Relief in federal COVID-19 response includes Chapter 11, Chapter 13 bankruptcy changes
Thursday, June 18, 2020
By Robert Drummond
The Small Business Reorganization Act (SBRA) was signed by President Donald Trump on Aug. 26, 2019, and took effect in February 2020. The Act made changes to the Bankruptcy Code to assist small businesses and some individuals in a streamlined financial reorganization process.
Six weeks after the effective date of the SBRA, the Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law on March 27, 2020. The Act includes suspensions of foreclosures and evictions, payment relief, financial assistance, and numerous other consumer protections.
These two Acts offer protection and relief to small businesses and individuals in Montana. The SBRA supplements Chapter 11 of the Bankruptcy Code simplifying the reorganization process for small businesses and individuals. The CARES Act makes changes to the Bankruptcy Code for businesses and consumers facing COVID-19 related financial stress. This article examines application of these two Acts and the relief they offer to Montana businesses and consumers.
CONSUMER AND BUSINESS BANKRUPTCY CHANGES
The SBRA was enacted to make bankruptcies a faster and less expensive process for small businesses and certain individuals under the new subchapter V of Chapter 11. Debtors with total noncontingent, liquidated debts (both secured and unsecured) of no more than $2,725,625 are now allowed to seek relief under subchapter V under the SBRA. This limitation was temporarily raised in the CARES Act. The new subchapter offers many advantages over reorganization under Chapter 11 of the Code:
· There are no creditors’ committees unless court ordered.
· A debtor proceeding under the SBRA does not have to file a disclosure statement, unlike traditional Chapter 11 debtors.
· A court can confirm a plan under the SBRA even if all impaired classes vote to reject the plan.
· The SBRA eliminates the traditional Chapter 11 absolute priority rule, which precludes lower classes of creditors from receiving distributions unless the claims of creditors in each above class are paid in full. Thus, the debtor’s equity holders may retain their interests without contributing new value.
· It allows individual debtors to modify certain residential mortgages where the underlying loan was made primarily in connection with the debtor’s commercial or business activities as opposed to being used to purchase the residence.
Estimates based on recent Chapter 11 statistics show that up to half of Chapter 11 debtors will be eligible to file under the SBRA.
The debt limitation for subchapter V cases was raised to $7.5 million under the CARES Act. Other eligibility requirements are unchanged by the CARES Act. After the March 27, 2021, sunset date for eligibility, the debt limitation amount will return to $2.7 million.
Chapter 13 Changes. The existing Bankruptcy Code offers debtors the chance to reorganize and restructure debt repayment under a three- to five-year Plan. Debtors may repay home mortgage arrearages, priority tax and child support claims and retain nonexempt property under Chapter 13. The CARES Act permits individuals and families currently operating under Chapter 13 Plans to seek revised payment Plan modifications due to the COVID-19 pandemic. These debtors may extend their payment Plans for up to seven years after their initial Plan payment was due. Thus, this circumvents the five-year limitation for repayment Plans appearing under current Chapter 13 law. Again, this provision has a one-year sunset date. The Act also excludes COVID-19 related payments from the disposable income calculations under Chapter 13.
Federal foreclosure and eviction suspensions. The CARES Act provides foreclosure relief for federally backed loans for residential properties purchased, securitized, owned, insured, or guaranteed by Freddie Mac or Fanny Mae or owned, insured, or guaranteed by Federal Housing Administration (FHA), Veterans Administration (VA), and the U.S.Department of Agriculture (USDA). In 2018, just under half of all loan applications in Montana were FHA, VA, or USDA based applications. Under the CARES Act, the servicer of a federally backed mortgage loan may not initiate any judicial or nonjudicial foreclosure process, move for a judgment to foreclose, order a sale, or execute a foreclosure related eviction or foreclosure sale. The provision lasts for at least a 60-day period beginning March 18, 2020. This provision is not limited to borrowers with a COVID-19 hardship.
Homeowners of federally backed mortgage loans may obtain forbearance from making mortgage payments for up to 180 days and then request an additional forbearance for up to another 180 days. The Act does not reference taxes or insurance which may be collected and escrowed by the lender. However, during the forbearance period, no fees, penalties or interest may accrue on a debtor’s account beyond amounts scheduled or calculated as if the borrower made all payments on time.
During the 120-day period beginning on the Act’s enactment date, the lessor of a “covered dwelling” may not file a court action for eviction or charge additional fees for nonpayment of rent. After that 120-day period, the lessor cannot require the tenant to vacate until it gives the tenant a 30-day notice to quit. See § 4(c). A covered dwelling is one where the building is secured by a federally backed mortgage loan or participates in certain federal housing programs.
Gov. Steve Bullock executed Executive Orders 2-2020 and 3-2020 to declare a state of emergency in Montana. His directive implementing his Executive Order, dated March 30, 2020, limited residential foreclosures and evictions. This action specifically did not suspend payments that were due during the duration of his directive.
Student Loans. The CARES Act also offers relief for federal student loan borrowers. However, borrowers with Perkins loans or Federal Family Education Loans (FFEL) still held by banks or guarantee agencies are not protected. Direct loans and qualified FFEL borrowers will have their payments suspended through Sept. 31, 2020. Borrowers with federally held student loans will automatically have their interest rate set to 0% for a period of at least 60 days and will have the option to suspend their payments for at least two months to cope with the national emergency.
The Treasury Department has exempted the Social Security Administration from offsetting benefit payments against tax debts, student loans, or mortgage deficiency payments.
Fair Credit Reporting. The CARES Act provides minimal protections regarding credit reporting. From Jan. 31, 2020, until 120 days after the end of the national state of emergency, if a creditor has made an accommodation (such as a forbearance or workout) for a consumer pursuant to the state of emergency, the creditor shall report that account with the same status as prior to the accommodation to a consumer reporting agency. That is, if an account was current it shall continue to be reported as current, while a delinquent account shall continue to be reported as delinquent. The exceptions are (1) the provision does not apply to charged-off accounts and (2) if the account was delinquent and the consumer manages to bring the account current during the period of accommodation, the account shall be reported as current.
The House of Representatives on May 12 passed HR 6800, the Health and Economic Recovery Omnibus Emergency Solutions (HEROES) Act. Although likely not in its final form, the proposed legislation extents and expands the eviction and foreclosure moratorium in the CARES Act and extends forbearance provisions for student loans. It also specifies certain home loan modification and loss mitigation programs that should be available following a moratorium to prevent any homeowner from facing foreclosure if they cannot pay the skipped payments. The bill would also raise the debt limitations in the bankruptcy code to make more individuals eligible for chapter 13.
What is clear is that the financial impact of COVID-19 on consumers and businesses will be widespread. The SBRA and the CARES Acts offer some short-term relief for virus related financial hardships.
Robert Drummond is a Chapter 13 Trustee from Great Falls.
 The CARES Act offers relief to businesses and consumers facing financial stress as a result of the COVID-19 epidemic.
 11 U.S.C. § 1325(b)(4)
 Treasury Technical Bulletin No. 2020-7