How The CARES Act Impacts Consumer Bankruptcies

The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted into law on March 27, 2020 as Congress rushed to address the economic fallout from the COVID-19 virus. Although most media attention was paid to the $2.2 trillion stimulus package, the CARES Act also included several temporary modifications of the Bankruptcy Code affecting consumer debtors, primarily in Chapter 13 cases.

First, the direct $1,200 per person stimulus payments received from the government will not be considered “disposable income” required to be paid by a Chapter 13 debtor towards their plan by 11 U.S.C. § 1325(b)(2). This applies to individuals currently in a Chapter 13 case who had not confirmed a plan when the CARES Act was enacted, as well as to future Chapter 13 debtors.

Additionally, these direct stimulus payments are not included in “current monthly income” calculations to determine eligibility for Chapter 7 or calculate the Plan payment in Chapter 13. The Office of the United States Trustee has sent a directive to all Chapter 7 Trustees stating that while the CARES Act is silent on the subject, the United States Trustee expects it is “highly unlikely” that any Trustee would seize stimulus payments from Chapter 7 debtors for payment to creditors.

The CARES Act also allows chapter 13 debtors in existing cases to apply for a modification of their confirmed plan due to financial hardships related to COVID-19. In the most significant change to Chapter 13, the Act allows a plan to be modified to extend the term of the plan for up to seven years after the first payment under the confirmed plan became due if a debtor is experiencing a “material financial hardship” due, directly or indirectly, to the COVID-19 pandemic. This is an additional two years from the existing five-year maximum Plan. However, this ability to seek a plan modification over five years will end one year after the CARES ACT was enacted, on March 27, 2021.

Please call Weintraub Zolkin Talerico & Selth LLP at 310-584-7702 to discuss how bankruptcy can help you.

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