Can Chapter 11 Provide a Company Relief from PPP Loans?
Small businesses that used the Paycheck Protection Program to keep their workforces employed during the COVID-19 pandemic may now be looking for ways to relieve their financial burdens. One path for relief is PPP loan forgiveness through the U.S. Small Business Administration (SBA). Alternatively, a company might be able to use Chapter 11 bankruptcy to discharge PPP loans.
To qualify for PPP loan forgiveness through the SBA, a business must have used at least 60 percent of the loan funds on payroll expenses and must have must have maintained or quickly rehired employees at their normal salary levels. Borrowers who do not meet these criteria can explore the remedy of Chapter 11. In this type of bankruptcy, a business adopts a court-approved plan of reorganization outlining how it intends to repay its creditors and continue its operations.
The treatment of PPP loans in Chapter 11 can depend on various factors, including the nature of the debtor’s business, the terms of the PPP loan and the specifics of the bankruptcy case. Here are some of the general considerations:
- Classification of PPP loans as debt — In some cases, a debtor business may treat PPP loans as ordinary unsecured debt. This means that the business includes the PPP loan amount in its overall debt obligations and proposes a plan for repaying creditors, which may include the PPP loan.
- Negotiations with Creditors — The debtor may negotiate with its creditors, including the lender providing the PPP loan, to modify the terms of the loan as part of the Chapter 11 reorganization. This could involve extending the repayment period, reducing interest rates or even converting the loan into equity in the reorganized company.
- Plan Approval — The bankruptcy court must approve the reorganization plan, including how PPP loans are treated. Creditors, including the PPP lender, have the opportunity to vote on and object to the plan. If the plan is approved, it becomes binding on all creditors, including the PPP lender.
The treatment of PPP loans in bankruptcy can vary. The Small Business Reorganization Act (SBRA), which became effective in February 2020, introduced some changes to Chapter 11 that make it more accessible and efficient for small businesses.
Businesses seeking forgiveness of PPP loans should engage legal professionals to ensure compliance with relevant laws and regulations. An experienced bankruptcy attorney can review your situation to determine if Chapter 11 is a good path for handling your unpaid PPP loan or if other forgiveness options are available.
The Law Offices of Michael Jay Berger in Beverly Hills represents California businesses in Chapter 11 bankruptcy proceedings. To schedule a free consultation, call 310-271-6223 or contact me online today.