Last March, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law to mitigate the economic effect of COVID-19 on U.S. residents. It included temporary modifications of the U.S. Bankruptcy Code, which are summarized below.
Some federal income is excluded from the “income” definition
Traditionally, courts have looked at your disposable income to determine whether you qualify for Chapter 7 and how much you have to pay your creditors each month if you file for Chapter 13. Disposable income is determined after calculating your current monthly income and subtracting allowable expenses.
For Chapter 7 and 13 cases, the definition of “current monthly income” has been modified to exclude the COVID-19 payments that Americans have received under the National Emergencies Act. It provides that these payments do not qualify as disposable income, making it easier to qualify for Chapter 7 and benefiting future Chapter 13 cases arising from pandemic-related insolvency.
Chapter 13 filers can modify their pre-COVID plans
Chapter 13 filers whose plans were confirmed before the CARES Act was enacted can seek modifications due to coronavirus-related “material financial hardship.” Modifications include the extension of the plan period from five to seven years after the first payment came due.
Although there is no firm definition of what qualifies as a “material financial hardship,” the pandemic has had such a catastrophic effect due to unemployment rates and stay-at-home orders that the courts will likely be lenient in its standards.
Debt limit has changed for Chapter 11 filings
When the Small Business Reorganization Act (SBRA) took effect on February 19, 2020, it added a new subchapter to the U.S. Bankruptcy Code. Subchapter V stated that to qualify as a debtor, a Chapter 11 filer could not have more than $2,725,625 in secured and unsecured debt. Under the CARES Act, the limit has been temporarily increased to $7,500,000, making it easier for small businesses to access bankruptcy protection and relief.
If not extended, then these temporary changes will expire on March 27, 2021. If lockdowns and social distancing have left you in a difficult position financially, then contact a New York bankruptcy attorney. Most law firms are continuing to operate remotely, so you can get legal advice via phone or video conferencing, and, if your situation warrants it, then make plans to file for bankruptcy once the courts reopen.
COVID-19 has had a damaging effect on the financial wellbeing of individuals and businesses across the globe. When you reach the point where you can’t cover your family’s necessary living expenses AND pay your credit card or medical bills, filing for bankruptcy can get you past that difficult state and let you start anew once the crisis passes.