david ludwig headshotBy David Ludwig

Ludwig is a partner practicing out of Dunlap Bennett & Ludwig’s Leesburg, VA office

 

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (CARES Act) was passed by both houses of Congress, and was signed by the President. The CARES Act provides a wide variety of emergency assistance for individuals, families, and businesses affected by the 2020 coronavirus pandemic. In addition, the CARES Act makes some important changes to the United States Bankruptcy Code, offering greater flexibility for struggling businesses and high net worth individuals.

In February, the Small Business Reorganization Act (SBRA) became effective. The SBRA created a new, more streamlined mechanism for certain Chapter 11 bankruptcy cases. Chapter 11 bankruptcies are utilized by companies to and restructure their debts, as well as higher net worth individuals whose debt limits exceed those applicable to Chapter 13 bankruptcies. However, traditionally, the high costs and complexities of Chapter 11 cases made them a poor option for small businesses. The SBRA amendments created a new more streamlined process for confirmation of a Chapter 11 Plan, which made the reorganization process far more appealing to smaller businesses with debts up to $2,725,625. Under the provisions of the SBRA, a qualifying small business does not need to have a majority of creditors vote to approve a reorganization plan as in larger Chapter 11 cases. Rather, a reorganization plan can be confirmed as long as it provides that all disposable income for three to five years will be used to make plan payments.

Section 1113 of the CARES Act increases the SBRA debt limit for smaller Chapter 11 cases from $2,725,625 in debt to $7.5 million in debt. Therefore, businesses with debts of $7.5 million or less will now qualify to file cases under the streamlined procedures implemented by the SBRA. This change in the debt limit applies only to cases filed after the CARES Act becomes effective and is applicable for one year after that effective date. With this change, the CARES Act will allow many more businesses that may benefit from a Chapter 11 reorganization to take advantage of the new provisions of the United States Bankruptcy Code and the new relaxed requirements for confirming a plan.

As with all bankruptcy cases, planning ahead is critical. Companies and high net worth individuals should not want for a cash crunch to begin considering various options for addressing the downturn, including the protection of the bankruptcy laws. To understand how these changes may impact your company’s ability to reorganize debts and liabilities, please contact Dunlap Bennett & Ludwig at 703-777-7319 to schedule a consultation.

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Posted in: Business Law, Corporate Transactions