Article by Heesoo Park, J.D. Candidate 2022, Boston College Law School
On March 27, President Joe Biden signed the COVID-19 Relief Extension Act into law. The Act extends for another full year, the provisions of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) that temporarily modified the Bankruptcy Code and the Small Business Reorganization Act of 2019 (“SBRA”), subchapter V of chapter 11. The SBRA was enacted to make chapter 11 more accessible and affordable for small businesses.
In response to the financial crisis caused by the COVID-19 pandemic, certain provisions of the CARES Act provide financially distressed small businesses and individuals greater access to bankruptcy relief. The relevant modifications of the CARES Act were originally set to expire on March 27, 2021, but with the new law, it will now expire on March 27, 2022. A summary of the extended provisions are as follows:
1. Increased debt limit for debtor eligibility under the SBRA
One of the most important bankruptcy related changes made by the CARES Act was an increase in the aggregate debt limit for debtor eligibility under the SBRA. §1113(a)(1). Originally, the SBRA defined a debtor as the Bankruptcy Code’s §101(51D) definition of “small business debtor”, which capped debt limit at aggregate noncontingent, liquidated, secured and unsecured debt of $2,625,625. The CARES Act redefines a debtor under the SBRA, temporarily raising the debt limit to $7,500,000, until March 27, 2021. As a result, it significantly increased access to the SBRA for many small businesses and individuals impacted by the pandemic that were previously ineligible due to lower debt limit. The newly signed COVID-19 Relief Extension Act extends the temporary increased debt limit to March 27, 2022.
2. Excluding COVID-19 Related Benefits from “Current Monthly Income” Under §101(10A) of the Bankruptcy Code
Another important change brought under the CARES Act was the provision excluding COVID-19 related relief payments from the Federal Bankruptcy Code’s §101(10A) definition of “current monthly income”. §1113(b)(1)(A)(iii). This has significant implications for determining whether an individual is eligible for chapter 7 or chapter 13.
In a chapter 7, consumer debtors must complete the “means test”. If current monthly income exceeds a certain threshold, chapter 7 relief may be unavailable and chapter 13 may be the only option. COVID-19 related payments artificially inflate a debtor’s income. Excluding those payments will generate a more realistic picture of the debtor’s income consistent with the purpose of chapter 7 – providing a fresh start to honest but unfortunate debtors.
Excluding COVID-19 related payments can also have a significant impact on determining the applicable commitment period of chapter 13 debtor in plan confirmation. The debtor’s current monthly income is an important factor in determining the length of the plan. Therefore, excluding COVID-19 related payments ensures that the relief payments do not result in lengthening the term of the chapter 13 plans from three years to five years.
3. Excluding COVID-19 Related Benefits from “Disposable Income” Under §1325 of the Bankruptcy Code
The CARES Act excludes COVID-19 related payments from “disposable income” for the purposes of confirming a plan under chapter 13. §1113(b)(1)(B). In order to confirm a plan under chapter 13, the plan must provide for payment of all the debtor’s disposable income to unsecured creditors.
Excluding COVID-19 related payments from disposable income prevents an artificial increase in the amount of money that a debtor would have to devote to the payment of unsecured creditors. The CARES Act applies to future chapter 13 debtors and pending cases without confirmed plans.
4. Allowing Modification of a Confirmed Plan under Chapter 13 for “Material Financial Hardship” due to COVID-19
The CARES Act added a new provision §1329(d)(1). It allows a chapter 13 debtor with a plan that was confirmed before the enactment of the CARES Act (March 27, 2020), to seek modification of the plan if the debtor is “experiencing or has experienced material financial hardships due, directly or indirectly” to COVID-19. The recently signed extension preserves this change but now applies to any plans confirmed before the enactment of the COVID-19 Relief Extension Act (March 27, 2021), allowing more debtors to qualify for the relief. Under this provision, the plan term may be extended up to seven years after the date of the first payment under the original plan. The previous chapter 13 permits plans for up to five years.
The Act is silent as to what amounts to “material financial hardship” or the scope of the term “indirect”. However, there is case law addressing the issue of whether a plan default prior to the enactment of CARES Act is a cause for modification under §1329(d)(1). In In re Fowler, 2020 WL 6701366 (Bankr. M.D. Ala. Nov. 13, 2020), the court held that the only requirements under §1329(d)(1) are that (i) the plan was confirmed before March 27, 2020 and (ii) that the debtor experienced or is experiencing a material financial hardship due to COVID-19. Therefore, the court allowed the debtor with pre-CARES Act plan default to avail herself of the 7-year plan modification.
The CARES Act significantly opened the doors to bankruptcy relief for individuals and small businesses in financial distress due to the pandemic. The decision by the Congress and the Biden administration to extend these protections for another full year continues this positive step. The effects of COVID-19 pandemic still linger and many households and small businesses will continue to suffer financial distress. Given the successes of the SBRA, and the CARES Act, Congress should begin the discussion now on making these changes permanent.