The Consolidated Appropriations Act (CAA), one of the most important bills ever passed by Congress, was enacted on December 27, 2020. In addition to providing funding and additional relief from COVID, the CAA contains several changes to Title 11 of the Bankruptcy Code to provide temporary relief and flexibility to debtors, landlords, tenants and sellers who have been materially affected by the ongoing COVID-19 pandemic.
The main points to remember for changes to the Bankruptcy Code are as follows:
- Extension of late rent for small business debtors.
CAA amends Section 365 (d) of the Bankruptcy Code for Small Business Debtors in Subchapter V to allow an additional 60 days to pay rent (this is in addition to the 60 day period currently allowed under subchapter V), when a small business debtor has experienced and continues to experience significant financial hardship related to COVID. These deferred obligations can now be paid over time according to plan (as opposed to the day the company comes out of bankruptcy). (sunset after 2 years, December 27, 2022).
- Extended period for assuming or rejecting leases.
For all Chapter 13 bankruptcy cases, under the CAA, debtors now have 210 days to assume or reject a lease (and, as before, can request an additional 90-day extension). This gives tenant-debtors 300 days (instead of 210 days) to try to find a viable exit strategy from bankruptcy. (sunset after 2 years, December 27, 2022).
- Protection preferably for certain owners and suppliers.
CAA helps homeowners and merchants who have provided assistance to their tenants and customers by prohibiting a debtor from avoiding payments resulting from a deferral of payments agreement. To be eligible, (a) the debtor and owner / supplier must have entered into a binding lease or contract prior to filing the bankruptcy case, (b) they must have amended the lease or contract after March 13, 2020, and (c) the amendment must have deferred or deferred payments otherwise due under the lease or contract. This amendment should encourage owners and suppliers to work with counterparties in difficulty, it being understood that the deferred or reduced payments negotiated will not be subject to preferential recovery. (sunset after 2 years, December 27, 2022)
- PPP Loans For Small Business Debtors?
The CAA contains provisions for subchapter V debtors to obtain PPP loans, but these provisions will only come into effect at the sole discretion of the administrator of the SBA. Currently, the courts are divided over a debtor’s eligibility for a PPP loan.
- Changes in consumption.
The CAA also includes temporary changes that primarily impact consumer bankruptcy cases, including:
- change the time limit for the loan manager to file a proof of claim;
- protect federal coronavirus relief payments to mass bankruptcy taxpayers;
- give a court more discretion to grant discharge to Chapter 13 debtors in cases where a debtor defaults on a home loan;
- extend protection against discriminatory treatment against debtors who have filed for bankruptcy to enable those debtors to obtain mortgage forbearance relief or other mortgage-related assistance under the CARES Act; and
- provide relief from the obligation to make a utility deposit to avoid termination of services.
Previous changes to the SBRA debt limit not extended
Certain provisions of the Bankruptcy Code which were recently modified as part of the previous relaunch cycle (which we previously written on) are likely to expire. More importantly, the CARES Act increased the debt ceiling for small business debtors in Subchapter V from $ 2,725,625.00 to $ 7,500,000.00. This change significantly broadened the universe of potential small business debtors who could use the many advantages of subchapter V of the Bankruptcy Code.
However, this provision will expire on March 27, 2021. Unless Congress acts quickly, a significant number of small businesses will no longer be able to file under subchapter V of the Bankruptcy Code. Businesses that continue to experience financial difficulty may consider their options before the March 2021 expiration to ensure they can still take advantage of Subchapter V.