Coronavirus Bankruptcy Changes

Given the economic fallout from the coronavirus shutdown, bankruptcy filings are going to increase dramatically in the next few years. Congress has already made changes to the bankruptcy laws as part of the coronavirus relief and stimulus package. The COVID-19 shutdowns are not only going to lead to an increase in bankruptcies, but they are also causing disruption, delay and confusion for the status of existing bankruptcy cases in Maryland and throughout the country.

This page will explain the new changes to the bankruptcy laws and how they could impact small businesses, creditors and individual debtors in Maryland. We will also summarize the most current bankruptcy court closing, postponements, and other procedural changes that will apply to pending bankruptcy cases in Maryland.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act is a massive federal economic aid package that was enacted in response to the pandemic at the end of March. The CARES Act contains many provisions aimed at providing relief. Among these are some temporary amendments to the U.S Bankruptcy Code. The changes to the bankruptcy law implemented by the CARES Act will affect both small businesses and individuals.

a) Small Business Amendments

The CARES Act amendments make it easier for small businesses to file for Chapter 11 reorganization. The amendments increase the maximum amount of business debt that can be restructured under a Chapter 11 bankruptcy from $2,725,625 to $7,500,000. This increase will drastically increase the number of small business that can take advantage of Chapter 11 and reorganize their debt rather than liquidate.

The CARES Act amendments also simplify the Chapter 11 plan process, allowing small business debtors to retain equity under certain circumstances, shortening certain deadlines in the case, and eliminating committees of unsecured creditors. These simplifications are designed to make Chapter 11 business reorganizations less daunting and reduce the costs of attorneys fees which are often prohibitive.

b) Individual Debtor Amendments

The CARES Act temporarily amends certain Chapter 7 and Chapter 13 rules for individual debtor bankruptcies. Most significantly COVID-19-related benefit payments from the federal government will NOT be treated as part of a debtor’s income. Normally, if a debtor is receiving unemployment or similar government benefits, the amount of that compensation is consider monthly income in bankruptcy. Excluding any COVID-19 relief payments will make it easier for to qualify for a Chapter 7 even if your getting $600 a week plus regular unemployment after a COVID-19 layoff. The benefits also won’t count as disposable income in a Chapter 13.

The other major amendment allows Chapter 13 debtors to amend their repayment plans to reduce payments if “the debtor is experiencing or has experienced a material financial hardship due, directly or indirectly, to the coronavirus disease 2019 (COVID-19) pandemic.” Chapter 13 debtors experiencing such hardships are also permitted to extend their plan payments for up to seven years after the time that the first payment under their original confirmed plan was due. These provisions affecting individual debtors also sunset after one year.

Like the state courts in Maryland, the U.S. Bankruptcy Court for the District of Maryland is closed to the public. This means no hearings or court proceedings are taking place. However, new case filings and filings in pending cases are still being accepted. Here is a brief summary of the current status of bankruptcy proceedings in Maryland:

• The Clerk’s office is still open to the public through telephone access and drop boxes located in each court house’s lobby.
• CM/ECF will continue to be available for electronic filings.
• Any emergency matters like first day motions should be filed consistent with past practice and will be dealt with as necessary.
• All in-court proceedings in the Greenbelt Division are temporarily suspended until further order of the Court. All emergency bankruptcy matters arising in the Greenbelt Division shall be heard in Baltimore unless the presiding judge orders otherwise
• All § 341 creditor meetings (also know as “trustee meetings”) have been stayed and will be rescheduled after the courts reopen. All filings deadlines based on the $341 meeting date will run from the rescheduled date rather than the original meeting date.
• All filing deadlines set to fall between March 16, 2020 and April 24, 2020, have been extended by forty-two (42) days.