CARES Act & Bankruptcy: Congress Wants the Largest of Small Businesses to Liquidate

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The CARES Act

By: Donald L Swanson

The CARES Act (“Coronavirus Aid, Relief, and Economic Security Act” ) is now law—and has been since March 27, 2020.

Bankruptcy Amendments in CARES Act

Sec. 1113 of the CARES Act deals with “Bankruptcy” and contains the following provisions.

  1. Eligibility for Small Business Bankruptcy. Total-debts eligibility for the Small Business Reorganization Act (Subchapter V of Chapter 11) is now this: “aggregate noncontingent liquidated secured and unsecured debts” must be “not more than $7,500,000.” This is an increase from $2.72 million. This eligibility amendment, (i) “shall apply only with respect to cases commenced . . . on or after the date of enactment of this Act,” and (ii) shall return to $2.72 million on the day that is “1 year after the date of enactment of this Act.”
  2. Current Monthly & Disposable Income. Federal benefits relating to the “coronavirus disease 2019 (COVID–19)’’ will be excluded from computations of “current monthly income” under § 101(10A)(B)(ii) and from “disposable income” under §1325(b)(2). Such exclusions, (i) “shall apply to any case commenced before, on, or after the date of enactment of this Act” and (ii) shall expire on the day that is “1 year after the date of enactment of this Act.”
  3. Chapter 13 Plan Modification. A Chapter 13 debtor may modify an already-confirmed plan when debtor experiences “a material financial hardship due, directly or indirectly, to the coronavirus disease 2019 (COVID–19) pandemic” and may provide payments for as long as “7 years after the time that the first payment under the original confirmed plan was due.” This modification opportunity, (i) applies to any case for which a Chapter 13 plan “has been confirmed . . . before the date of enactment of this Act,” and (ii) expires on the day that is “1 year after the date of enactment of this Act..”

What Does Congress Have Against the Largest of Small Businesses?

For most purposes, the CARES Act adopts the meaning of the term “small business” from the Small Business Act. According to the Congressional Research Service, the Small Business Act defines a “small business” as one that:

  • is organized for profit;
  • has a place of business in the United States;
  • operates primarily within the United States or makes a significant contribution to the U.S. economy through payment of taxes or use of American products, materials, or labor;
  • is independently owned and operated; and
  • is not dominant in its field on a national basis.

Note:

  1. The foregoing list makes no reference to “amount of debt” as an element that defines a “small business”; and
  2. The CARES Act refers to “not more than 500 employees” as a “small business” distinctive.

So . . . why does Congress insist upon limiting “small business” bankruptcy relief to businesses with very-small amounts of debt: i.e., $7.5 million under the CARES Act and $2.72 million outside the CARES Act? This is an aberration.

What does Congress expect a formerly-successful family business to do, that has $7,600,000 of total debts today (or $2,800,000 of total debts a week ago or a year from now)?

  • Congress obviously wants such family businesses to use the same bankruptcy rules that govern publicly traded behemoths like General Motors (e.g., the absolute priority rule, which eliminates the ownership class); and
  • Congress apparently can’t stomach the thought of such family-owned businesses actually reorganizing in bankruptcy—Congress obviously prefers death sentences for such businesses (i.e., liquidation) over reorganization.

And that’s simply bizarre!

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