Forgiveness for the Unforgiven: Small Business Chapter 11 Solution to Adverse PPP Loan Results


Since the Payroll Protection Program (PPP) went into effect on March 27, companies that applied for and received or were considering applying for PPP loans have been on a roller coaster ride of uncertainty as to whether and under what conditions the loans would be granted. First, PPP borrowers who had existing lines of credit with other lenders – which are not prohibited under PPP – have been convicted by Congress and the Treasury Secretary and threatened with criminal investigations. When it later found that the stringent loan waiver requirements were impractical for the neediest businesses, Congress passed legislation to relax the PPP loan waiver requirements. Nevertheless, the current political climate ensures that the uncertainty about the loan waiver will persist. For those borrowers who are denied meaningful loan relief and need to include short-term SBA debt on their balance sheets, there is an alternative to reducing the additional debt burden: the Small Business Debtor Reorganization Act, Subchapter V of Chapter 11 of the Bankruptcy Act. Subchapter V became law last February.

Most small businesses will find it difficult to meet PPP lending requirements

Companies with 500 or fewer employees will struggle to get the PPP up and running for them as the law sets high standards for the repayment of the entire loan amount. Under the previous PPP law, companies were required to use 75% of the loan on payroll for employees at the pre-pandemic level within eight weeks. The June 5 amendments to the PPP law reduced the payroll requirement to 60% and extended the term of the loan by 16 weeks. However, these and other requirements of the PPP make it difficult for small businesses to obtain full credit relief. Borrowers will only get a portion of their PPP loan waived if they work with reduced headcount and do not re-hire or replace workers who were on leave during the shutdown. By the time a distressed company receives the funds, its payroll will in all likelihood be reduced to keep the company alive. The loan forgiveness aspect does not work for companies that have limited or no activity, or for companies whose labor costs are relatively low compared to storage and procurement costs. And those companies that received PPP loans prior to the recent amendment to the PPP law will still have to repay the loan within two years. For most companies, this means adding short-term debt to their balance sheets at a time when they can least afford it.

Help from the Small Business Debtor Reorganization Act

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