The C.A.R.E.S. Act: Trillions in Stimulus Payments, But also Business Bankruptcy Law Changes Creditors Need to Know

[Originally Published 4/6/20; Updated 6/3/22]

The Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) passed by Congress and signed into law by the President on March 27, 2020, provides substantial economic stimulus to individuals, businesses, and health care facilities to address the remarkable and unprecedented impacts of the novel coronavirus (COVID-19). The CARES Act also includes important provisions relating to bankruptcy law. Some of these provisions sensibly apply to individual debtors, allowing them to exclude CARES Act stimulus payments from certain income calculations otherwise applicable in a case.

But the CARES Act also dramatically increases the amount of debt that can be owed by a business debtor that wants to elect the benefits of a new section of Chapter 11, known as Subchapter V, added by the Small Business Reorganization Act of 2019 (the “SBRA”). This increase in the debt limit is important because Subchapter V materially shifts the balance of power in a Chapter 11 case even more in favor of the debtor, so creditors must be prepared to actively protect their rights with the likely increase in new Subchapter V cases that seem destined to follow.

Specifically, the CARES Act increases the debt ceiling for a “small business debtor” from roughly $2.725 million to $7.5 million. While the debt ceiling increase sunsets after one year (i.e., unless the deadline is modified in the future, the debt limit will revert back to $2.725 million in March 2021), many more struggling businesses will now have access to a new set of reorganization tools, impacting creditors’ rights in the process.

[UPDATE June 2022—Although the $7,500,000 debt ceiling was extended for another year to March 2022, Congress allowed the increase to expire at that time.  Currently, due to regular three-year increases based upon the Consumer Price Index, the current maximum debt ceiling for small business debtor treatment under Subchapter V is $3,024,725.  Legislation to increase the ceiling back to $7,500,000 is currently pending, but not yet approved by both houses of Congress.]

Under the SBRA, passed last August but only effective February 19, 2020, if a debtor elects to proceed under Subchapter V, there are several important provisions not otherwise applicable in a usual Chapter 11 case. To name a few:

• There is a presumption against the appointment of a creditors’ committee;
• A trustee gets appointed to help develop a consensual plan and monitor payments;
• The plan of reorganization can be approved by the court even if no creditors affirmatively accept or vote for the plan, so long as the court determines that the plan is “fair and equitable”; and,
• Rather than having to pay unpaid administrative claims when the plan becomes effective (such as unpaid 503(b)(9) claims or unpaid post-petition debts), if a class of creditors does not vote to accept the plan, the debtor can spread those payments out over the expected three- to five-year life of the plan.

These are just a few of, but not the only, debtor-friendly provisions that creditors will have to confront under the SBRA.

As of this writing, the CARES Act is only a couple of weeks old. Moreover, the SBRA itself has been in effect for less than two months, so there is very little data or practical experience on how the Courts will interpret and apply its many new provisions. With the CARES Act substantially increasing the likely number of debtors that might use Subchapter V, creditors must be especially vigilant throughout the Chapter 11 process and strongly consider engaging experienced bankruptcy counsel to protect their rights and to guide them through this new process.

For further information about the CARES Act, the SBRA, and how you might proactively address dealing with customers and vendors that might seek protection under the new laws, contact KMK attorney Samuel C. Wisotzkey via email or call the main office at 414-962-5110.

About KMK
Founded in 1937, Kohner, Mann & Kailas, S.C. (KMK) is a leading law firm with a global reputation for success and a rich tradition of results, providing legal expertise in business and financial services, business litigation, and commercial collections. Recognized by U.S. News & World Report as one of the nation’s Best Law Firms, KMK is headquartered in Milwaukee, WI. For more information, visit www.kmksc.com.