On Friday, March 27, 2020, the President signed into law The Coronavirus Aid, Relief, and Economic Security (CARES) Act, which provides various types of relief for American workers, their families and small businesses.
CARES Act Mortgage Relief
The CARES Act put in place certain home retention protections for homeowners experiencing financial hardship due to the Coronavirus pandemic. This relief is available to homeowners with federally backed mortgages (FHA, VA, USDA, Fannie Mae, Freddie Mac).
First, a moratorium has been put in place where lenders are prohibited from beginning a foreclosure action or finalizing a foreclosure judgment or sale. The protection began on March 18, 2020, and extends through at least August 31, 2020.
Second, homeowners experiencing financial hardship due to COVID-19 have a right to request and obtain forbearance for up to 360 days with no additional fees, penalties or additional interest (beyond scheduled amounts), added to their account.
CARES Act Changes to Chapter 11 Reorganization of Small Business Debtors
The CARES Act made bankruptcy reorganization a viable option for more small businesses by temporarily increasing the debt limit for a debtor to qualify as a subchapter 5 debtor.
By way of background, on February 19, 2020, the Small Business Reorganization Act (SBRA) went into effect. The SBRA created a new type of chapter 11 debtor that gets special/different treatment under the bankruptcy law – a “subchapter 5” debtor. Subchapter 5 was enacted for purposes of creating a new streamlined and less costly chapter 11 option for those engaged in small business activities, both individuals and businesses alike.
To qualify as a subchapter 5 debtor, the debtor must: (1) elect to be a subchapter 5 debtor; (2) be engaged in commercial or business activities (excluding a single asset real estate business); and (3) have liquidated debts of not more than $7,500,000, of which at least 50% arose from the debtor’s business activities.
The CARES Act temporarily increased the subchapter 5 debt limit from $2,725,625 to $7,500,000. The increased debt limit applies to subchapter 5 cases filed within the one year period between March 27, 2020 and March, 27, 2021. Thereafter, the debt limit will once again be reduced to $2,725,625. By increasing the debt limit for a debtor to qualify as a subchapter 5 debtor, the CARES Act makes a bankruptcy reorganization a viable option for more small businesses.
CARES Act Changes to Individual Debtors
The CARES Act offers a number of protections for individual debtors in bankruptcy by making certain temporary changes applicable to individual Chapter 7 and Chapter 13 cases.
For purposes of calculating an individual debtor’s income to determine his or her eligibility for Chapter 7, coronavirus-related payments from the federal government are excluded from the analysis.
Similarly, coronavirus-related payments are not considered in determining a debtor’s disposable income for a Chapter 13 plan of reorganization.
Also, the CARES Act allows Chapter 13 debtors who have already confirmed a plan as of March 27, 2020 to extend their plan to a seven (7) year plan if they are experiencing material financial hardship caused by the Coronavirus pandemic.
These changes are temporary, and expire on March, 27, 2021.