The COVID-19 pandemic significantly altered the bankruptcy landscape in 2020. The year kicked off on a promising note with the February implementation of the 2019 Small Business Reorganization Act (SBRA), which increased the ability of small companies to file Chapter 11 more efficiently and cheaply. Once the nation went into lockdown, though, bankruptcy filings plummeted, with 230,000 fewer filings in a 12-month period than the same period in 2018 or 2019. On the other hand, Chapter 11 filings for all of 2020 increased by roughly 8,100—due in part, perhaps, to the SBRA and Congress’s having increased the debt limit for eligible businesses from $2.7 million to $7.5 million.
A l though many forecast an imminent tsunami of bankruptcies, the number of filings remains low in 2021 compared to the past 20 years. Bankruptcy specialists point to several factors:
- stimulus checks;
- increased unemployment benefits;
- foreclosure and eviction moratoriums;
- court closures and the inability to obtain and execute judgments; and
- financial institutions’ unwillingness to pursue bad assets.
The Legislative Impact On Bankruptcy
SBRA: New legislation was the single most important development affecting bankruptcy in 2020, and the SBRA was the most important individual new law. It took effect on February 19, 2020, intending to make Chapter 11 reorganization viable for small companies by speeding up the proposal and implementation of a plan, reducing costs to debtors, and providing quicker returns to creditors. Three key features of the SBRA were the lack of an unsecured creditors committee; no necessary disclosure statements; and the imposition of no quarterly fees.
CARES Act: The Coronavirus Aid, Relief, and Economic Security Act revised the definition of “small-business debtor” such that companies and individuals with less than $7.5 million in total eligible debt can benefit from the SBRA—nearly triple the previous limit of $2,725,625. This increase significantly expanded the SBRA’s reach, and Congress has extended the increased debt limit through March 2022. Many expect the increased limit will remain and perhaps even be boosted to $10 million, consistent with Chapter 12.
The CARES Act helped consumers and small businesses alike by providing for a number of things: the Paycheck Protection Program; temporary relief for federal student-loan borrowers; federally backed mortgage loan forbearance; foreclosure and eviction moratoriums; stimulus checks for eligible individuals; and additional unemployment benefits. In addition to increasing the SBRA debt limit, meanwhile, the CARES Act also included other bankruptcy provisions, amending the definition of “income” to exclude COVID-related payments from “disposable income” and permitting modifications and ex tensions to Chapter 13. The combined effect was to alleviate the financial pressure caused the pandemic, leading to fewer bankruptcy filings in the short term.
Consolidated Appropriations Act: With several CARES Act provisions scheduled to lapse at the end of 20 20, Congress passed the Consolidated Appropriations Act on December 27. The CAA was one of the largest-ever Congressional spending bills, totaling $2.3 trillion in stimulus payments and omnibus spending.
The CAA included several bankruptcy-related provisions as well. First, it amended Sections 501 and 502 of the Bankruptcy Code to allow creditors to file proofs of claim for unpaid forbearance-period amounts under the CARES Act. Second, it amended Section 365 to permit SBRA debtors to request an additional 60 days (to 120 in all) to pay their rental obligations, and to allow Chapter 11 debtors up to 300 days to decide whether to assume or reject an unexpired lease of nonresidential real property. Finally, it amended Section 547 of the code, which addresses the recovery of preferential transfers, to protect certain payments to landlords of suppliers of goods and services that had documented an agreement with the debtor regarding late payments. The change to the law with respect to preference payments expands the ordinary course defense for eligible creditors and is advantageous for debtors negotiating late payments with suppliers.
Consumer: At the end of 2020, Senator Elizabeth Warren and Representative Jerrold Nadler— Democrats from Massachusetts and New York, respectively— introduced the Consumer Bankruptcy Reform Act (CBRA) of 2020. The legislation would implement significant consumer bankruptcy reforms, including the creation of a new Chapter 10, eliminating Chapter 7 and Chapter 13 consumer cases. If passed, the bill would streamline the process of filing for bankruptcy and would lower costs for debtors. The bill died in Congress but is likely to be reintroduced. Many see it as necessary to address deficiencies in the current consumer-bankruptcy protocols, including the discharge of student-loan debt.
Although many forecast an imminent tsunami of bankruptcies, the number of filings remain low in 2021."
What’s Next?
Public filing trends: While bankruptcy filings declined in 2020, filings by public companies were the most numerous since the Great Recession in 2008 and 2009. Major corporate filings were led by entities in the oil-and-gas industry, followed by retail, health care, pharmaceuticals, entertainment, software, and air travel. The single largest filing in 2020, as measured by asset value, was made by Hertz.
Spotlight on case law: Developments in bankruptcy case law in 2020 included makewhole premiums and post-petition interest under a Chapter 11 plan; rent relief during bankruptcy for commercial tenants during the pandemic; and the rejection of natural-gas agreements.
The case that made perhaps the most impact was City of Chicago v. Fulton, which was argued before the U.S. Supreme Court last October 13. The Court held that the mere retention of the debtor’s collateral after filing does not violate the automatic stay. It determined that a debtor must seek turnover of the property before alleging a stay violation. This requires trustees and debtors in-possession either to relent and pay the creditors, thus favoring them over other creditors, or incur the costs and time necessary to file and litigate adversary actions against the creditors, because turnover requires not a motion but rather the filing of an adversary proceeding.
Looking Ahead
The year of COVID-19 was one many would like to forget. Its impact on bankruptcy is ongoing, and uncertainty remains over whether lifting legislative restrictions will cause more businesses and individuals to seek bankruptcy protection. Questions also linger as to whether 2021 will be the year of significant bankruptcy reform. Although expectations are uncertain, several indicators may prove important:
- whether the coronavirus Delta variant causes shutdowns and closures, leading to further extension of state and federal economic assistance;
- whether businesses that received Paycheck Protection loans can service the additional debt or receive loan forgiveness;
- whether the current Congress will revisit the CBRA;
- whether the Supreme Court will hear a case to address differing viewpoints on the discharge of student-loan debt; and
- whether variations in commodity pricing and rising inflation will force more companies to reorganize.
Whatever the final months of 2021 bring, restructuring professionals will surely remain in high demand to help businesses and individuals navigate these extraordinary times.
As counsel at Phelps Dunbar, Patrick "Rick" M. Shelby has handled a wide range of bankruptcy work, from complex Chapter 11 cases representing debtors, creditors’ committees and secured creditors to consumer bankruptcy cases in Chapter 7 and 13. With a background that includes 15 years as an engineer, technical sales representative and marketer, Rick applies his corporate experience and knowledge when counseling corporate clients in restructuring and bankruptcy.
