December 9, 2020

CARES Act Temporarily Expands Streamlined Small Business Process in Chapter 11 Bankruptcy

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In February of 2020, the Small Business Reorganization Act (SBRA) became effective and added new Subchapter V of the United States Bankruptcy Code. ¹ SBRA aims to “streamline existing bankruptcy procedures and provide new tools to increase a small business’ ability to achieve a successful restructuring.” ²

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Importantly, new Subchapter V helps small businesses by reducing their costs and expenses to reorganize under chapter 11. The new, streamlined process is commonly referred to as the “small business case” process in chapter 11.

Although, SBRA was not enacted as a response to COVID-19 pandemic which is wreaking havoc in the economy, it was particularly timely and has already been revised to provide even more small businesses with easier access to the bankruptcy court.  

Just last week, the Coronavirus Aid, Relief and Economic Security (CARES) Act ³ was enacted, and it includes significant revisions to the United States Bankruptcy Code. The most important revision is the temporary adjustment to the debt limit eligibility threshold for Subchapter V.

Before the CARES Act, qualification for relief under Subchapter V of SBRA required that a company’s debts could not exceed $2,725,625 (including both secured and unsecured debts). The CARES Act dramatically increases that threshold to $7,500,000. With that increase, many more businesses will qualify to elect the more streamlined “small business case” process in Chapter 11 reorganizations.

Additionally, according to the American Bankruptcy Institute, the following are other critical issues addressed by the Bankruptcy Act within the CARES ACT pertaining to both chapters 11 and 13:

  • Amending the definition of “income” in the Bankruptcy Code for chapters 7 and 13 to exclude coronavirus-related payments from the federal government from being treated as “income” for purposes of filing bankruptcy.
  • Clarifying that the calculation of disposable income for purposes of confirming a chapter 13 plan shall not include coronavirus-related payments.
  • Explicitly permitting individuals and families currently in chapter 13 to seek payment plan modifications if they are experiencing a material financial hardship due to the coronavirus pandemic, including extending their payments for up to seven years after their initial plan payment was due.⁴

Remember, the bankruptcy provisions of the CARES Act listed above sunset within a year of the legislation being enacted.⁵

Given the current dire economic circumstances, many small businesses may find themselves in need of bankruptcy tools. It is encouraging that more small businesses will now have access to the streamlined process in the Subchapter V of the SBRA. The process is cheaper, faster and more tailored to small businesses’ needs. We strongly encourage small businesses seeking relief to consult with their legal professional about this faster track to reorganization and any other COVID-19 relief provisions that could help.

If you are a concerned debtor or creditor, please contact Frost Law for a free consultation today by clicking here or calling 410-862-2806.

Footnotes

  1. Pub. L. 116-54.
  2. https://www.grassley.senate.gov/sites/default/files/documents/Bankruptcy%2C%2004-09-19%2C%20Small%20Business%20Reorganization%20Act%20Fact%20Sheet.pdf
  3. Pub. L. 116-136.
  4. https://www.abi.org/newsroom/bankruptcy-headlines/house-approves-trump-signs-coronavirus-stimulus-into-law-with
  5. Pub. L. 116-136, §1113.
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