President Biden signed Congressman Ben Cline’s (R-Virginia-06) HR 1651, the COVID-19 Bankruptcy Relief Extension Act on Saturday, which extends a $7.5 million debt cap on bankruptcies taking advantage of a more cost-effective bankruptcy option provided by Cline’s 2019 Small Business Reorganization Act (SBRA).
“The [SBRA] has served as a lifeline for struggling businesses throughout the COVID-19 pandemic,” Cline said in a press release. “Since its inception, 80 percent of small business debtors have chosen to proceed under the provisions of this bill, meaning more entrepreneurs have been able to keep their doors open and employees on payroll during these uncertain times.”
Essentially, the SBRA makes it easier for businesses to stay open while undergoing bankruptcy reorganization, allowing them to keep employees on payroll and pay suppliers, according to a news alert by Pillsbury Law. However, the SBRA requires debtors to meet the definition of small businesses, previously capped at $2.5 million of debt, a cap increased to $7.5 million in the CARES Act with an expiration date set for March 27, 2021. Cline’s Bankruptcy Relief Extension Act adds another year to the higher debt cap.
“By extending the debt threshold for eligibility, significantly more businesses can take advantage of this bill,” Cline said.
Cline and House Judiciary Committee Chairman Jerry Nadler, (D-New York-10) introduced the bill in the House.
Businesses typically file for either chapter seven or chapter 11 bankruptcies; chapter seven is a complete liquidation of the business assets, while chapter 11 allows the business owner to stay in control of the business while repaying debts under bankruptcy supervision, according to Business Law Today, published through the American Bar Association. However, before the SBRA, chapter 11 was costly and time consuming, placing it out of reach for some businesses.
“Before the SBRA’s enactment, the barriers to entry (i.e., the overall length and sheer expense) often prevented small businesses from pursuing the benefits of chapter 11. This left small businesses in a position where a closure and liquidation, or a state law bankruptcy alternative (such as an assignment for the benefit of creditors), was often their only viable option,” American Bankruptcy Institute (ABI) Executive Director Amy Quackenboss said in a letter to legislators earlier in March.
The SBRA amended chapter 11 requirements for small businesses with less than $2.7 million of debt, making it possible for struggling businesses to remain operational.
“While the economic strains of the COVID-19 pandemic linger, these important extensions provide another year of enhanced bankruptcy protections for struggling small businesses and consumers,” Quackenboss said in a press release.
According to ABI, HR 651 also includes changes to chapter 13 bankruptcies, which are used by individuals to create an installment plan to repay debt while keeping their homes from undergoing foreclosure. HR 651 allows individuals to seek modifications to their payment plan for COVID-19-related hardships. It also exempts federal COVID-19-related payments from the definition of income for chapter seven and chapter 13 bankruptcies.
Quackenboss said in the release, “Our members will continue utilizing these tools to help consumers and small businesses struggling with overwhelming debts due to the economic fallout of the pandemic.”
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