Bradleys Bankruptcy Basics: 5 Significant (if Temporary) Amendments to the Bankruptcy Code Resulting from the COVID-19 Pandemic – JD Supra

As we cross the one-year anniversary of the COVID-19 pandemic, we reflect on the multiple amendments to the Bankruptcy Code that have been implemented to help curb the effects of various economic shutdowns and financial hardships caused by the coronavirus. These Bankruptcy Code amendments are only temporary, but Congress is considering extending them to facilitate the continued recovery from the COVID-19 pandemic. Below are five significant, though temporary, amendments to the Bankruptcy Code resulting from the COVID-19 pandemic.

Under the Small Business Reorganization Act of 2019 (SBRA), which took effect in February 2020 (just before the COVID-19 pandemic began), only small businesses with secured and unsecured debts less than or equal to $2,725,625 qualified to be Subchapter V debtors. Businesses with debts in excess of the $2,725,625 debt limit would be required to seek relief under regular Chapter 11 or liquidate under Chapter 7. However, a month after the SBRA became effective, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) became law and increased the SBRAs debt limit to $7.5 million. As such, under the CARES Act, small business debtors with debts $7.5 million or less qualify for bankruptcy relief under Subchapter V.

The CARES Act also amended the Bankruptcy Codes definition of current monthly income to exclude payments made under Federal law relating to the national emergency declared by the President under the National Emergencies Act with respect to the coronavirus disease 2019 (COVID-19). The concept of current monthly income is used in the Chapter 7 means test to determine whether a debtor is eligible for a Chapter 7 discharge or instead receives sufficient income to repay some or all of his debts through a Chapter 13 or Chapter 11 plan. Additionally, current monthly income is the amount a Chapter 13 debtor must pay unsecured creditors through a Chapter 13 plan if an unsecured creditor or the Chapter 13 trustee objects to his plan. It is also the amount that an individual Chapter 11 debtor must pay in his Chapter 11 plan. This CARES Act amendment allows debtors to exempt income related to COVID-19 from the calculation of their current monthly income. On December 21, 2020, Congress passed the Consolidated Appropriations Act, 2021 (CAA 2021), which expanded the protection of coronavirus relief payments by explicitly excluding them from the property of the bankruptcy estate. This ensures that consumers will not need to utilize an exemption to retain the relief payments.

The CARES Act further amended the Bankruptcy Code to allow pre-COVID-19 Chapter 13 plans to be modified to account for a debtors financial hardships resulting from the pandemic. Additionally, under the CARES Act, Chapter 13 plans that were confirmed prior to the COVID-19 pandemic can be extended from the prior maximum plan period of five years to a period of seven years, resulting in the reduction of debtors monthly plan payment amounts.

Recently, the Bankruptcy Court for the Middle District of Alabama allowed two debtors whose Chapter 13 plans were confirmed prior to March 2020 to modify their plans based on COVID-19 hardships. Although one of the debtors hardships was only indirectly caused by COVID-19, the debtor was nonetheless permitted to modify her plan pursuant to the CARES Act. Additionally, the Bankruptcy Court allowed the plan modifications despite any pre-pandemic defaults on plan payments. A closer look at these decisions is available here.

Under the CAA 2021, Chapter 13 debtors who have defaulted on up to three monthly residential mortgage payments during the pandemic as a result of COVID-19 may, upon notice and a hearing, receive a Chapter 13 discharge. Additionally, the CAA 2021 provides that debtors who include residential property in a cure and maintain plan and enter into a qualifying loan modification or forbearance may also receive a Chapter 13 discharge.

The CAA 2021 further amended the Bankruptcy Code to allow mortgage servicers to file supplemental proofs of claim for claims that are forborne, deferred, or otherwise modified under the CARES Act, even after the claims bar date has passed. Similarly, mortgage servicers and other parties in interest can move to modify a Chapter 13 plan to allow for payment of such supplemental proofs of claim before the plan period ends and the Chapter 13 case is closed.

A more detailed analysis of the CARES Acts impact on the Bankruptcy Code can be found here, and more information regarding the CAA 2021s changes to the Bankruptcy Code can be found here. Although these amendments to the Bankruptcy Code are only temporary and scheduled to sunset in 2021 and 2022, Congress is currently considering extending this relief as the COVID-19 pandemic continues.

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Bradleys Bankruptcy Basics: 5 Significant (if Temporary) Amendments to the Bankruptcy Code Resulting from the COVID-19 Pandemic - JD Supra