

The CARES Act also made some modifications to the Bankruptcy Code by permitting chapter 13 cases that had previously been limited to up to 5 years on repayment plans to be modified up to 7 years. Further provisions in the CARES Act provide that stimulus relief funds to individuals are exempt and are to be not considered income for bankruptcy purposes.

New Bill Pending in Congress That May Significantly Change Consumer Bankruptcy

In December 2020, the Consumer Bankruptcy Reform Act of 2020 was introduced that would significantly change the administration of consumer bankruptcies in the future. The proposed legislation would eliminate Chapter 7 and Chapter 13 bankruptcy filings and replace them with a new Chapter 10. This one chapter of bankruptcy filings would allow a consumer debtor to have three types of payment plans, provide for minimal, if any, payback to unsecured creditors, and allow for the discharge of student loan debt and other currently non-dischargeable obligations. Absent a showing of “undue hardship” (a difficult standard to meet), student loan obligations currently are considered nondischargeable. While this proposed legislation is not yet law, there seems to be congressional support to change the rules of bankruptcy for individuals in the coming year.

Bankruptcy Case Filings

Total bankruptcy filings during 2020 decreased 30 percent from 2019 numbers in a large part due to economic stabilization and stimulus measures provided by the government in response to the COVID-19 pandemic. While consumer bankruptcy cases were significantly down, commercial bankruptcy filings increased 29 percent during 2020. Much of the decrease in consumer bankruptcy filings is likely attributed to eviction and foreclosure moratoriums currently in place. Further, many courts across the country have implemented measures that have stay or delayed collection litigation. These creditor rights actions are the common impetus for individuals to consider filing for bankruptcy protection and placing many of the actions on hold for the moment has also resulted in individuals holding off filing bankruptcy.

What to expect in 2021

The sunset provision in the CARES Act that extends the debt limit in a Subchapter V case expires on March 27, 2021. Unless that deadline is extended, there may be a significant number of businesses with debts of more than $2.75M but less than $7.5M that will be prompted to consider filing under the “easier” bankruptcy option prior to the March deadline. This is likely to increase commercial filings during the next few months.

If student loan debt becomes dischargeable under the new proposed bankruptcy law (or a different proposed law) in the coming year, it is very likely that consumer bankruptcy cases will significantly increase. There is likely an artificial suppression of consumer bankruptcy case filings going on given that many of the most common financial distress events (evictions, foreclosures, collection litigation) are more or less on hold at the moment. Even if a change to student loan debt discharge does not become a reality, there seems to be a day of reckoning coming this year when deferred mortgage payments and rent payments are likely to come due and credit litigation gets back on track.

While much of the government assistance in response to COVID-19 has been focused on preserving jobs and housing, unintended victims in this pandemic response have been landlords and other creditors which been forced to put their collection rights on hold due to mandatory moratoriums and court proceedings. Those delays and accommodations are generally in the form of delay and deferral, not an outright forgiveness of the obligation. At some point, those restrictions will be lifted and a backlog of litigation will recommence; likely resulting in many individuals and businesses turning to bankruptcy options as protective measures.

As we find our way out of the pandemic, relief efforts and moratoriums will be discontinued or lifted. For many businesses and individuals that remain in financial distress, it may cause an increase in bankruptcy case filings. 2021 may also include some statutory changes that could also result in an increase in bankruptcy filings.

Michael A. Steel is an attorney with the Financial Reorganization and Creditors Rights team at Brennan, Manna & Diamond. Please feel free to reach him at masteel@bmdllc.com or (330) 374-7471.


Valley National Bank/Trulieve Loan: A Big Step Out of the Shadows

In a late December press release, Trulieve announced that it had secured a $71.5 million commercial bank loan. In addition to the amount of the loan, which may be the largest commercial bank loan to date to a cannabis company, the release prominently identified Valley Bank and featured both a quote from Valley’s Senior Vice President, John Myers, and a description of the Bank’s service platform and commitment to the cannabis industry.

The End of Non-Competes? The Impact It Will Have on the Healthcare Industry

On January 5, 2023, the Federal Trade Commission (“FTC”) announced a proposed rule that, if enacted, will ban employers from entering into non-compete clauses with workers (the “Rule”), and the Rule would void existing non-compete agreements. In their Notice, the FTC stated that if the Rule were to go into effect, they estimate the overall earnings of employees in the United States could increase by $250 billion to $296 billion per year. The Rule would also require employers to rescind non-competes that they had already entered into with their workers. For purposes of the Rule, the FTC has defined “worker” to also include any employees, interns, volunteers, and contractors.”

2022 Healthcare Recap and 2023 Healthcare Check-Up

As the country begins to return to a new “normal” following the COVID-19 pandemic, there are many healthcare rules changing on both the federal and state levels as a result. Thus, it is important for healthcare providers and their employers to be aware of these changing rules, and any implications they may have on their practice. Look back on healthcare in 2022 and find a checklist for 2023.

Direct Support Professional Retention Payments

On December 15, the Ohio Senate and House passed House Bill 45, which authorizes the Department of Developmental Disabilities (DODD), in conjunction with the county boards of developmental disabilities, to launch their initiative to issue retention payments to Direct Support Professionals (DSPs). These retention payments will be distributed quarterly to participating home and community-based waiver providers to address the workforce crisis in the direct provider sector. Governor DeWine needs to sign the Bill to begin the payments, but he is expected to do so by the end of 2022.

Real Estate Investors Position for 2023 Opportunities

Real estate investors weathered another year in a post-pandemic world, with the year closing with yet another interest rate increase coupled with both uncertainty and heightened interest carrying into 2023. Just last Wednesday, the Federal Reserve raised its benchmark interest rate 0.50 percentage points, shifting the target range to 4.25% to 4.50%. The new level is the highest the fed funds rate has been since December 2007 and marks the seventh rate hike this year. So what does this mean to investors, brokers, lenders, and others in the real estate world? Read a few perspectives below from stakeholders familiar with our BMD clients and the markets in which they do business.