Bankruptcy in the Age of COVID-19

It’s hard to believe how much the country has changed in only a couple of months. Reaction to the COVID-19 virus has been swift and unprecedented at all levels of government. State and local officials implemented measures designed to slow the spread of the virus, but the toll of such measures has been devastating. Most businesses and schools have been forced to close and most areas of the country have been under some form of shelter-in-place order forcing people to remain at home.

In an effort to offset the financial impact of COVID-19, Congress passed, and the President signed into law, the Coronavirus Aid Relief and Economic Security Act, commonly referred to as the CARES Act. Although most people primarily associate it with the $1,200 stimulus payment sent to each taxpayer, the law is much broader in scope. It includes amendments to the bankruptcy code that will benefit small businesses and consumers filing new petitions in Chapter 7 and Chapter 13 cases and individuals unable to meet the scheduled payments under existing Chapter 13 plans.

Changing the bankruptcy code to help small businesses

As state and local governments move toward loosening the restrictions previously imposed, some business owners in Georgia may voluntarily remain closed because they do not believe they can ensure the safety of customers and employees. A study reported by the Harvard Business School found that the average small business has only 27 days of cash reserves, which would not be enough to allow it to survive the pandemic.

The Small Business Reorganization Act became effective just before states began to force business owners to close their doors in response to COVID-19. The act represented an effort by the federal government to make it easier for small businesses to take advantage of the benefits of Chapter 11 bankruptcy by using their income to repay creditors over a three- to five-year period.

The CARES Act makes it possible for more businesses to qualify for business reorganization under SBRA. CARES increased the maximum debt of an eligible business from $2.7 million to $7.5 million. This change makes it possible for more small businesses to utilize Chapter 11 under the SBRA guidelines.

Some of the benefits small businesses struggling under the financial pressures created by a devastated national economy include:

  • Businesses or individuals with debt that does not exceed $7.5 million may file for reorganization under the streamlined provisions for small businesses under Chapter 11.
  • Filers under some SBRA provisions may not be subject to paying quarterly fees of the government trustee assigned to the case.
  • The trustee appointed in certain SBRA cases has a more debtor-oriented role than a trustee in a standard Chapter 11 filing. For example, an SBRA trustee can assist a debtor in creation of a reorganization plan.
  • The debtor has the control to file a plan in most cases filed under SBRA.
  • Notably, a SBRA case will proceed quickly so the Debtor must have its books and records in position to have an idea of the desired outcome from the SBRA plan.

  • Business owners or individuals in need of debt relief who believe SBRA may hold the answer for them should not procrastinate. The increased debt ceiling of $7.5 million created by the CARES Act expires in March, 2021, unless Congress extends it. Absent an extension, the debt ceiling reverts to its previous $2.7 million level.

    Bankruptcy benefits for consumers under the CARES Act

    More than a million people filed claims for unemployment benefits in Georgia caused by business and school closures due to the COVID-19 virus. Consumers in need of debt relief may find it through changes to Chapter 7 and Chapter 13 bankruptcies contained in the CARES Act. For example, debtors who previously filed a Chapter 13 bankruptcy and have a confirmed plan in place may have difficulty making payments under the plan due to the current economic turmoil.

    The CARES Act allows a bankruptcy court to modify existing Chapter 13 plans by extending the payment period for debtors able to prove they were the victims of a material financial hardship. Extending the payment period reduces the amount a debtor would be required to pay each month.

    Another CARES Act provision that may benefit individuals who need to file a Chapter 7 or Chapter 13 bankruptcy has to do with the stimulus payment people received from the federal government. The $1,200 payment, which could be higher for an individual with minor children living at home, does not count as income that could potentially prevent a person from being eligible to file a Chapter 7 bankruptcy. It also does not count as disposable income for Chapter 13 filers.

    Consult a bankruptcy attorney

    Business owners and consumers facing insurmountable financial challenges due to the COVID-19 virus may find relief through amendments to the bankruptcy code put into place by the CARES Act. An Atlanta bankruptcy attorney is an excellent source for the most current information about laws and procedures that may be of benefit to businesses and consumers struggling during the worldwide pandemic.