As written by Jana S. Pail and Abagale Steidl in the ACBA Lawyers Journal on February 12, 2021.
After much pushback and handwringing on all political sides, the $900 billion COVID-19 relief package was enacted into law at the end of December 2020. The legislation is known as the Consolidated Appropriations Act of 2021 (CAA 2021), and contains a slew of bankruptcy-related provisions affecting both consumer and commercial bankruptcy filings. The changes are temporary and will sunset on certain varied dates.
The bill provides financial support for individuals and families which could potentially serve to blunt or
delay a run on consumer bankruptcy services. These include a one time $600 per person stimulus payment to
those whose incomes totaled less than $75,000 based on 2019 income (or $112,500 for head of household and
$150,000 for couples filing jointly) and provides a $600 payment for each child, 16 years of age and younger, who were claimed on the parents’ last filed tax return. Unemployment insurance is being expanded once again, to include a $300 per week bonus allotment through March 14, 2021, as well as extensions for eligibility to gig
and self-employed workers. It has been directed that this additional stimulus payment should not be considered in the bankruptcy Means Test calculation for the last six months of a debtor’s income.
The bill also provides a boost in Supplemental Nutrition Assistance Program (SNAP) benefits by 15 percent
to those eligible, provides additional funding to food banks, and dedicates $11 billion to support childcare programs.
In terms of impact on consumer bankruptcy filings, the Act’s housing provisions are arguably the most
impactful on holding back the expected consumer filing deluge. The legislation provides for $25 billion in rental
assistance, prioritized for those experiencing unemployment, those in low income brackets, and those at risk for housing instability or homelessness. The aid is non-taxable.
Notably, the legislation also extended the Centers for Disease Control and Prevention’s (CDC’s) eviction moratorium until January 31, 2021. An Executive Order signed by President Joseph Biden has further extended this moratorium until March 31, 2021 in addition to the foreclosure moratorium in place for federally backed mortgage loans.
While the intent of the housing provisions is to prevent the further spread of COVID-19, the practical effect on bankruptcy filings is the application of downward pressure on the number of filings, as the need to stop a foreclosure or eviction becomes less exigent.
As to the business community, the legislation provides $325 million for small business relief including $284 billion in additional loans through the Paycheck Protection Program (PPP) which exhausted its prior funding in August 2020. Even more, the new legislation makes a number of notable changes to the PPP including simplifying the PPP application process, expanding the expenses for which the PPP forgivable funds can be used, and expanding loan amounts for businesses in the hotel and food services industries. It also allows certain small businesses, with less than 200 employees, that have experienced a 25 percent reduction in quarterly gross receipts to receive a second forgivable PPP loan.
Other specific bankruptcy-related provisions include the following:
Utilities
Section 366 of the Bankruptcy Code is amended to prohibit utility companies from terminating service for individual debtors who cannot provide adequate assurance of future performance, so long as that individual becomes and remains current within 20 days of the bankruptcy filing.
No Discrimination Permitted
Based on Bankruptcy Filing Section 525 of the Bankruptcy Code is amended to provide that no person may be denied relief under the foreclosure moratorium and right to request forbearance (15 U.S.C. §9056), the forbearance of mortgage payments for multifamily properties (15 U.S.C. §9057) and the temporary moratorium on eviction filings (15 U.S.C. §9058).
Chapter 13 Discharge
Section 1328 of the Bankruptcy Code is amended to give the courts discretion to grant a discharge to a Chapter 13 debtor even if a debtor has defaulted on not more than three monthly residential mortgage payments. This provision would allow the debtor to exit the bankruptcy case with a discharge of other non-mortgage debts even though mortgage payments are not fully cured, but it would not relieve the debtor of the obligation to tender the payments and, in fact, failure to do so puts the debtor at risk that the lender will seek to exercise state court remedies post-discharge.
PPP Loans to Debtors
The previous Coronavirus Aid, Relief, and Economic Security Act (CARES Act) enacted in March of 2020 created the PPP, but the Small Business Administration (SBA) – the agency charged with administering the program – refused eligibility to debtors in bankruptcy. Much litigation ensued, and the outcome has been inconsistent among the federal circuits. The CCA of 2021 amends the Bankruptcy Code to permit PPP loans to certain debtors, but only if the SBA Administrator sends a letter to the Director of the Executive Office for United States Trustee agreeing to grant SBA loans in bankruptcy. Even then, the loans will only be available to Subchapter V small business debtors, Chapter 12 family farmer debtors, and self-employed Chapter 13 debtors.
Assuming the SBA sends the aforementioned letter, debtors in bankruptcy would now be able to pursue PPP loans on an expedited schedule. The legislation voids contractual provisions and applicable non-bankruptcy law that might prohibit a debtor from incurring additional debt, and it grants administrative priority status to PPP loans while preserving the temporal repayment term of the loan. Much depends on the Biden administration and the new SBA Administrator as to whether such a letter will be issued.
In addition, some lenders are engaging in the argument that the filing of a bankruptcy case acts as a violation of the loan and can make loan forgiveness more difficult.
Preferences
In bankruptcy, payments made to creditors in the 90 days prior to a case filing are subject to potential recapture by a trustee. The Bankruptcy Code seeks to level the playing field amongst creditors by recovering payments made to creditors who were ‘preferred.’ The CCA of 2021 amends Section 547 of the Bankruptcy Code to encourage landlords and goods and services vendors to accommodate distressed tenants and customers through reduced risk of preference exposure. The legislation would bar avoidance of payments made to landlords and suppliers to catch up past defaults. Numerous terms and conditions apply and documentation is crucial.
Customs Duties
Customs brokers perform a vital function in international trade by advancing payment of estimated duties to the U.S. Customs and Border Protection on behalf of importers. But those payments are subject to preference actions in bankruptcy, in which case a trustee, if successful, could clawback payments made on behalf of an importer even though the customs broker only served as a pass through entity. The CCA of 2021 amends Section 507(d) of the Bankruptcy Code so that a customs broker that pays the U.S. government a customs duty on behalf of a bankrupt importer is subrogated to the government’s priority status under Section 507(b)(8)(F) for customs duties. As a result, trustees will not be able to seek repayment from the customs broker. In turn, customs brokers will be less inclined to refuse to advance or guarantee payments of customs duties to the federal government.
Subchapter V Debtors
Subchapter V business debtors experiencing material financial hardship due to the pandemic now have an expanded window of time under Section 365(d) during which they are excused from paying rent while they decide to assume or reject a nonresidential real estate lease – from 60 to 120 days. The bill does not appear to extend the March 27, 2021, sunset of the expanded $7.5 million debt limit to qualify as a small business under Subchapter V, a provision which appeared in the earlier CARES Act.
Unexpired Non-Residential Real Property Leases
Debtors-in-possession now have 210 days from the petition date to assume or reject unexpired nonresidential leases – up from 120 days provided by Section 365(d)(4)(A) of the Bankruptcy Code.
Supplemental Mortgage Proofs of Claim
The CCA of 2021 allows mortgage servicers to file supplemental proofs of claim for mortgage payments deferred or otherwise modified under the previous CARES Act even though the bar date has passed. The supplement must include a description of the modification and be filed within 120 days after the end of the modification.
Chapter 13 Plan Modification
The CCA of 2021 allows mortgage servicers, the court or any party in interest to seek modification of a
confirmed Chapter 13 plan to account for deferred payments under the previous CARES Act. This provision will
help ensure that cases are sufficiently funded for earlier deferrals before the end of their plan terms.
Student Loan Payments
Under the initial CARES Act, eligible federal student loans were placed into a penalty free forbearance until October 2020. That deadline was later extended by Executive Order until January 31, 2021. The CCA of 2021 initially had talk of further extensions, but these were not included in the final bill. Instead, an Executive Order issued by President Biden extends the forbearance period to September 2021.
The CCA of 2021 contains many provisions that directly, and indirectly, impact commercial and consumer bankruptcy debtors and certainly deserves a review.