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How Did the CARES Act Change the Bankruptcy Code?

On March 27th, the President signed the “Coronavirus Aid, Relief, and Economic Security Act” (CARES Act) into law. In total, it is a $2 trillion economic stimulus package in response to the COVID-19 pandemic, providing various forms of financial support for both consumers and businesses.

One major form of relief the CARES Act provides is the suspension of federal student loan payments and interest for 6 months. Essentially, borrowers can stop payments until September 30, 2020 without penalty and without accruing interest. Nearly 100% of student loan borrowers qualify for this relief.

The CARES Act also allows more individuals and businesses to qualify for bankruptcy due to provisions that will last for one year.

Here are the 3 major ways the CARES Act temporarily changed the Bankruptcy Code:

  • Excluding COVID-19 related government payments (e.g. stimulus checks) from the definition of “income” in Chapter 7 and Chapter 13 bankruptcy. In other words, anyone who receives this type of emergency funding will not need to include it in calculations of income (or disposable income) when they file Chapter 7 or 13. If these payments were included, many consumers would not qualify for Chapter 7, and others would potentially have larger payments for their Chapter 13 plan.
  • Allowing those currently in Chapter 13 proceedings to modify payment plans if they experience financial hardship because of COVID-19. This modification would involve extending the payment plan deadline and, therefore, lowering the monthly payment amounts.
  • Raising the eligibility threshold for Subchapter V of Chapter 11 bankruptcy. Per the Small Business Reorganization Act of 2019 (SBRA), Subchapter V provides greater opportunities for small business owners to take full advantage of Chapter 11. Before the CARES Act, small business owners could qualify if they owed less than $2,725,625. Now, they can owe up to $7,500,000 and still file under Subchapter V.

Due to the increased eligibility threshold for Subchapter V, many more small business owners will be able to qualify for Chapter 11 bankruptcy. Through this form of debt relief, they can minimize liquidations, restructure their debt, reduce layoffs, and satisfy creditors. Chapter 7 is usually the only alternative for business owners who don’t qualify for Chapter 11, and they cannot retain control or ownership of their business after filing Chapter 7. This temporary update to the SBRA, therefore, is particularly pivotal.

Bring Your Questions and Concerns to Fridman Legal

The COVID-19 pandemic is developing rapidly. As such, it is impossible to predict how long this situation could last, how the government may continue to help individuals and businesses, and what long-lasting effects the economy may experience. If you are considering filing bankruptcy, our attorney at Fridman Legal can guide you through this process with an in-depth understanding of how emergency legislation may affect your case. When your financial future is on the line, you will need nothing short of exemplary legal support.

We are currently conducting all consultations via phone, email, and videoconference. Schedule your complimentary remote consultation with our firm by calling (847) 278-0665 or contacting us online today!