The COVID-19 pandemic has had a significant impact on the global economy, leaving many individuals and businesses struggling to make ends meet. With unemployment rates at an all-time high and businesses shutting down, bankruptcy has become an increasingly common option for those facing financial hardships.
In response to the economic crisis brought on by the pandemic, the U.S. government passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which includes several provisions that impact bankruptcy filers. This article will provide an overview of Chapter 5 bankruptcy, explain how the CARES Act affects bankruptcy filings, and offer tips for surviving bankruptcy in today’s economic climate.
Understanding Chapter 5 Bankruptcy
Bankruptcy is a legal process that allows individuals and businesses to eliminate or restructure their debts. There are several different types of bankruptcy, but the most common types for individuals are Chapter 7 and Chapter 13. Chapter 7 bankruptcy involves liquidating assets to pay off debts, while Chapter 13 bankruptcy involves creating a repayment plan to pay off debts over a period of three to five years.
Chapter 5 bankruptcy, also known as a the bankruptcy code “small business reorganization,” is a relatively new option for small businesses that allows them to restructure their debts and stay in business. This type of bankruptcy was created by the Small Business Reorganization Act of 2019 and is designed to be a simpler and faster process than traditional Chapter 11 bankruptcy.
To be eligible for Chapter 5 bankruptcy, a business must have no more than $7.5 million in debt. The business owner must also be willing to work with a court-appointed trustee to create a repayment plan. The process of filing for Chapter 5 bankruptcy involves submitting a petition to the court, providing financial information and a list of creditors, and attending a meeting of creditors.
The CARES Act and Chapter 5 Bankruptcy
The CARES Act was signed into law in March 2020 and includes several provisions that impact bankruptcy filings. One of the most significant changes is the temporary increase in the debt limit for Chapter 5 bankruptcy from $2.7 million to $7.5 million, which allows more small businesses to qualify for this type of bankruptcy.
The CARES Act also includes provisions that allow individuals and businesses to access relief funds, such as the Paycheck Protection Program (PPP) and the Economic Injury Disaster Loan (EIDL) program, without affecting their eligibility for bankruptcy. This means that businesses can still file for bankruptcy even if they have received PPP or EIDL funds.
In addition, the CARES Act provides temporary relief for individuals and businesses that are already in bankruptcy by allowing them to modify their repayment plans if they have been impacted by COVID-19. This allows them to adjust their plan payments and their payment schedules and reduce their monthly payments to better accommodate their financial situation.
However, it’s important to note that the CARES Act does not provide complete protection for bankruptcy filers paying creditors. For example, it does not prevent creditors from taking legal action against debtors, and it does not eliminate all types of debt, such as student loans.
How to Survive Chapter 5 Bankruptcy in Today’s Economic Climate
If you are considering Chapter 5 bankruptcy, it’s important to have a plan for managing your finances during and after the process. Here are some tips for surviving bankruptcy in today’s economic climate:
- Create a budget – Keep track of your income and expenses to help you stay on track with your repayment plan.
- Cut expenses – Look for ways to reduce your monthly expenses, such as canceling subscriptions or negotiating lower bills.
- Avoid new debt – Don’t take on new debt while you’re in bankruptcy, as it will only make it harder to stay on top of your repayment plan.
- Rebuild credit – After bankruptcy, focus on rebuilding your credit by paying bills on time, keeping balances low, and checking your credit report for errors.
- Seek support – There are resources available for bankruptcy filers, such as credit counseling services and legal aid organizations.
In today’s economic climate, bankruptcy has become a more common option for individuals and businesses facing financial hardships. Understanding the different types of bankruptcy and the impact of the CARES Act on bankruptcy filings is crucial for those considering this option. By following the tips for managing finances and rebuilding credit after bankruptcy, individuals and businesses can survive and thrive in the years to come.
What is Chapter 5 bankruptcy under the CARES Act?
Chapter 5 of the CARES Act is known as the Small Business Reorganization Act (SBRA) and it aims to provide relief to small businesses during the COVID-19 pandemic by making it easier and less expensive for them to file for bankruptcy.
Who is eligible to file for Chapter 5 bankruptcy under the CARES Act?
Small business debtors with non-contingent, liquidated debts of no more than $7.5 million are eligible to file for Chapter 5 bankruptcy under the CARES Act.
How does Chapter 5 bankruptcy differ from traditional Chapter 11 bankruptcy?
Chapter 5 bankruptcy is designed to be a simpler and less expensive alternative to traditional Chapter 11 bankruptcy. It allows for a streamlined reorganization process, with a focus on keeping small businesses operating.
What are the benefits of filing for Chapter 5 bankruptcy under the CARES Act?
The benefits of filing for Chapter 5 bankruptcy under the CARES Act include a simplified and less expensive reorganization process, the ability to retain ownership and control of the business, and the potential for debt forgiveness.
What is a Small Business Debtor?
Under the CARES Act, a Small Business Debtor is a business entity that is engaged in commercial or business activities with non-contingent, liquidated debts of no more than $7.5 million.
What is a Subchapter V Trustee?
A Subchapter V Trustee is a court-appointed official who oversees the administration of a Chapter 5 bankruptcy case. The Subchapter V Trustee is responsible for facilitating negotiations between the debtor and creditors on plan of reorganization together, and for ensuring that the debtor complies with the terms of the reorganization plan.
How long does the Chapter 5 bankruptcy process take?
The Chapter 5 bankruptcy process is designed to be a streamlined and efficient process, with a focus on keeping small businesses operating. The process typically takes between 90 and 180 days to complete.
What is a reorganization plan?
A reorganization plan is a proposal that outlines how a business intends to restructure its debts and continue operating. The plan must be approved by the court and the debtor retains creditors before it can be implemented.
How does Chapter 5 bankruptcy affect a business owner’s personal liability?
Chapter 5 bankruptcy allows business owners to retain their equity interest, ownership and control of their business while restructuring their debts. However, the business owner may still be personally liable for certain debts, such as payroll taxes and personal guarantees on loans.
Can a business file for Chapter 5 bankruptcy more than once?
Yes, a business can file for Chapter 5 bankruptcy more than once. However, there are limits on when a business can file for Chapter 5 bankruptcy again after a previous filing.
Chapter 5 Bankruptcy Cares Act: Glossary
- Chapter 5 Bankruptcy: A type of bankruptcy designed specifically for businesses that operate internationally.
- CARES Act: Coronavirus Aid, Relief, and Economic Security Act, a law passed in response to the economic impact of the COVID-19 pandemic.
- Economic Climate: The overall state of the economy, including factors such as unemployment rates, inflation, and market conditions.
- Bankruptcy: A legal process for individuals or businesses who cannot pay their debts.
- Debt Relief: A process of reducing or eliminating debts owed by an individual or business.
- Bankruptcy Court: A specialized court that deals with bankruptcy cases.
- Bankruptcy Trustee: A court-appointed individual who oversees the bankruptcy process and ensures that creditors are paid as much as possible.
- Debtor: An individual or business that owes money to creditors.
- Creditor: An individual or business that is owed money by a debtor.
- Automatic Stay: A provision in bankruptcy law that stops creditors from taking collection actions against the debtor.
- Reorganization: A type of bankruptcy where the debtor restructures their business to pay back creditors over a period of time.
- Liquidation: A type of bankruptcy where the debtor’s assets are sold to pay back creditors.
- Priority Claims: Claims in bankruptcy that are paid before other claims, such as taxes owed to the government.
- Secured Claims: Claims in bankruptcy that are backed by collateral, such as a mortgage or car loan.
- Unsecured Claims: Claims in bankruptcy that are not backed by collateral, such as credit card debt.
- Exemptions: Assets that are protected from being sold in bankruptcy to pay back creditors.
- Discharge: A court order that releases the debtor from their debts and legal obligations.
- Means Test: A test used to determine whether an individual or business qualifies for bankruptcy and which type of bankruptcy they can file for.
- Bankruptcy Plan: A document that outlines how the debtor will pay back creditors in a reorganization bankruptcy.
- Bankruptcy Dismissal: A court order that ends the bankruptcy process without discharging the debtor’s debts.