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Chapter 11 Bankruptcy And PPP Loans, SBA Loans

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Businesses throughout the Tampa Bay area that have struggled during the pandemic have sought government relief through the Paycheck Protection Program (PPP) and through the Economic Injury Disaster Loan (EIDL) program, both through the U.S. Small Business Administration (SBA). Yet questions and concerns remain about Chapter 11 business bankruptcy and SBA loans during the COVID-19 emergency. For some businesses, these loans have not been able to provide enough support, and as a result, those businesses are considering the possibility of bankruptcy. For other businesses that previously filed for Chapter 11 bankruptcy, confusion about eligibility for PPP loans and other types of SBA loans has resulted in court cases across the country.

We want to provide you with information about Chapter 11 bankruptcy and how it affects PPP loans and other SBA loans during the pandemic.

Can a Business in a Chapter 11 Bankruptcy Get a PPP Loan? 

When PPP loans became available last year, some business owners who had already filed for Chapter 11 bankruptcy applied for these loans. Given that the SBA announced Second Draw PPP loans, or a second round of PPP funding, the question about eligibility for PPP loans when a business is already in bankruptcy has arisen again. In response to questions and concerns about whether a business that is currently making payments on a Chapter 11 repayment plan can be eligible for PPP funding, the SBA issued some guidance through FAQ 67.

After the first round of PPP loans, the SBA argued that debtors in possession in a Chapter 11 case could not be eligible for PPP loans. In the second round of PPP applications, any entity seeking a loan must certify that, as an applicant, it is not “presently involved in any bankruptcy.” Yet the term “presently involved” was not clarified. Did it mean, for example, a business that had not yet had a Chapter 11 plan confirmed, or a business currently completing the terms of an approved Chapter 11 plan? In FAQ 67, the SBA clarified that, once a Chapter 11 plan is confirmed, the business is not “involved” in a bankruptcy case and it may be possible to apply for a PPP loan.

The second round of PPP funding ends on May 31, 2021, which means that all businesses seeking this type of funding must apply by the end of May. If you have any questions about your eligibility, and if you want to seek funding for your business despite having filed for Chapter 11 bankruptcy, you should seek advice from a Tampa bankruptcy lawyer about your eligibility.

Discharging PPP Loans in a Chapter 11 Bankruptcy 

While the recent clarification from the SBA about eligibility for PPP loans in relation to Chapter 11 cases should come as good news for many businesses in Tampa Bay, other businesses are considering the possibility of bankruptcy. Accordingly, a business owner might want to know if it is possible to include a PPP loan in a Chapter 11 bankruptcy case.

Generally speaking, PPP loans can be eligible for inclusion in a business bankruptcy case. For most businesses, a PPP loan is likely to be treated as unsecured debt that can be eligible for discharge. However, the situation could become more complicated for businesses currently making payments on a Chapter 11 bankruptcy plan (as discussed above). For those debtors, the PPP loan could potentially be treated as a priority debt.

If you have any questions about discharging a PPP loan in Chapter 11 bankruptcy, you should have an experienced bankruptcy attorney discuss your options with you based on the particular facts of your situation.

See Advice from Our Tampa Bankruptcy Lawyers 

If you have any questions about Chapter 11 bankruptcy and PPP loans, or SBA loans more broadly, our Tampa bankruptcy attorneys can help. Contact Samantha L. Dammer today for more information.

Resource:

sba.gov/funding-programs/loans/covid-19-relief-options/paycheck-protection-program/second-draw-ppp-loan

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