The Federal Government Will Now Give PPP Loans to Borrowers in Bankruptcy

The federal government quietly turned the tide on a policy that had barred thousands of businesses from seeking economic aid in a pandemic, just weeks before funds ran out.

End of March, ProPublica reported on a Small Business Administration rule that prohibited currently bankrupt individuals or businesses from obtaining relief through the Paycheck Protection Program, an $ 813 billion pot of funds distributed to small businesses in the form of loans that are canceled if the money is mainly spent on the payroll. The agency had fought in court against several bankrupt companies trying to apply for PPP loans, and did not change course even after Congress explicitly passed a law in December allowing it to do so.

Referring to the history of ProPublica, the National Association of Consumer Bankruptcy Attorneys wrote a letter to Isabella Guzman, the new SBA administrator, urging her to follow Congress’ suggestion and tell the executive office of the U.S. Trustees – a division of the Department of Justice that oversees most U.S. bankruptcy courts – to allow debtors to receive PPP loans.

The agency has not yet contacted the Department of Justice. But on April 6, the SBA released new guidance as part of its frequently asked questions for the program, redefining what it means to be “currently involved in bankruptcy”. Under the new interpretation, debtors who have filed a claim under Chapters 11, 12, and 13 – which cover businesses, family farms, and individual consumers, respectively – are eligible for PPP loans once a judge has decided. approved their reorganization plan. A spokesperson for the SBA said the explanation was added by “clarity.”

A reorganization plan specifies the debtor’s path to fulfill his obligations to creditors and is supervised by a trustee. In straightforward cases, a judge can confirm this within a few months of filing. This is often the case in Chapter 13 consumer cases, of which around 279,000 were filed in 2019, as well as in relatively straightforward Chapter 11 cases that do not require significant litigation. About 5,500 companies filed for Chapter 11 in 2019.

The US Courts Administrative Office does not track how many of these companies have confirmed reorganization plans in place, but it is estimated that they number in the thousands. Now, companies on the verge of bankruptcy – which typically takes years – can apply for P3 loans before the program’s deadline of May 31. With $ 50 billion remaining after several extensions, PPP funds are expected to run out before then.

Ed Boltz, a bankruptcy attorney on the NACBA board of directors who circulated the organization’s letter, said he believed the SBA had changed its position after becoming “aware of the insanity of the position of the previous administration “.

The change would not have helped all of the companies that sued the SBA for its policies. Florida-based Gateway Radiology Consultants, for example, did not have a confirmed reorganization plan before applying for a PPP loan last year, resulting in legal action. But the bankruptcy lawyer in that case, Joel Aresty, said many of his current clients could benefit.

“If they were lucky enough to be confirmed already, they could freely claim a PPP loan – the fact that you were bankrupt is no longer a deterrent,” Aresty said. “It’s amazing how they made such a simple, really difficult proposition.”

The new definition can now help Mark Shriner, a cafe owner in Lincoln, Nebraska, who filed for Chapter 13 bankruptcy in 2018 following a divorce. His plan was confirmed the same year. The SBA’s exclusion of debtors from the PPP originally prevented it from applying, forcing it to take out higher interest rate loans to keep its doors open.

His cafe would likely have received up to $ 25,000, and Shriner said he could have used some of the money to improve his online orders or design a takeout menu. Even now, he said, getting PPP money would help him plan for the future and bring back more staff.

Informed of the change last week, Shriner sent a request to his bank, which said it would receive a response from the SBA in a few weeks.

“Wow,” Shriner said. “That would be great.”

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