Bulletin: SBRA Postscript, the Definition of Income, and Changes to Section 1113(b)(1)(B) and (C)



CARES Act Passed by Senate Increases Eligibility to Small Business Debtors
with Aggregate Debts Up to $7,500,000 And Other Changes

Early last Thursday morning, the Senate passed a substitute for H.R. 748, called the “Coronavirus Aid, Relief, and Economic Security Act” (the “CARES Act”). The bill passed the House on Friday, and the President is expected to sign it that day. All of the provisions highlighted below would apply only to cases commenced on and after enactment and would “sunset” after one year. Of course, Congress has enacted “sunset” bankruptcy legislation previously that was later extended; for example, the Chapter 12 provisions originally had sunset provisions.

Section 1113(a) of the bill would amend the Small Business Reorganization Act (SBRA), 11 U.S.C. § 1181 et seq., to increase the eligibility threshold to elect treatment of the case under subchapter V of Bankruptcy Code Chapter 11 to businesses with debts of not more than $7,500,000. Other aspects of this standard for eligibility (such as the requirement that not less than 50 percent of the debt arose from the commercial or business activities of the debtor) would remain unchanged. After the sunset date, the eligibility amount would return to $2,725,625.

Section 1113(b)(1)(A) of the bill would amend the definition of income in Bankruptcy Code Chapters 7 and 13 to exclude Coronavirus-related payments from the federal government from being “current monthly income” for purposes of eligibility to file for bankruptcy relief under Chapter 7. Current monthly income (“CMI”) is defined in 11 U.S.C. § 101(10A) and the means test is set out in 11 U.S.C. § 707(b)(2). Again, this change has a one-year sunset date.

Section 1113(b)(1)(B) of the bill would clarify that the calculation of disposable income for purposes of confirming a chapter 13 plan shall not include coronavirus-related payments. Again, this provision has a one-year sunset date.

Section 1113(b)(1)(C) of the bill would explicitly permit 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. Again, this provision has a one-year sunset date.

There are also provisions in the legislation for suspension of student loan payments and interest accrual, applicable to Direct Loans and FEEL loans owned by the Department of Education, and there are many other provisions in the legislation that have impacts on consumers.

See the separate article Covid-19 and the 7 Year Plan, by Ken Siomos.

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