Coronavirus Stimulus Act Makes Benefits of Small Business Reorganization Act Available to More Businesses for One Year

We recently wrote about how the Small Business Reorganization Act of 2019 (“SBRA”) may help small businesses survive the COVID-19 pandemic and resulting economic impact. See our story here. One of the key features of SBRA is that it allows business owners to retain their equity interests in their businesses even when they cannot pay creditors in full. When SBRA became effective February 19, 2020, only debtors owing up to $2,725,625 were eligible.

On March 27, 2020, the U.S. House of Representatives passed the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), and the president signed it the same day. You can read the full text here.

The CARES Act increases the debt limit to $7.5 million, meaning many more businesses will be able to seek relief under SBRA. Other benefits of SBRA include expedited timelines, the elimination of quarterly fees to the U.S. Trustee, and the ability to modify mortgages on primary residences, as long as the debt was used for the business. For a complete analysis, click here.

The aim of SBRA is for more small business to reorganize under chapter 11 of the bankruptcy code. On the flipside, creditors will receive less.

However, the limit will drop back to $2,725,625 one year after the CARES Act becomes effective.

The CARES Act also excludes Coronavirus-related payments from the federal government from the definition of “income” for bankruptcy purposes, meaning a debtor will not have to relinquish such payments to creditors, and explicitly allows chapter 13 debtors who are currently in payment plans to seek plan modifications, including an extension of the payment plan to up to seven years from when the initial payment was due.