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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:

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.

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.

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.