Understanding the COVID-19 Bankruptcy Relief Extension Act

The COVID-19 pandemic has had an extended impact on the U.S. economy. Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act.  The law provided a wide variety of relief to individuals and businesses. It included several changes to federal bankruptcy law. Those changes were set to expire in March 2021, one year after the law took effect.

While millions of people and businesses benefited from the CARES Act and other stimulus bills passed by Congress, the pandemic continued to affect the country as the one-year deadline for bankruptcy reforms grew closer. The president signed the COVID-19 Bankruptcy Relief Extension Act (CBREA) into law hours before the deadline. The CBREA extended the CARES Act’s bankruptcy provisions for another year, until March 2022.

The CARES ACT made several important changes to bankruptcy law

Among the CARES Act’s many reforms were several amendments to federal bankruptcy laws, which provided assistance to small businesses and individuals. The law expanded eligibility for certain bankruptcy programs and omitted certain income from bankruptcy courts’ jurisdiction.

Small business debtor reorganization

The Small Business Reorganization Act (SBRA) of 2019 sought to make Chapter 11 bankruptcy more widely available to small businesses. Prior to the SBRA’s enactment, many small businesses could not meet the requirements for filing under Chapter 11, which would allow them to retain control over their operations while reorganizing and restructuring their debts. The only alternative for small businesses was Chapter 7, which would result in the liquidation of the business.

The law added a new Subchapter V to Chapter 11 addressing small businesses. It also modified the definition of a “small business debtor” to include businesses with “aggregate noncontingent liquidated secured and unsecured debts” of no more than $2 million dollars, with that number subject to annual adjustments. As of the date that the CARES Act became law, the amount was $2,725,625.

Small business debtor reorganization

Under the SBRA, businesses that met the definition of a small business debtor could avoid liquidation and take advantage of Chapter 11’s reorganization procedures. Bankruptcy courts appoint a trustee for each small business that files for Chapter 11. Small business debtors are not subject to as many formal procedures in a Chapter 11 case as larger businesses, which cuts down on the expense. For example, a court will not appoint a committee of creditors in a small business Chapter 11 case unless it finds good cause to do so. A small business Chapter 11 case is somewhat similar to how courts and trustees manage Chapter 13 personal bankruptcies.

The CARES Act expanded eligibility for small businesses to use the SBRA’s Chapter 11 procedures. It amended the definition of “small business debtor,” to the purposes of the SBRA, to include businesses with up to $7.5 million in total debt. This represents slightly more than twice the debt limit under the pre-CARES Act SBRA.

“Current monthly income” in personal bankruptcies

While Chapter 7 bankruptcy for businesses usually means an end to the business, for individuals it can mean a discharge of most debts after a period of repayment set by the court. Federal law limits the availability of Chapter 7 to individuals who can pass a “means test.” A person’s income must be less than the median income in their state, and they must lack enough disposable income to pay their debts in a Chapter 13 repayment plan.

A bankruptcy court looks at an individual’s “current monthly income” as part of the means test for Chapter 7. Current monthly income is also a factor in Chapter 13 bankruptcies. The court will consider it when determining a debtor’s payment plan, which can last from three to six years.

Federal law defines “current monthly income” to include most forms of income, whether taxable or not, during the previous six-month period. It does not include Social Security or disability benefits, or payments from a fund for victims of crime or terrorism. Thanks to the CARES Act, “current monthly income” also does not include stimulus payments from the federal government related to the COVID-19 pandemic.

Modification of Chapter 13 bankruptcy plans

In a Chapter 13 bankruptcy, a debtor must make monthly payments according to a plan approved by the court. A payment plan must last a minimum of three years, but cannot last longer than five years.

Individuals who had a Chapter 13 payment plan already in place on March 27, 2020, the date the CARES Act took effect, could request a modification of their payment plan if they were experiencing financial hardship related to the COVID-19 pandemic. After giving notice to creditors and other interested parties, the court could hold a hearing to determine whether to modify the debtor’s payment plan

The CARES Act allows bankruptcy courts to extend the duration of a payment plan to a total of seven years from the plan’s start date. If a debtor is in the first year of a three-year payment plan, this means that the court could grant the debtor another four years to make payments. If the debtor is in the fifth year of their plan, the court cannot grant more than two extra years.


The bankruptcy provisions of the CARES Act were scheduled to end in March 2022

The bankruptcy provisions of the CARES Act were scheduled to end in March 2021

Most of the programs and benefits established by the CARES Act have sunset clauses. Many programs were set to expire at the end of 2020. The bankruptcy provisions were to last until one year after the date the CARES Act became law, or March 27, 2021:

  • Section 1113(a)(5) of the CARES Act, which amended the SBRA provisions of Chapter 11, was set to expire “1 year after the date of enactment of this Act.”
  • Section 1113(b)(2)(B), which changed the definition of “current monthly income,” used the same language to set its end date.
  • Section 1113(b)(1)(D)(ii) allowed modification of Chapter 13 payment plans in effect before March 27, 2020, for COVID-related financial hardship.


The CBREA extends the sunset dates for several important parts of the CARES Act

The president signed the CBREA into law on March 27, 2021, the date the CARES Act’s bankruptcy reforms were set to expire. Without the CBREA, expanded eligibility for SBRA Chapter 11 and the revised definition of “current monthly income” would have ended on that date. No one with a Chapter 13 payment plan dated March 27, 2020 or later would be able to request an extension of time because of the impact of COVID-19.

Section 2 of the CBREA extends the sunset provisions found in § 1113 of the CARES Act.

  • It changes the sunset date for the SBRA section from “1 year” to “2 years” after the CARES Act became law.
  • Similarly, it changes the date for the amended definition of “current monthly income” from 1 year to 2 years after March 27, 2020.
  • In the section of the CARES Act addressing modification of Chapter 13 plans, it changes the cutoff for eligibility from plans that were in effect on the day the CARES Act became law to those that were in effect “before the date of enactment of the COVID–19 Bankruptcy Relief Extension Act of 2021.” Anyone with a Chapter 13 payment plan confirmed by a court before March 21, 2021 could therefore be eligible for modification of their plan.

The CARES Act was one the largest and most comprehensive laws Congress has ever passed. It made three important changes to bankruptcy law in order to help individuals and businesses who suffered financial harm during and/or because of the pandemic. The law, as originally written, only kept those bankruptcy reforms in place for one year. With the COVID-19 Bankruptcy Relief Extension Act, Congress renewed the CARES Act’s bankruptcy provisions for another year, until March 27, 2022.


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