During these uncertain times with the national emergency of the Coronavirus (COVID-19) pandemic, the economic consequences of the virus are of the upmost concern. Bankruptcy may provide relief to both individuals and businesses.

There are four different options available, and choosing among them involves various factors including the filer’s legal status, income, and goals.

1. Chapter 7 – Liquidation of an individual or business estate, overseen by a trustee.
2. Chapter 13 – Restructuring of an individual estate through a 3 to 5-year Chapter 13 Plan, overseen by a trustee.
3. Chapter 11 – Reorganization of a business or individual estate through a Chapter 11 Plan.
4. Chapter 11, Subchapter V – a new, streamlined method of reorganization.

This blog will focus on the new Subchapter V and how it is likely to be revised by the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) currently speeding through Congress. Subchapter V, known as the Small Business Reorganization Act of 2019, was signed by President Trump in August 2019 and took effect on February 19, 2020. The key provisions of Subchapter V are:

• The debtor must be a person or an entity engaged in any commercial or business activity other than being a single-asset real estate business. The CARES Act imposes a further restriction, disallowing corporations that are subject to certain Securities Exchange reporting requirements, which restriction sunsets after one year.
• The aggregate secured and unsecured debts cannot exceed $2,725,625. The CARES Act would increase that debt ceiling to $7,500,000, but that increase would sunset after one year and then it would return to the $2,725,625 level.
• The debtor may operate as a debtor-in-possession like debtors may in all chapter 11 cases; in other words, the debtor continues to run its own operations rather than being taken over by a trustee.
• A Small Business Trustee is still appointed, but his or her role is similar to a chapter 13 trustee in a non-business case. The trustee acts as a conduit for plan payments and has the authority to investigate the financial affairs of the debtor.
• There are no creditor committees.
• The debtor has the exclusive right to file a proposed reorganization plan, which must be filed within 90 days after the bankruptcy petition is filed. There is no disclosure statement required.
• Confirmation of the plan follows the same requirements as a standard Chapter 11 plan, except that it can be confirmed without the acceptance of an impaired class of creditors.

Three important provisions of the CARES Act also impact individual bankruptcy filings. These are:

1. Payments received by debtors under the CARES Act as a result of the coronavirus are excluded from the definition of income for purposes of calculating whether your income is low enough to qualify for Chapter 7 (liquidation) rather than Chapter 13 (which requires you to pay disposable income toward your debts for 3-5 years). This revision sunsets after one year.
2. The calculation of disposable income in chapter 13 cases also excludes coronavirus-related payments. This revision sunsets after one year.
3. Debtors currently performing under chapter 13 plans are permitted to modify their plan payments if they are experiencing a material financial hardship due to the coronavirus pandemic. This relief includes extending the typical five-year plan payment term for up to seven years. This revision sunsets after one year.

As you can see there are many options to help you through difficult financial times, which are becoming even more accessible through new legislation. Please contact Bradley Stevens or Fay Bidlack for more information or for assistance with any of your bankruptcy questions or concerns.

If you have questions about this new rule, please contact Bradley J. Stevens or Fay Waldo Bidlack in our Bankruptcy, Restructuring, and Creditors’ Rights practice.

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Bradley J. Stevens | Read Bio