Bankruptcy Related Changes Under the CARES Act and the Consolidated Appropriations Act of 2021

February 9, 2021 By Andreozzi Bluestein LLP  By: Daniel F. Brown, Esq. (provided here for educational purposes only).

The Consolidated Appropriations Act of 2021

The Consolidated Appropriations Act of 2021 (the “Appropriations Act”) was passed by Congress and became law on December 27th, 2020, and addressed a number of specific bankruptcy issues which had not been addressed as a part of either the original Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) legislation or subsequent amendments or supplements to that Act.

A Quick Review of Bankruptcy Changes Under Original CARES Act

The original CARES Act provided for $1,200 stimulus payments to most individuals.   In Chapter 7 filings, the CARES Act also amended the definition of “income” to exclude coronavirus-related payments from the federal government.  It also excluded the coronavirus-related payments from “disposable income”.  The practical effect of these provisions was to prevent the stimulus payments from affecting a debtor’s eligibility to file under either chapter.

The CARES Act also provided relief to Chapter 13 debtors operating under a confirmed plan, as of the March 27, 2020 effective date.  The CARES Act allowed a debtor to request modification of a plan if the debtor is experiencing or has experienced a material financial hardship due, directly or indirectly, to the COVID-19 pandemic.  Further, debtors may extend plan payments under the plan for up to seven years after the initial plan payment was due.  These changes apply to any case for which a plan was confirmed before the enactment of the CARES Act.

Both the income definition changes and the Chapter 13 Plan modification and extension provisions of the CARES Act will expire on March 27, 2021, so anyone needing to modify and extend a Chapter 13 plan because of COVID-19 must do so quickly.

The CARES Act also modified provisions of the Small Business Reorganization Act (SBRA), which became effective in February, 2020 and which enacted a new Chapter 11 Subchapter V that was intended to allow small businesses to reorganize more quickly and less expensively.  As originally enacted, a business’s debts must be less than $2,725,625 in order to be eligible to file a case under Subchapter V.  This debt limit was increased to $7.5 million under the CARES Act, but that increased debt limit will expire and eligibility will return to its original dollar limit on March 27, 2021.

Changes Under the Consolidated Appropriations Act of 2021

The Appropriations Act became law on December 27, 2020.  That statute made a number of additional temporary changes to the Bankruptcy Code, all of which, by their terms, expire either one year or two years after the changes became effective.

  1. The Appropriations Act amends the Bankruptcy Code to expressly provide that stimulus payments are not property of a debtor’s bankruptcy estate. This provision expires December 27, 2021.
  2. The Appropriations Act amends the Bankruptcy Code to provide that no person may be denied relief under three enumerated CARES Act provisions solely because the person is or was a debtor in a bankruptcy case. The three CARES Act provisions are: (a) the foreclosure moratorium and right to request forbearance, (b) the forbearance of mortgage payments for multifamily properties, and (c) the temporary moratorium on eviction filings.  This provision expires on December 27, 2021.
  3. The Appropriations Act amends the Bankruptcy Code to give the bankruptcy court discretion to grant a discharge to a Chapter 13 debtor even though the debtor defaulted on or after March 13, 2020 in not more than three monthly payments under a residential mortgage because of a material COVID-19 related financial hardship. Furthermore, the court can also grant a discharge to a debtor whose confirmed plan provides for curing defaults on a residential mortgage and the debtor has entered into a qualifying loan modification or forbearance agreement with the lender.  This does not mean the debtor will be discharged of the mortgage debt, but a debtor will be eligible to receive a plan discharge of other debts even though the debtor did not pay all mortgage payments when due under the plan.  This provision expires December 27, 2021.
  4. Under the CARES Act, borrowers under federally-backed residential and multifamily mortgages can request payment forbearance because of COVID-19 hardships. In the case of federally-backed residential mortgage, the forbearance period can be as long as 12 months.  At the end of the forbearance periods, the borrower must pay the deferred mortgage payments in a lump-sum.  These deferred mortgage payments caused significant procedural and administrative complications in Chapter 13 cases.  To remedy these complications, the Appropriations Act allows qualified servicers to file a proof of claim for the deferred payments, even if the claims bar date has passed.  The Appropriations Act also authorizes debtors to modify a confirmed Chapter 13 plan to address the deferred payment plan.  If the debtor fails to modify his plan, the bankruptcy court (on its own motion), the U.S. Trustee’s office, the Chapter 13 Trustee and/or any party in interest may move for such a modification.  These changes expire on December 27, 2021.
  5. Ordinarily, a Chapter 11 debtor is obligated to timely make all post-petition payments and to perform all post-petition obligations under an unexpired lease of non-residential real property. The Appropriations Act amends the Bankruptcy Code to allow the court to extend a Subchapter V small business debtor’s time to perform under an unexpired lease of non-residential real property if the debtor is experiencing or has experienced a material financial hardship due, directly or indirectly, to COVID-19.  These changes apply only to cases commenced under Chapter 11 Subchapter V and they expire December 27, 2022.
  6. The Appropriations Act also amends the Bankruptcy Code in cases under all chapters of the Bankruptcy Code to give the debtor (or trustee) 210 days after the order for relief to assume an unexpired non-residential real property lease. Existing law had provided Debtors or Trustees 120 days to assume or reject an unexpired non-residential real property lease.  This change expires on December 27, 2022.
  7. The Appropriations Act also amends the Bankruptcy Code to prohibit a debtor or trustee from avoiding payments made by a debtor during the preference period for “covered rental arrearages” and “covered supplier arrearages.” To qualify for the exemption, (a) the debtor and the counterparty must have entered into a lease or executory contract before the filing, (b) they must have amended the lease or contract after March 13, 2020, and (c) the amendment must have deferred or postponed payments otherwise due under the lease or contract.  This provision expires on December 27, 2022.
  8. The Appropriations Act also addresses the much litigated issue of the eligibility of bankruptcy debtors to obtain PPP loans, but regrettably only adds to the uncertainty. The CARES Act,  created the Paycheck Protection Program (the “PPP”), the now-familiar potentially forgivable loan program administered by the Small Business Administration (“SBA”).  Since the passage of the CARES Act, the SBA has taken the position that companies in bankruptcy are not eligible for PPP loans.  The SBA has consistently denied PPP loans for debtors, and the case law around the country has been inconsistent.  The SBA has doubled down on position in its January 6, 2021 interim rules, which are also supposed to cover PPP Round 2 loans.  The Appropriations Act amends the Bankruptcy Code to permit PPP loans to debtors in Chapter 11, 12 and 13 cases.  It also discusses how claims for such loans are to be paid, as a part of a debtor’s plan, if they are not forgiven.

However, the statute also says such PPP loans will be available only if the SBA Administrator sends a letter to the Director of the Executive Office for United States Trustee acquiescing to PPP loans in bankruptcy.  Therefore, the new statute seemingly delegates to the SBA administrator the discretion whether to approve PPP loans during bankruptcy, so we do not yet know whether these PPP loans will be available.

Assuming the SBA Administrator acquiesces to PPP loans in bankruptcy, the loans will be available: (a) only in cases pending on or filed on or after the date the SBA sends the aforementioned letter to the Office of the United States Trustee, and (b) only to certain types of debtors, namely, Chapter 11 Subchapter V small business debtors (regular Chapter 11 debtors are not eligible), Chapter 12 family farmer debtors, and self-employed Chapter 13 debtors.  This provision, if it becomes effective, will expire on December 27, 2022.

The bankruptcy changes brought about through the CARES & Appropriations Acts provide debtors a window of opportunity that may significantly impact the resolution of their bankruptcies, but that window may be rapidly closing.  The attorneys at Andreozzi Bluestein are well versed in how the CARES & Appropriations Acts can impact debtors in all forms of bankruptcy.  If you or a client need clarification on how these changes may impact your specific situation, call us today for a no obligation consultation.

(click here for the original article)CARES Act

MUSINGS BY DIANE:

To some extent Congress provided cash-strapped debtors some relief under the two new COVID Acts passed in 2020 and 2021.  The problem is that all of the provisions have expiration dates on the changes.  There at least to challenges: first, the expiration dates are going to ambush both debtors and their attorneys. Second, the new laws bring with them different interpretations.  It will take years for enough courts to determine the “proper” interpretations for that jurisdation.  One jurisdiction’s interpretation can differ dramatically from another jurisdiction.

My advice – never rely on advice from the Internet or your neighbor.   Understand that the “law” changes regularly, so a good answer today can be a bad answer next year.  Seek advice from at least two people who are experienced in the area you need help. Once armed with good information, then use your common sense to decide what is best for you. 

Lastly, never look for the easy out.  For instance, if you can pay your rent or mortgage, then do so.  In the long run, don’t assume you are going to get a free place to live.

– Diane L. Drain
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