As the COVID-19 pandemic forces businesses to close and causes economic distress, Congress is working to address the economic effects of COVID-19. Congress’ most recent response measure is a stimulus Bill known as the Coronavirus Aid, Recovery, and Economic Security (CARES) Act, which seeks to address the economic impacts of COVID-19. The Senate and the House passed a final version of the Bill, and on Friday, March 27, President Trump signed the bill into law.
One concern addressed by the CARES Act is that the COVID-19 pandemic is expected to push otherwise viable businesses into insolvency due to a temporary but severe disruption of cash flow. The CARES Act addresses this by making a temporary, but significant, amendment to the Small Business Reorganization Act (the “SBRA”), which went into effect in February. The SBRA added a chapter to Chapter 11 of the Bankruptcy Code which provides an avenue for small businesses to reorganize through a process designed to be more streamlined and cost-effective than the traditional Chapter 11 process. The streamlined reorganization process available under the SBRA is available only if a debtor qualifies as a “small business debtor,” which was originally defined as any person engaged in commercial or business activities who has less than $2,725,625 in total debt, and for whom at least 50% such debt arose from its business and commercial activities.
The CARES Act expands access to the streamlined reorganization process provided by the SBRA by raising the $2,725,625 “debt ceiling” under the SBRA to $7,500,000. This will allow more small businesses access to the more streamlined and cost-effective reorganization process available under the SBRA. Expanding access to the SBRA’s streamlined reorganization process will facilitate the recapitalization of these otherwise viable businesses and help them bounce back from the economic effects of the COVID-19 pandemic more quickly and easily than the traditional Chapter 11 process. The increased debt ceiling is only a temporary measure, and the ceiling will return to $2,725,625 after one year from the enactment of the CARES Act; however, this temporary change will make the bankruptcy process quicker and more efficient for small businesses who are impacted by the COVID-19 pandemic and will allow them to return to normal business operations more rapidly.
Other amendments to the Bankruptcy Code by the CAREs Act, specifically exclude coronavirus-related payments from the federal government from the definition of “income” under Chapters 7 and 13. The Act also allows debtors who are currently in chapter 13 bankruptcies to seek plan modification if they are experiencing a “material financial hardship” directly or indirectly related to the COVID-19 pandemic. These amendments seek to soften the financial blow dealt by the pandemic and helps maintain access to the bankruptcy system for debtors who receive financial assistance during the pandemic. These amendments also are subject to a sunset provision and will last for only one year after the enactment of the CARES Act.
Jason W. Bank is the chair of the firm’s Bankruptcy and Restructuring department. He focuses his practice in the areas of commercial bankruptcy, out-of-court workouts, corporate restructuring and creditors’ rights. Jason has successfully guided numerous businesses through out-of-court restructurings and Chapter 11 reorganizations. He has negotiated resolutions of complex financial issues and debtor-creditor disputes and achieved consensual restructurings while avoiding bankruptcy or litigation.
Brandi M. Dobbs is an associate at Kerr Russell who supports the business and litigation needs of clients. She focuses on bankruptcy and restructuring. Brandi has successfully guided consumer debtors through Chapter 7 and assisted business debtors through the Chapter 11 process.
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