CARES Act and Bankruptcy Law Changes

The new Coronavirus Aid, Relief, and Economic Security (“CARES”) Act affects a variety of different areas of the law, and bankruptcy law is no exception. Here are the three primacy changes to the U.S. Bankruptcy Code under the CARES Act:

• Changes to the Definition of “Income"

The CARES Act modifies the definition of “current monthly income” to exclude coronavirus-related payments from the federal government, such as individual stimulus payments. This modification applies to bankruptcy under both Chapters 7 and 13.

Additionally, the CARES Act provides that coronavirus-related payments are not considered in determining a debtor’s “disposable income” for a Chapter 13 plan of reorganization.

• Modifications to Confirmed Plans for Chapter 13 Debtors

The CARES Act allows Chapter 13 debtors with confirmed plans to modify their plans due to COVID-19-related hardships. Specifically, the debtor must be experiencing a “material financial hardship” that is “directly or indirectly” caused by the ongoing coronavirus pandemic. This provision may give some debtors greater flexibility in responding to the coronavirus pandemic.

• Subchapter 5 Changes 

Finally, the CARES Act increases the debt limit for a debtor to qualify for bankruptcy under Subchapter 5, which is a streamlined and simpler process for a debtor to confirm a reorganization plan. Normally, to take advantage of the Subchapter 5 process, a debtor had to be engaged in business and have a total debt not exceeding $2,725,625 in the aggregate. The CARES Act nearly triples that debt limit to $7.5 million. This increase will allow more small businesses to qualify for the streamlined Subchapter 5 process.

To learn more about the CARES Act, click here.