Chapter 7 & 13 Consumer Bankruptcy Impact

Chapter 7 & 13 Consumer Bankruptcy Impact

April 2, 2020 Off By administrator

On March 27, 2020, the President signed into law the historic Coronavirus Aid, Relief, and Economic Security Act (“CARES Act” or “Act”), a $2.2 trillion stimulus package designed to mitigate the widespread economic effects of the novel coronavirus (“COVID-19”). The Act includes several temporary modifications to chapter 7 and chapter 13 of the U.S. Bankruptcy Code.[1] This alert details these modifications.

CERTAIN FEDERAL PAYMENTS EXCLUDED FROM DEFINITION OF “INCOME”

For cases under chapter 7 and 13, the CARES Act modifies the definition of “current monthly income” in 11 U.S.C. § 101(10A)(B)(ii) to expressly exclude payments made under federal law relating to the national emergency declared by the President under the National Emergencies Act with respect to COVID-19. Similarly, the Act provides that any payments made to individuals under federal law relating to the COVID-19 pandemic do not constitute “disposable income” required to be committed to a chapter 13 debtor’s plan pursuant to 11 U.S.C. § 1325(b)(2). The amended definition of “disposable income” will benefit both current chapter 13 debtors who did not have confirmed plans as of the date of enactment of the CARES Act, as well as future chapter 13 debtors.

MODIFICATIONS AND PLAN PERIOD EXTENSIONS FOR CHAPTER 13 DEBTORS WITH CONFIRMED PLANS

The CARES Act also permits chapter 13 debtors with plans that were confirmed as of the date of enactment of the CARES Act to seek modifications of their plan due to COVID-19-related hardships. Specifically, the Act adds subsection (d)(1) to 11 U.S.C. § 1329 to permit a debtor to modify a confirmed plan, after notice and a hearing, if such debtor is experiencing a “material financial hardship” due, “directly or indirectly,” to the COVID-19 pandemic. Under the Act, a plan also may be modified to extend the plan period up to seven years after the first payment under the original confirmed plan became due.[2] A bankruptcy court may approve such a modification upon request of a debtor. Until the amendment sunsets one year from March 27, 2020, chapter 13 debtors with plans confirmed prior to the enactment date will be able to seek to modify their plans consistent with this provision.

The Act does not define the scope of an “indirect” hardship arising from the COVID-19 pandemic or what type of proof will be required of a debtor to show indirect hardship. Further, it is unclear what bankruptcy courts will deem to be “material financial hardship” sufficient to justify a plan modification. Given the uncertain and unprecedented times, it is likely that many debtors with confirmed plans will meet the qualifications for “material financial hardship” directly or indirectly arising from COVID-19, but how expansively bankruptcy courts interpret this requirement remains to be seen.

IMPACT OF CARES ACT PROVISIONS ON CHAPTER 13 CREDITORS

At this juncture, it is still unclear what types of plan…

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