We have gotten a flurry of phone calls from people who are concerned about the impact of current health crisis on the financial well being. We will try our best to stay up to date on developments as they relate to financial recovery.
On March 27, 2020, President Donald Trump signed into law the $2.3 billion Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. The Act provides a financial lifeline for individuals as well as many businesses (including sole proprietorships) that have suffered monetary consequences due to the current COVID-19 pandemic.
In addition, the Act makes several significant changes in the Bankruptcy Code that affect how the payments below are treated.
The Act makes several significant changes to the Bankruptcy Code:
- The COVID-19-related payments described below are excluded from income the for purposes of determining whether an individual debtor (including a sole proprietor) meets the “means” test that allows him or her to file a Chapter 7 liquidation petition rather than a Chapter 13 reorganization plan. We’ve written about the means test in a previous post.
- COVID-19 payments are not included in a debtor’s “disposable income” for purposes of developing a Chapter 13 debt reorganization plan.
- The Act also permits Chapter 13 debtors with a previously confirmed reorganization plan to modify the plan based on a material financial hardship due to loss of employment or other COVID-19-related financial hardship. This relief may include extending payments under the plan for up to seven years after the initial plan payment was due.
- Chapter 7 bankruptcy filers using Colorado exemptions do not currently appear to be able to exempt their COVID-19-related payments.
Small Business Administration Loan Provisions
One of the areas addressed by the Act is the plight of small businesses forced to close or curtail operations as a result of COVID-19-related closure orders or other governmental actions. The Act includes significant funding and other changes in eligibility and terms of new and existing loans guaranteed by the U.S. Small Business Administration.
The CARES Act expands the eligibility of many small businesses to obtain loans through June 30, 2020 to cover the following expenses:
- Payroll of up to 2.5 times a business’s average monthly payroll
- Health care
- Mortgage interest payments
- Rent and utility payments
- Interest on qualified existing loans.
- Payments on new loans will be deferred for between six months and one year and the usual SBA fees will be waived. The borrower also need not meet the usual SBA loan requirement of showing that financing was not available through other sources.
Perhaps most significantly, repayment of SBA loans made under the Act will, subject to certain conditions, be permanently forgiven. Amounts not forgiven will continue to be guaranteed by the SBA and will have a maturity date of 10 years from the date the borrower applied for forgiveness.
Unemployment Insurance Provisions
The Act also expands eligibility for unemployment insurance for workers who are displaced due to COVID-19 and will provide federal funding for the following:
- The Pandemic Unemployment Assistance program. This program will provide up to 39 weeks of combined federal and state unemployment assistance during 2020. Benefits are available to so-called “gig economy” workers and other independent contractors as well as employees who are either not eligible for or have exhausted, other state or federal benefits.
- The Federal Pandemic Unemployment Compensation Program. The Program is intended to provide up to $600 for up to four months to individuals already collecting state unemployment insurance payments.
- Payments enabling states to recover the cost of waiving the typical one week waiting period for unemployment applicants.
- Partial unemployment benefits if work hours are reduced but not eliminated.
As of the date of this post, the duration and severity of the pandemic are at best subject to conjecture. Additional relief to current and prospective individual bankrupt debtors and businesses beyond that provided by the Act may become necessary.
If you are struggling through this time and would like to know if bankruptcy might be a helpful option, we hope you’ll schedule a free consultation with an experienced Colorado bankruptcy attorney. You can set up an appointment by clicking here.