CARES Act Expands Bankruptcy Options for Individuals and Small Businesses (1)Client Alert
The Coronavirus Aid, Relief and Economic Security (CARES) Act provides a $2 trillion economic stimulus for US companies and citizens faced with the challenges of the COVID-19 coronavirus. The CARES Act also significantly expands existing bankruptcy options for small businesses by temporarily increasing certain debt limits set forth in the recently effective Small Business Reorganization Act of 2019 (SBRA).
Small Business Reorganization Act of 2019 (SBRA)
In August of 2019, President Trump signed into law the Small Business Reorganization Act of 2019 (SBRA) – a piece of legislation that gave small businesses a variety of benefits when filing for Chapter 11 bankruptcy. Effective February 22, 2020, the SBRA offers small businesses with aggregate liabilities that do not exceed $2,725,625 the opportunity to resolve their outstanding debts and financial obligations through a more price-conscious and streamlined Chapter 11 process under a new subchapter V component of the Bankruptcy Code. In an attempt to minimize business liquidations, the SBRA will allow business owners to retain the equity in their business, while simultaneously providing more guidance and structure throughout the reorganization process at an affordable cost.
The SBRA’s key provisions include:
Simplifying the Process
Debtors now have 90 days to file their reorganization plan from the day in which they file their bankruptcy petition, with easier rules for extending their payment plans. The SBRA will also incorporate more lenient reorganization requirements. Aside from maintaining that all plans are “fair and equitable,” businesses now have two primary ways to repay their creditors: (1) the business, through its restructuring plan, will identify any “disposable income” (income not used to pay for a business’s necessary expenses) and how it plans on distributing this income to its creditors; or (2) the plan will lay out an outline of how a company intends on distributing some or all of its property, provided that it can demonstrate that such property “is not less” than the projected disposable income that would be paid to its creditors. In exchange for complying with one of these two plans, the SBRA permits business owners to maintain possession of their company.
Extending the Payment Schedule & Debt Dismissal
A small business’ debts are no longer required to be paid in full. Under the SBRA, business owners can now create a repayment schedule that can span anywhere from 3 to 5 years. By adhering to this payment schedule, business owners are permitted to maintain ownership of their companies. After complying with this 3- to 5-year creditor repayment plan, courts are required to discharge any remaining debt owed by the small business.
Standing Trustee Appointment
Similar to Chapter 13 personal bankruptcy filings, the SBRA establishes that once a small business files under the SBRA, a “standing trustee” will be appointed to oversee the case. Throughout the plan of reorganization payment period, the standing trustee will oversee the small business’ estate, which includes general business operations, reviewing the company’s financial condition, or possibly, reporting any fraud or misconduct to the court. The goal under the SBRA is that by appointing a standing trustee, small businesses will have an additional resource in ensuring that adherence to their reorganization plans. In addition, unless the court orders otherwise, no unsecured creditors’ committees are permitted to be appointed or otherwise oversee the case.
Coronavirus Aid, Relief and Economic Security (CARES) Act provisions related to expanding bankruptcy options for small businesses
Under the CARES Act enacted March 27, 2020, the debt limit under the SBRA for small businesses filing under the new subchapter V of chapter 11 of the Bankruptcy Code increases from $2,725,625 to $7.5M for a period of 1 year only. The debt limit would then decrease back to $2,725,625 after the one-year increase. For small businesses in financial distress with debts between this range ($2,725,625 - $7,500,000), a time-sensitive evaluation of bankruptcy options should be considered prior to the expiration of the expanded debt limit in March,2021.
The CARES Act also extends benefits to individuals in a bankruptcy. For individuals in a chapter 13 bankruptcy case that have a material financial hardship due to the coronavirus, bankruptcy plans can be expanded for up to 7 years. Further, the coronavirus financial assistance funds shall not be considered “income” for bankruptcy purposes.