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31 March 2020

Effects of the CARES Act on Bankruptcy Cases

Topics: Bankruptcy

On March 27th, 2020, President Donald J. Trump signed into law the Coronavirus Aid, Relief and Economic Security Act or the “CARES Act.” This is the largest economic stimulus package in U.S. history, estimated at $2 trillion dollars, providing much-needed protection for U.S. citizens and businesses negatively impacted by the COVID-19 coronavirus pandemic.
 
According to the American Bankruptcy Institute, the CARES Act contains several provisions that will impact current or future bankruptcy cases, including:
 
  • Requiring the Secretary of Education to defer all federally held student loan payments, principal, and interest for six months, through September 30th, 2020, without penalty to student loan borrowers, and suspending involuntary collection for all federally-owned loans. This will affect over 95% of student loan borrowers, with 62 million of the stimulus package will be dedicated to this effort
 
  • Allowing bankrupt debtors to request a post-confirmation modification of their plans, if the debtor is experiencing or has experienced a material financial hardship due, directly or indirectly, to the coronavirus pandemic, including extending his or her payments for up to seven years after the initial plan payment was due.
 
  • Amending the definition of “income” in the Bankruptcy Code for chapters 7 and 13 to exclude coronavirus-related economic stimulus payments 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.
 
  • Amending the Small Business Reorganization Act of 2019 (SBRA) to increase the eligibility threshold for businesses filing under new subchapter V of chapter 11 of the U.S. Bankruptcy Code from $2,725,625 of debt to $7,500,000.  
 
All of the changes listed above will sunset within a year, after which all of the amended provisions of the Bankruptcy Code will revert back to their original language unless further changes are made.  In addition to the bankruptcy-specific provisions of the CARES Act outlined above, there are some other provisions specific for federal credit unions:
 
  • Suspension of generally accepted accounting principles for loan modifications related to the coronavirus pandemic that would otherwise be categorized as a “troubled debt restructuring”.  The NCUA shall defer to the determination of the financial institution regarding such suspensions.
 
  • Extensions of credit from the NCUA Central Liquidity Facility will not be approved without first having obtained evidence that the applicant has made reasonable efforts to first use primary sources of liquidity, including balance sheet and market funding sources, to address the liquidity needs of the applicant.  This provision will sunset on December 31st, 2020.
 
In the meantime, clients should take note that bankruptcy courts around the country are still open and are accepting new filings.  Most courts are waiving wet-signature requirements on documents, and allowing parties to appear telephonically at Section 341 meetings of creditors, confirmation hearings, and hearings on opposed motions – but, generally speaking, the hearings are all still proceeding unless a continuance or specific stay is requested.  The federal judiciary’s main priority is to continue operations, for the benefit of all, while ensuring the safety of court personnel and members of the public by adjusting the way it conducts business.
 
The full text of the final version of the CARES Act can be found here. If you have any questions or concerns about the effect of COVID-19 on your bankruptcy filings, or about the CARES Act in general, please do not hesitate to give us a call. 

For more comprehensive information and insights, watch part I and II of our Ask a Pro: Navigating Chapter 7 & 13 Bankruptcies webinar series here and here.

This blog is not a solicitation for business and it is not intended to constitute legal advice on specific matters, create an attorney-client relationship or be legally binding in any way. 

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