According to the Bureau of Labor Statistics (BLS), the unemployment rate for April 2020 rose to a record high of 14.7%, an increase of 10.3% over the previous month. BLS also states that 14.7% is the highest rate and 10.3% is the highest monthly increase in the history of data dating back to 1948. This record unemployment rate translates to 23.1 million people who lost their jobs in April 2020 as a result of the COVID-19 pandemic.
Over 170 companies comprising restaurants, retailers, fitness centers, airlines, oil producers, and many others declared bankruptcy in 2020. They blamed COVID-19 for at least part of the circumstances beyond their control.
When Congress passed the Coronavirus Aid, Relief, and Economic Security Act (known as the CARES Act) in 2020, the legislation included changes made to bankruptcy laws to help small businesses as well as individual taxpayers. The following describes those and other changes to bankruptcy laws.
Small Business Reorganization Act
Signed into law in August 2019, the Small Business Reorganization Act (SBRA) provides a middle pathway for small businesses caught between Chapter 7 bankruptcy and Chapter 11. Commonly referred to as Subchapter 5 of the U.S. bankruptcy code, SBRA lowers the cost and streamlines the bankruptcy plan process with the intention of allowing small businesses to not only survive the bankruptcy process but to maintain control of their operations.
Before the SBRA, small businesses only had two bankruptcy options:
- Chapter 7 meant liquidating all non-exempt assets and distributing funds to creditors. A small business would not survive Chapter 7 bankruptcy.
- Chapter 11 allows businesses to retain control over operations and to restructure in accordance with a court-approved plan. The court assigns a bankruptcy trustee, and any plan to pay back debts is subject to strict requirements and court approval. Chapter 11 requires monthly reports to the bankruptcy trustee and the court must approve all non-usual business expenses. The creditors form a creditors' committee that can hire its own professional staff, the fees for whom they then charge against the debtor. Small businesses often cannot afford the costs involved in the Chapter 11 process.
Small Business Bankruptcy Option After SBRA
- Increased filing threshold. Businesses or individuals with 50% commercial debt and no more than $7.5 million in total debts are eligible to file Chapter 11 under Subchapter 5.
- Faster time frames. The deadline for filing a bankruptcy plan is 90 days after the debtor files the case, compared to 120 days in Chapter 11.
- No requirement to pay U.S. trustee fees (which are not inconsequential under Chapter 11).
- Each SBRA case is assigned a trustee who supervises the creation of a bankruptcy plan, reports fraud or misconduct, keeps the debtor focused, and monitors distributions under the plan. The trustee does not run the business operations.
- Only the debtor files a Subchapter 5 bankruptcy plan, not the creditors. Under Chapter 11, creditors can file competing plans.
- No disclosure statement is required unless the court so orders.
- The Subchapter 5 bankruptcy plan can be court-approved, even if the creditors do not approve.
- The small business' administrative costs can spread out over the term of the Subchapter 5 bankruptcy plan.
- There is no absolute priority rule under Subchapter 5, which means equity stakeholders can keep their business interests even if creditors are not paid in full under the bankruptcy plan.
Changes to Bankruptcy Code Chapters 7 and 13
The CARES Act also revised Chapters 7 and 13 of the U.S. Bankruptcy Code in order to help many people financially strapped by the COVID-19 crisis.
Consumers should be aware of the following changes:
- Individuals with confirmed Chapter 13 plans may seek plan modifications, including extending payments up to seven years after the first payment was due. This change can substantially decrease monthly payment amounts.
- CARES ACT stimulus payments are not considered income for eligibility or disposable income for confirmation purposes. This provision allows debtors to get the full financial assistance from the stimulus payment.
All Things Considered
COVID-19 has significantly changed the world we live in, especially when it comes to the national employment sector. Still, small businesses can take comfort in SBRA provisions that make bankruptcy under Chapter 11 more appealing and bearable for them.
Both small businesses and individuals can relax knowing that CARES Act stimulus payments will not adversely impact their bankruptcy plans or confirmations.
Current bankruptcy filers can take advantage of payment extensions to reduce monthly payments.
With so much economic pain in the country, bankruptcy law practices find themselves overwhelmed with requests to file for bankruptcy assistance. Attorneys and intake staff often find it impossible to answer all calls within expected time frames, and attorneys spend too much non-revenue-generating time trying to keep up with intake screening.
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