Now that the government begins to reopen the economy it is appropriate to take stock of what impact COVID-19 will have on consumer bankruptcy cases. On March 27, 2020, Congress passes the Coronavirus Aid, Relief and Economic Security Act (Cares Act). The Cares Act is an attempt to mitigate against the adverse impacts that COVID-19 has had on our nation. The Care Act made changes to several forms of bankruptcy cases including Chapter 7, Chapter 13 and Subchapter V Chapter 11 cases recently made available from the Small Business Reorganization Act. The changes made by the Cares Act provide short term relief to individuals and small businesses involved in these forms of bankruptcy cases. However, unless extended by congress, the Bankruptcy Code provisions altered of the Cares Act expire on 3/27/2021.
In Chapter 7 cases, the Cares Act prevents payment made under the Act from being included in eligibility calculations. In determining if an individual is eligible to file a Chapter 7 bankruptcy, the law requires an analysis of their Current Monthly Income. The Currently Monthly Income, generally speaking, is the income from all sources that an individual (or if married, the individual and their spouse) receives during the six months immediately preceding the filing of the Chapter 7 case. If their income is below the median income for a household of their size, they qualify for Chapter 7. If their income is above the median income for a household of their size, they must use the Means Test to determine if they are eligible. The Means Test uses the Internal Revenue Service's guidelines to determine the amount of expenses people in specific regions should be paying with some exceptions being made for the actual expenses that a household incur.
In Chapter 13 cases, the Cares Act prevents payment made under the Act from being included in the determination of how much creditors are entitled to receive. This provision in Cares Act has implications for individuals entering Chapter 13 as well as those already in a case. The analysis in the beginning of a Chapter 13 case is similar to that for a Chapter 7 case. The individual or household's Current Monthly Income is calculated the same in Chapter 7 and Chapter 13. An individual or household that is below the median income has a three year commitment period while an individual or household that is above the median has a five year commitment period. If the individual's (or if married, the individual has their spouse's) income is below the median income, their monthly payment to the bankruptcy Trustee is determined by looking at their projected future income less their actual projected future reasonable and necessary expenses. The difference between the two is what needs to be paid into the case. If the individual's (or if married, the individual and their spouse's) income is above the median income, their Disposable Income must be paid to the bankruptcy trustee. The Disposable Income is calculated using an analysis similar to the Chapter 7 Means Test. After reviewing the Internal Revenue Service's guidelines for expenses, combined with certain actual expense and some expenses not permitted in the Chapter 7 Means Test, a figure is derived which is the amount that needs to be paid to the unsecured nonpriority creditors.
The Cares Act provides for a one time lump sum payment in the amount of $1,200 per individual with an additional payment of $500 per child. Additionally, the Cares Act provides for an additional $600 per week paid to people on unemployment compensation due to COVID-19. These payments are not included in a Chapter 7 or Chapter 13 Current Monthly Income. Therefore, stimulus payment and the additional weekly unemployment compensation of $600 are not considered in determining if an individual in Chapter 7 or Chapter 13 are above the median income. In many instances this will reduce the cost of a bankruptcy filing because the Means Test will not be required. For Chapter 13 cases, an individual's commitment period may be three years rather than five years because the Cares Act income is not included in the income analysis. If an individual or household received Cares Act income after they have filed for Chapter 13 relief, that income is not required to be paid it the case because is not considered part of their disposable income.
Finally, the Cares Act temporarily allows Chapter 13 cases that were confirmed as of 3/27/2020 to be extended from a maximum of five years to a maximum of seven years if the debtor has a material financial hardship that is directly or indirectly related to COVID-19. The ability to extend the life of the case to seven years expires on 3/27/2021. Ideally, the ability to extend the life of a Chapter 13 case will provided time for an individual in bankruptcy to make up for any loss of income resulting from the pandemic and complete their reorganization.