Congress’ Third Major Coronavirus Legislation Makes Bankruptcy Relief for Potential and Current Individual Debtors Easier

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On Friday March 27, 2020, President Trump signed into law the third major piece of coronavirus-related legislation in the last several weeks – the Coronavirus Aid, Relief, and Economic Security Act (CARES). The new law contains several amendments to the Bankruptcy Code. One of these amendments increases the maximum indebtedness for a “small business debtor” to $7.5 million and is discussed in a recent Bradley email alert. The other amendments are discussed herein.

New Definition for “Current Monthly Income”

The most notable change is the amendment to the definition of “current monthly income.” The new law simply exempts from “current monthly income” any “payments made under Federal law relating to the national emergency declared by the President under the National Emergencies Act with respect to the coronavirus disease 2019 (COVID-19).” The phrase “current monthly income” is used at various places in the Bankruptcy Code, including in the so-called “means test” for determining whether or not a debtor is eligible for Chapter 7 liquidation or instead must seek relief under another chapter of the Bankruptcy Code that requires repayment. This means potential Chapter 7 debtors will not be forced into Chapter 11 or 13 to repay some or all of their debts as a result of payments received under the new law.

Amending and Extending Confirmed Plans

“Current monthly income” is also incorporated into the Bankruptcy Code’s definition of “disposable income,” which is (1) the amount a debtor is required to pay to unsecured creditors in a Chapter 13 plan if the trustee or an unsecured creditor objects to the debtor’s proposed plan, and (2) the minimum amount an individual debtor must pay into a Chapter 11 plan. This amendment ensures that debtors are allowed to keep payments received under the new loan instead of paying them into their bankruptcy plans.

The other change is an amendment to the bankruptcy statute governing a debtor’s ability to modify a confirmed Chapter 13 plan. The new law allows a plan to be amended upon a debtor’s request “if the debtor is experiencing or has experienced a material financial hardship due, directly or indirectly, to the coronavirus disease 2019 (COVID-19) pandemic,” subject to court approval. It also allows a Chapter 13 plan to be extended up to seven years (compared to an existing maximum plan period of five years) from the date of the first payment under the plan, subject to court approval. This amendment should allow Chapter 13 debtors to reduce their monthly payments to the trustee and remain under the protection of the Bankruptcy Code.

Limited Timeline for Relief

All of the above changes are effective only for one year from March 27, 2020, after which they will be automatically stricken from the Bankruptcy Code.

More Information

Congress and the administration are expected to work on at least one additional stimulus package, Stimulus Four, and it is expected to include corrections and clarifications to the CARES Act and previous stimulus efforts, as well as additional relief and stimulus efforts. Bradley is actively monitoring and engaging with Congress and the administration on these issues.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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