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Congress Urged to Expand Bankruptcy Relief in Wake of Virus (1)

March 23, 2020, 4:42 PMUpdated: March 23, 2020, 7:37 PM

Congress should expand bankruptcy protections for businesses and consumers in response to the new coronavirus pandemic, a group of leading bankruptcy practitioners said.

The National Bankruptcy Conference, a nonpartisan group of attorneys, law professors, and bankruptcy judges that advises the government on bankruptcy policy, sent a letter to Senate and House leaders Sunday, urging them to take action in response to the spread of Covid-19, the disease caused by the virus.

“It threatens the lives, the livelihoods, and the savings of millions of Americans,” the letter said.

Leaders must ensure that the bankruptcy system provides relief “to avoid massive numbers of both bankruptcies and economically untenable foreclosures,” it said.

On top of existing relief measures, Congress should act on proposed legislation that would give tax credits to small and medium-sized businesses, raise debt thresholds for small businesses seeking bankruptcy relief, and provide more relief to consumers under Chapter 13.

Tax credits

Tax credits that business could use against their 2019 tax liabilities could give struggling businesses liquidity to avoid further job losses and bankruptcies, the letter said.

Credits for payment of rent, mortgages, or payroll costs would be particularly useful for businesses that were strong before the pandemic forced them to suddenly close. They include restaurants, travel and entertainment businesses, and certain medical and dental offices, the letter said.

Congress also should increase the eligibility debt threshold under the Small Business Reorganization Act from $2.7 million to $7.5 million, or even higher, so more small businesses can apply for relief, the conference said.

“The economic effects of the pandemic on small businesses are likely to be catastrophic,” the letter said. Allowing more businesses to reorganize under SBRA would benefit business owners, creditors, suppliers, customers, employees and the entire economy, it said.

Consumer relief

Congress also should modify certain aspects of Chapter 13, which is used by consumer debtors, so that individuals who have declared bankruptcy can keep supporting their families during the current crisis, the group said.

For example, debtors should be allowed to modify their plan if their income is affected by Covid-19 shutdowns. Congress also should consider allowing debtors to modify their mortgages to avoid widespread foreclosures.

The Servicemembers Civil Relief Act could be used as a template to formulate measures that would grant a temporary pause on evictions, repossessions, foreclosures, and similar disruptions that lie ahead, the group suggested.

Designed to protect members of the armed forces from undue economic hardship following their military service, protections under the SCRA include a 90-day stay on foreclosures or evictions from rental housing and a 90-day stay on civil actions or administrative proceedings.

Individuals and businesses will need “a period of breathing space to regroup since the onslaught of the Covid-19 crisis,” the letter said.

Representatives for House Speaker Nancy Pelosi (D-Calif.), House Minority Leader Kevin McCarthy (R-Calif.), Senate Majority Leader Mitch McConnell (R-Ky.), and Senate Minority Leader Charles Schumer (D-N.Y.) weren’t immediately available to comment on the letter.

(Updated with additional reporting throughout.)

To contact the reporter on this story: Leslie A. Pappas in Wilmington, Del. at lpappas@bloomberglaw.com

To contact the editor responsible for this story: Seth Stern at sstern@bloomberglaw.com

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