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Bankruptcy and COVID-19

As a nation, we are heading further into the financial crisis that the COVID-19 virus is causing in the United States. Many Americans are going on a month without employment or income and many small businesses have had to limit their operations or shut their doors temporarily due to “shelter in place” orders issued by states. It should not be surprising that economists are predicting that bankruptcies, specifically related to shutdowns caused by COVID-19, will set records in the next 12 months.

Recently enacted legislation, the CARES Act, revised provisions of the U.S. Bankruptcy Code to provide relief to small businesses and individuals who may have to file for bankruptcy as a result of COVID-19 shutdowns.

For small businesses that must file for bankruptcy as a result of the COVID-19 shutdown, the CARES Act temporarily increases the debt threshold for filing under Chapter 11 of the Bankruptcy Code. This will allow small businesses to reorganize their debts while maintaining some control over their businesses. Ultimately, it will allow more small businesses to remain open and conducting business while working through a Chapter 11 bankruptcy.

The CARES Act also addresses the needs of individuals who seek bankruptcy as a result of the COVID-19 shutdown. There were two main changes to the Bankruptcy Code that will affect individuals.

First, the CARES Act will allow individuals who have already filed Chapter 13 bankruptcy who have suffered a “material financial hardship” due to COVID-19 to seek modifications to their existing plans. These changes could allow individuals to extend their payments over a longer period of time and reduce their monthly payments. 

Second, monies received by individuals from the Federal Government as a result of the CARES Act, i.e. “stimulus checks” will not be included in the definition of “income” when considering whether an individual is eligible to file for bankruptcy.  This means that individuals can still consider filing for bankruptcy, if necessary, without fear of losing their stimulus checks. These changes provided by the CARES Act are probably the beginning of legislation that will affect how small businesses and individuals will be looking at bankruptcy in the aftermath of COVID-19.

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