Richard Hollenbach

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Signed into law at during the Spring of the year 2020, the CARES act changed many things including the Bankruptcy Code. This change came about due to the large economic strain brought on by the Covid-19 Pandemic to American families and small businesses. The goal was to make the reorganization of small businesses and other qualified entities more efficient and easier. I feel that these changes succeeded in their goals of expanding access and efficiency under the CARES act, specifically subchapter 5 of Chapter 11 Bankruptcy.

First, an overview of all the changes under the CARES act. Originally, there was a debt cap of $2,725,625 for tradition Chapter 11 cases. However, upon the onset of the Worldwide Covid-19 Pandemic which shut down travel and led to massive lockdowns, which resulted in decreased sales amid steady costs. As a result, many businesses faced increasing debts with no end in sight. To allow more businesses to qualify as “small” when filing, the cap was increased to $7,500,000 for the next year, subjected to possible extensions. This change allows larger companies, if they owe sufficient unliquidated amounts, to file for bankruptcy under the more relaxed standards of Subchapter V rather than traditional Chapter 11. As a result, owners can retain control over their companies and even their equity.

The change in debt cap greatly increased the number of businesses that could file for Subchapter V bankruptcy compared to traditional Chapter 11. Larger businesses that would normally place out of this cap could now file for Subchapter V. In addition, small businesses that were hit very hard due to the pandemic could still file for the more streamlined and friendly category rather than traditional bankruptcy. Thus, this change satisfies the first qualification, improving access to Subchapter V of the bankruptcy code.

Other small changes include further protections for the creditors. The so-called “Best Interest Test” states that creditors must receive at least as much as they would in liquidation. Also improved is the ability of creditors to retain any increase of value of their collateral post-confirmation, which is detailed in section 1111(b) in the code for bankruptcy. These additional changes should help balance the changes from the business and the creditor sides and keep the playing field level.

The final and most important change to the code through the CARES act is the choice in Trustee in the process. In the past, an attorney from the United States’ Trustees Office operates as the trustee in the case; however, the change allows a businessman to serve in this position instead. The purpose of the trustee is to monitor the affairs of the debtor, evaluate assets, prospects for success, and recommend plans. Sometimes the trustee even collects and distributes the payment plans. Obviously, this is a vital role in the bankruptcy process, so changing who can serve in this role is a huge change.

One benefit from a businessman serving as the trustee comes from the position itself, where the trustee can serve as an advisor to the debtor. Through the Subchapter V process, the trustee will advise the business to develop a repayment plan and come to terms with the creditor. If the trustee is familiar in the business setting, they will be more useful as an advisor for the debtor. Thus, the Bankruptcy process should be more efficient with the help of the trustee.

If there are disputes between the creditor and the debtor, the trustee often serves as a mediator. Allowing a businessman to serve as this mediator would also increase the efficiency of this process, since the trustee is likely to be more comfortable in this business setting. When disputes are resolved and a repayment play is created, the trustee will then appear at bankruptcy hearings and ensure that the debtor is making the appropriate payments according to the plan. Thus, the entire process will be improved with the presence of a business-oriented trustee rather than an attorney from the United States’ Trustee’s Office.

As a result, the change in trustee qualification satisfies the second requirement for improvement to Subchapter V of the bankruptcy code, improving efficiency in the process. Combined with the expanded access to this more streamlined and friendly bankruptcy process from the increase in debt cap, the CARES Act succeeded in its goals.

References:

CARES Act Expands Eligibility under the Small Business Reorganization Act: What Distressed Small Businesses and Their Creditors Should Know (pillsburylaw.com)

Senators Propose COVID-19 Bankruptcy Relief Extension Act to Extend Covid-19 Changes to the Bankruptcy Code | McGuireWoods

The Role Of The Trustee In A Chapter 11 Subchapter 5 Small Business Bankruptcy (tampalawadvocates.com)