Business Law

CARES Act – Summary of Insolvency-Related Provisions

On March 27, 2020, President Trump signed into law H.R. 748, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”).  As an emergency act, the CARES Act takes immediate effect.  A copy of the CARES Act, as enacted, may be found here

While there are numerous provisions in the CARES Act that will impact everyone, there are several provisions specifically relevant to insolvency professionals, including several key revisions to the Bankruptcy Code (discussed below), the majority of which expire after one year. 

Generally speaking, the CARES Act creates two new types of loan programs, guaranteed by the Small Business Administration (“SBA”) and administered by the Department of the Treasury.  The first is the Paycheck Protection Program (defined in Section 1102), which creates a new type of 7(a) loans that are subject to forgiveness under certain conditions.  The second program is the Economic Injury Disaster Loans (defined in Section 4003), which are designed to provide small businesses with working capital loans and loan advances to help overcome the temporary loss of revenue.  Future articles will discuss these loan programs in detail.  However, insolvency professionals must be aware that at this time, debtors in bankruptcy proceedings do not appear to be eligible for either the Economic Injury Disaster Loans or the Paycheck Protection Program available under the CARES Act.

For example, Section 4003(c)(3)(D) states that “[a]ny eligible borrower applying for a direct loan under [the Economic Injury Disaster Loans] program shall make a good faith certification that – (v) the recipient is not a debtor in a bankruptcy-proceeding.” (emphasis added).  Similarly, the first question on the Paycheck Protection Program Borrower Application Form asks whether “the Applicant, or any owner of the Applicant . . . [is] “presently involved in any bankruptcy?” (emphasis added).  The form states that if the answer is yes, “the loan will not be approved.”  A link to the application form may be found here.

In addition, Section 1113 of the CARES Act makes certain modifications to the Bankruptcy Code to provide additional relief to small businesses and individual debtors affected by the Coronavirus Pandemic.  The changes to the Bankruptcy Code are summarized as follows:

  1. Increase in Small Business Debtor Combined Debt Eligibility Limit: The combined secured and unsecured debt limit for a “Small Business Debtor” under the recently enacted Small Business Reorganization Act, 11 U.S.C. §1181 et seq. (the “SBRA”) is increased from $2,725,625 to $7,500,000.
    1. The new debt limit applies only to cases filed after enactment of the CARES Act and automatically expires one year after enactment of the CARES Act.
    2. The restrictions that the Small Business Debtor cannot be a single asset real estate company, cannot be affiliated with other debtors with a combined debt limit over $7,500,000, and cannot be publicly traded are carried over from the SBRA.
    3. The CARES Act provides a new restriction, as a technical amendment, that a debtor is not eligible to be a Small Business Debtor if the Debtor is “an affiliate of an issuer (as defined in section 3 of the Securities Exchange Act of 1934 (15 U.S.C. section 78c).” This restriction is not subject to the sunset provisions of the CARES Act.
  2. Exclusion of Federal Coronavirus Related Assistance from Income: The definition of “current monthly income” under Section 101(10A) of the Bankruptcy Code and of “disposable income” under Section 1325(b)(2) of the Bankruptcy Code are modified to exclude “payments made under Federal law relating to the national emergency declared by the President under the National Emergencies Act (50 U.S.C. section 1601 et seq.) with respect to the coronavirus disease 2019 (COVID–19).”
    1. The effect of this provision is that payments made under the CARES Act or other Coronavirus related federal relief acts will not be considered as part of means testing for chapter 7, income testing to determine the maximum length of a chapter 13 plan, or disposable income testing to determine the distribution to unsecured creditors under a chapter 13 plan.
    2. >Notably, income from any state relief acts are not subject to this exemption and thus will be considered income to chapter 7 and 13 debtors.
    3. This amendment applies to any pending bankruptcy case, whether or not the case was filed before or after enactment of the CARES Act.
    4. The CARES Act is silent on whether these payments are property of the estate, however, the Executive Office of the US Trustee Office recently issued a notice that it expects that it is highly unlikely a chapter 7 trustee would administer the payment after consideration of all relevant circumstances.
    5. This provision automatically expires one year after the date of enactment of the CARES Act.
  3. Modification of a Chapter 13 Plan due to Coronavirus Related Financial Hardship: Section 1329 of the Bankruptcy Code, which sets forth the requirements for modification of a chapter 13 plan after confirmation, is amended to include new section (d). This section provides that a plan may be modified at the request of the debtor, after notice and hearing, if the “debtor is experiencing or has experienced a material financial hardship due, directly or indirectly, to the coronavirus disease 2019 (COVID–19) pandemic.”
    1. Any plan modified under this provision may be extended up to seven years from the date that the first payment under the original confirmed plan was due. Accordingly, this provision extends chapter 13 plans by up to two years beyond the previous five year limit allowed under the chapter 13.
    2. >Any modification of the plan under this new section (d) shall be made subject to the requirements of Section 1322(a)-(c) and Section 1325, meaning that, except for the length of the plan, any modified plan must comply with the traditional requirements of a chapter 13 plan.
    3. This new modification provision only applies to cases where plans were confirmed before enactment of the CARES Act.
    4. This provision automatically expires one year after the date of enactment of the CARES Act.

Additionally, Section 3513 of the CARES Act provides temporary relief for borrowers of federal student loans by deferring student loan payments, principal, and interest without penalty to the borrower, for a period of six months (through September 30, 2020). 

Finally, Section 4022 of the CARES Act provides relief from foreclosure as to “Federally Backed Mortgage Loans.”  These covered loans include Freddie and Fannie Mae owned loans, HUD Loans, Veteran Home Loans, and other federally backed loans.  For any covered loan, upon the request of a borrower who attests in writing that the she or he is suffering financial  hardship due to the COVID-19 Pandemic, and so long as the Federal National Emergency relating to the COVID-19 Pandemic is in place, the borrower is entitled to a 180 day forbearance period without providing further documentation.  During this time, no late fees, costs, or additional interest can be charged to the loan.  The CARES Act also appears to prohibit foreclosure on loans already in default so long as the borrower properly requests a forbearance.  This 180 day forbearance period may be extended one time for an additional 180 day period at the request of the borrower so long as the Federal Emergency is still in place. Further, there is an absolute moratorium on foreclosure for any covered loans, whether or not a forbearance is requested, from March 18 to May 17.

Because most borrowers do not know who the owner of their mortgage loan is, research may be required to determine if an individual borrower is eligible for the relief under this act.  If the servicer is unable to informally disclose whether the loan is a covered loan, a Request for Information under 1024.36 may be necessary to determine the borrower’s eligibility for forbearance.

The ILC will continue to review the CARES Act and other related Coronavirus legislation and provide updates as to legislation of interest to the insolvency community.

These materials were written by Bernard Kornberg of Severson & Werson P.C. in San Francisco (bjk@severson.com). Editorial contributions were provided by Christopher Hughes of Nossaman LLP in Sacramento (chughes@nossaman.com). Mr. Kornberg and Mr. Hughes are members of the Insolvency Law Committee.

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