Coronavirus - How the CARES Act impacts Chapter 7 and Chapter 13 Bankruptcies:
On March 27, 2020, in response to COVID-19, the Coronavirus Aid, Relief and Economic Security Act ("CARES") was enacted into Federal law. Among other things, CARES includes several temporary modifications to the Federal Bankruptcy Laws that are specific to Chapter 7 and Chapter 13 bankruptcies. These modifications are beneficial to persons filing for either Chapter 7 or Chapter 13. This is a brief summary of those modifications.
A. Certain CARES Payments Excluded from the definition of "Income":
1. Debtors in either Chapter 7 or Chapter 13 bankruptcies must complete the "Means Test" (see our page, on this site, called "Chapter 7 Bankruptcy - 5(B) The Means Test" for a general explanation of the Means Test). Under both a Chapter 7 and Chapter 13 Means Test, a person filing for bankruptcy must include all of their income for the prior six months, in the determination of "Current Monthly Income", or "CMI". The Means Test is of extreme importance in both Chapter 7 and 13 bankruptcies - in Chapter 7 cases, it determines whether a person will qualify to eliminate their debt; in Chapter 13 cases, it helps determine how much money a debtor will need to repay over the life of their Chapter 13 plan.
The CARES Act provides that any monies paid to an individual, pursuant to CARES (such as stimulus checks or enhanced Unemployment Benefits) are not considered to be "income" for purposes of calculating CMI for both Chapter 7 and Chapter 13 Means Tests. This is very beneficial in Chapter 7 bankruptcies, as this means it will be more likely that a person filing for a Chapter 7 bankruptcy will qualify and can therefore eliminate their unsecured debt in a Chapter 7 bankruptcy. In a Chapter 13 case, the less "income" a debtor has for CMI purposes may translate to a smaller amount of money that person needs to repay over the life of their Chapter 13 plan.
2. CARES payments (such as stimulus checks or enhanced Unemployment Benefits) that a debtor receives will also not be considered part of "disposable income" for purposes of a Chapter 13 plan. In Chapter 13 plans, debtors must commit all of their "disposable income" to repayment through their Chapter 13 plan for the life of the plan (either 3 or 5 years). "Disposable income" loosely means a debtor's monthly net income less their monthly living expenses. This provision will have the effect of reducing how much money a Chapter 13 debtor will need to repay through their plan. This change benefits current Chapter 13 debtors whose plan have not been confirmed as of the date of enactment of CARES (March 27, 2020), and also future Chapter 13 debtors.
B. Modifications to Chapter 13 Plans:
CARES also allows debtors, who already have a confirmed Chapter 13 plan, as of the date of enactment of CARES (March 27, 2020), to propose certain modifications to their Chapter 13 plan. To be eligible to do so, the debtor must first establish that he/she is experiencing or has experienced a "material financial hardship", which is due, either "directly or indirectly", to COVID-19. Among the possible modifications that a debtor may propose includes asking the Court to extend the Chapter 13 plan payments for up to seven years after the date the first payment under the original confirmed plan became due. Other modifications are possible, though they are not specified by CARES. Such modifications could potentially involve debtor requests to defer certain consumer debt payments. Each such debtor proposed modification will be considered for approval by the Bankruptcy Court on a case by case basis.
The exact meaning of the terms "material financial hardship", and whether that hardship was caused "directly or indirectly" by COVID-19 will be fleshed out by the Courts. The above temporary provisions to Chapter 7 and Chapter 13 bankruptcies will sunset one year from the date of the enactment of CARES, which is March 27, 2021.