Congress passed the Consolidated Appropriation Act (CAA) on December 27, 2020. The almost 5,600-page bill is claimed to be the longest bill ever enacted by Congress. Besides financing the federal government in 2021 and providing relief for individuals and businesses affected by COVID, the current bill modifies the Bankruptcy Code in at least nine respects. Most of the amendments will end after one or two years. One of the amendments would only become applicable once the Small Business Administration signs it.
Below, you’ll find a brief description of some of the amendments that directly affect the bankruptcy code.
PPP loans available to some debtors (and trustees)
The CARES Act developed the Paycheck Protection Program (PPP), the now-familiar program of forgivable loans operated by the Small Business Administration (SBA). Almost right after the CARES Act’s passing, the debtors started to apply for PPP loans, causing a debate about the supply of such loans to bankrupt businesses. The SBA repeatedly opposed PPP loans to debtors, and the case law was varied throughout the country.
The CAA amends the Bankruptcy Code to authorize PPP loans to some debtors. That being said, the law also specifies that certain PPP loans would only be available if the SBA Administrator sends a request to the Executive Office Director of the United States Trustee to issue PPP loans in bankruptcy. As a result, the current law transfers the authority to the SBA administrator to accept PPP loans through bankruptcy. For this reason, it’s not known yet if these PPP loans will be available.
Given that the SBA Administrator accepts PPP loans in bankruptcy, the loans will be eligible in two cases. The first would be in cases pending on, filed on, or after the date the SBA sends the request mentioned above to the Office of the United States Trustee. The second case concerns certain types of debtors, notably Subchapter V small business debtors, Chapter 12 family farmer debtors, and Chapter 13 self-employed debtors.
CHAPTER 13 availability of discharge even if certain plan pavements haven’t been made
The CAA allows the bankruptcy court the power to grant a discharge to a Chapter 13 debtor. Even if they defaulted on or after March 13, 2020, on no more than three monthly payments under a residential mortgage due to material financial distress related to COVID-19. The court can also award a discharge to a debtor whose established repayment plan provides for curing on the faults on a mortgage, and the debtor has entered into a qualifying loan adjustment or forbearance agreement with the lender. This does not mean that the debtor will be discharged from the mortgage debt. Instead, it means they will be eligible to receive a plan of discharge of other debts even though the debtor did not pay all mortgage payments when due under the plan.
No bankruptcy filing discrimination
No one may be denied relief under three of the CARES Act clauses simply because the person is or has been a debtor in a bankruptcy case. The provisions are as follows:
- Foreclosure moratorium and the right to seek forbearance
- Forbearance of mortgage payments on multi-family homes
- A temporary suspension on eviction filings
CARES forbearance claims; adjustment of Chapter 13 plans
Under the CARES Act, mortgage holders under federally-backed residential and multi-family mortgages can request forbearance payment due to COVID-19 hardships. In the case of federally backed residential mortgages, the forbearance period can last up to a year. By the end of the foreclosure period, the mortgage holder must pay the unpaid mortgage payments as a lump sum. In Chapter 13 cases, these missed mortgage payments created major procedural and logistical problems.
To address these complications, the CAA requires eligible servicers to file proof of claim for delayed payments even though the claims bar deadline has expired. The CAA also authorizes debtors to update the confirmed Chapter 13 agreement to address the delayed payment plan. Suppose the debtor fails to adjust his plan. In that case, the bankruptcy court, the U.S. Trustee, the trustee of Chapter 13, or any involved party will modify the plan.