Historic Coronavirus Aid Bill Expands Small Business Bankruptcy Relief

Birmingham Business Journal

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On March 27, 2020, President Donald Trump signed into law the third major coronavirus-related legislation in the last several weeks – the Coronavirus Aid, Relief, and Economic Security (CARES) Act – in response to the pandemic and resulting economic crisis. The CARES Act includes substantial federal spending and loan commitments that will benefit individuals and businesses.

But that is not all. The CARES Act also expands eligibility for small businesses to take advantage of recent amendments to the Bankruptcy Code. Taking effect in February 2020, the Small Business Reorganization Act of 2019 amended the Bankruptcy Code to add a new subchapter for small businesses. The aim of these amendments was to make small business bankruptcies faster, less expensive and, ultimately, more successful. At the time of enactment, the amendments only applied to business debtors with secured and unsecured debts less than $2,725,625. Now, under the CARES Act, small businesses with up to $7.5 million in debt (with some qualifications) may seek relief under the new streamlined procedures.

Notable provisions of the Bankruptcy Code available to more small businesses under the CARES Act include:

  • Appointment of a Trustee - The new small business subchapter provides for the appointment of a trustee who will help facilitate reorganization and may monitor payments to creditors under the debtor’s confirmed plan.
  • Streamlining Reorganization - Only the small business in bankruptcy can propose a plan of reorganization, which must be submitted within 90 days of the bankruptcy filing. The court does not have to approve a separate disclosure statement, reducing the time and expense necessary to confirm the debtor’s plan. Absent an order from the court, the new small business bankruptcies will not have committees of unsecured creditors. This will further reduce costs of bankruptcy for small businesses.
  • Elimination of the Absolute Priority Rule - In a typical reorganization, the small business must pay unsecured creditors in full if the owners wish to retain their equity interests. This requirement is no longer applicable to eligible small businesses. Rather than paying all creditors in full, owners can keep their interests by confirming a plan that does not discriminate unfairly among creditors, is fair and equitable, and provides that the small business will contribute its projected disposable income to the plan.
  • Modification of Certain Residential Mortgages - An individual who operates as an eligible small business may modify a mortgage secured by a residence if the underlying loan was for commercial purposes. This is a change from prior law that generally prohibited modification of mortgages secured by a principal residence.
  • Delayed Payment of Administrative Expense Claims - The new subchapter for small businesses does not require payment in full of priority claims – including for goods and services provided to the small business during bankruptcy – on the effective date of the plan. A small business debtor may now stretch payment of these claims out over the term of the plan, which will last three to five years.
  • Discharge Limitations - The scope of the discharge of debts for the small business will depend upon the terms of the plan and the consent of creditors. If creditors contest the plan, exceptions to a discharge, such as fraud and breach of fiduciary duty, will apply to the small business debtor. This is a departure from a typical business reorganization that has very limited exceptions to discharge.

The CARES Act attempts to remedy obstacles to small business reorganization by expanding access to the new subchapter of the Bankruptcy Code. But all small businesses will not enjoy this relief for long. There is a one-year deadline for small businesses with debts up to $7.5 million to file cases under the new subchapter of the Bankruptcy Code. As small businesses – and their creditors – continue to manage the consequences of the pandemic, they should be aware of these changes to the Bankruptcy Code and prepare for the challenges and opportunities presented in these new and unique bankruptcy cases.

the original article, "Historic Coronavirus Aid Bill Expands Small Business Bankruptcy Relief," first appeared in the Birmingham Business Journal on April 15, 2020