Federal Stimulus Package Bankruptcy Code Amendments: What You Need to Know

The Consolidated Appropriations Act, or “CAA,” was signed into law on December 27, 2020, after a heated battle between Senate Democrats and Republicans.

5,593 pages long, the CAA combined numerous appropriations bills aimed at addressing the economic damage of the COVID-19 pandemic, including those affecting the bankruptcy process.

There are 9 key provisions in the CAA related to bankruptcy of which businesses and individuals seeking to file Chapter 7, Chapter 13, Chapter 11, and Chapter 12 bankruptcy should be aware.

In addition, of note, the March 27, 2021 COVID-19 Bankruptcy Relief Extension Act of 2021 also extended notable bankruptcy CARES Act provisions.   The CARES Act refers to the Coronavirus Aid, Relief, and Economic Security Act, an economic stimulus bill signed into law on March 27, 2020, in response to the economic fallout of the COVID-19 pandemic. 

  1. PPP Loans to Debtors or Trustees

In 2020, the CARES Act created the Paycheck Protection Program (“PPP”). This program allowed businesses to apply for loans from the Small Business Administration (“SBA”) to cover the payroll costs for employees who might otherwise be laid off due to the effects of the pandemic.

Immediately after the enactment of the CARES Act, businesses in Chapter 11 bankruptcy began applying for these PPP loans.

The SBA opposed the provision of PPP loan funds to businesses in bankruptcy and successfully obtained judicial support in some U.S. courts for denying these applications.

The CAA amends Bankruptcy Code to permit the approval of PPP loans to debtors in bankruptcy—but only if the SBA Administrator consents to such use.  To date, the SBA Administrator has not taken action to allow PPP loans in bankruptcy.   

If and when the SBA Administrator consents, PPP loans will be available for businesses in Chapter 11, farms in Chapter 12, and self-employed individuals in Chapter 13 bankruptcy processes until this CAA provision sunsets in December, 2022.

  • Terms of Chapter 13 Bankruptcy Discharge for Debtors

A Chapter 13 bankruptcy is a “reorganization” bankruptcy for individuals rather than corporations.

One of the chief advantages of a Chapter 13 bankruptcy is that it allows an individual who has become delinquent in home mortgage payments to stop any foreclosure process with the filing of the bankruptcy. (The filing of the bankruptcy triggers a Federal “automatic stay against collections” injunction).

The debtor may then bring the mortgage arrearage current through the Chapter 13 process.

Previously, a debtor who missed Chapter 13 plan payments—or skipped mortgage payments paid outside of the Chapter 13 plan—would be denied a bankruptcy discharge.

The CAA allows the Bankruptcy Court the discretion to grant a discharge to Chapter 13 debtors who miss fewer than 3 monthly mortgage payments on a residential mortgage due to the effects of COVID-19 of their non-mortgage debts in certain circumstances.

This provision also sunsets in December of 2021.

  • Prohibition of CARES Act Discrimination Due to Bankruptcy Filing

The CAA also amended the Bankruptcy Code to ensure that CARES Act provisions dealing with the right to request a forbearance of mortgage payments, to enjoy the temporary foreclosure moratorium, are not denied to those who have filed bankruptcy.

This provision sunsets in December, 2021.

  • Chapter 13 Bankruptcy Plan Modifications & CARES Act Forbearance Claims

In Chapter 13 bankruptcies, creditors must file a document called a proof of claim with the Bankruptcy Court in order to receive a distribution payment from the Chapter 13 Trustee. For servicers or holders of secured mortgage claims, the proof of claim is also required to properly report mortgage and escrow balances to the Court.

The proof of claim must be filed by a certain deadline date after the Chapter 13 bankruptcy is filed.

The CARES Act allowed homeowners to request mortgage payment forbearances due to COVID-19. However, those forbearances disrupted confirmed Chapter 13 plans crafted around priority mortgage payments, causing huge headaches for creditors, debtors, Trustees, and bankruptcy judges.

The CAA attempts to remedy the headache by allowing creditors to file proofs of claim for forbearance payments even past the claims bar deadline date.

It also allows debtors to modify their Chapter 13 plans to address such a forbearance plan and for creditors or Trustees to do it if the debtors do not.

This provision sunsets in December, 2021, as well.  

  • Extension of Deadline for Rejection or Assumption of Non-Residential Real Property Leases

Leases and contracts must be explicitly assumed (continued) or rejected in bankruptcy.

Depending upon which Chapter of bankruptcy is filed, it will be either the debtor or the Trustee who must make this decision.

Prior to the CAA’s enactment, such leases were required to be assumed or rejected within 120 days of the commencement of the bankruptcy case.

The CAA amended the Bankruptcy Code to provide an additional 210 days for the acceptance or rejection of non-expired non-residential (commercial) real property leases by the debtor or the Trustee.

This provision will sunset in December, 2022.

  • Non-Expired Non-Residential Real Property Lease Performance Extension

Likewise, the Bankruptcy Code’s deadline requiring performance under non-expired, non-residential real property leases for Subchapter V small businesses was extended by the CAA to  60 days after the date of filing and may be extended a further 60 days in the discretion of the Court if the debtor is undergoing continuing difficulty related to COVID-19.

This provision applies only to Subchapter V Small Business debtors in Chapter 11 bankruptcies.

It also sunsets in December, 2022.

  • Preference Protection

In bankruptcy, one creditor may not be paid by a debtor in preference over other creditors within its same class.

A payment by a debtor to one creditor over certain amounts and within certain time-periods prior to the filing of the bankruptcy may be recovered by a debtor or Trustee as a so-called “preference payment.”

The CAA temporarily limits the recovery of a very specific sort of preference recovery: payments of certain rental arrearages and supplier payment arrearages deferred under a contract amended after March 13, 2020 (i.e., for COVID purposes).

It does not apply to the payment of penalties, late fees, or interest.

This provision sunsets in December, 2022.

  • Customs Duty Priority Treatment

Responding to the more arcane concerns of customs brokers, the CAA also elevates to priority payment classification government customs duty payment obligations.

This provision sunsets in December, 2021.

  • Utilities Treatment

Under the CAA, utility service providers may not discontinue utility provision to individual debtors if the utility bill is paid for 20 continuous days after the filing of the bankruptcy and is paid thereafter.

Michigan law also constrains utility service providers in this respect.

Generally, in the Eastern District of Michigan, if an individual debtor filing Chapter 7 or Chapter 13 bankruptcy carries an electric or gas bill arrearage at the time of filing, the pre-filing utility account is closed and the service provider opens a new account (with new account number) for service provision moving forward from the date of filing.

It is common that a security deposit is required by the utility provider, but it is generally cycled into the next 1-3 monthly bills.

This security deposit is also easily reduced by the debtor’s bankruptcy attorney if it is unreasonably high via a motion filed with the Bankruptcy Court.

  1. Maximum Debt Threshold Increase for Small Business Debtors

The March 27, 2021 COVID-19 Bankruptcy Relief Extension Act of 2021 also extended notable bankruptcy CARES Act provisions.

In particular, the maximum debt threshold increase for Subchapter V small business debtors from $2,725,620 to $7,500,000 has been extended to a new sunset date of March 27, 2022.

This will enable small businesses suffering under the weight of COVID-19 to reorganize more effectively in a streamlined manner while the crisis remains ongoing.

Conclusion

In summary, these CAA provisions clarify the CARES Act temporary Bankruptcy Code amendments in key respects.

It is true that these provisions are very specifically tailored to certain debtor circumstances only, however, if your case happens to implicate one or more of them, it is vital that you have retained legal counsel who is up to speed and cognizant of the sunset dates of the provisions.

Contact us if you would like to discuss your bankruptcy-related matter.