Federal government now allows PPP loans to borrowers in bankruptcy

The federal government has quietly reversed course on a policy that had kept thousands of businesses from applying for pandemic economic aid, with only weeks to go before funds are expected to run out, Route Fifty reports

In late March, ProPublica reported on a Small Business Administration rule that disqualified individuals or businesses currently in bankruptcy from getting relief through the Paycheck Protection Program, an $813 billion pot of funds distributed to small businesses in the form of loans that are forgiven if the money is mostly spent on payroll. The agency had battled in court against several bankrupt companies attempting to apply for PPP loans, and did not change course even after Congress explicitly passed legislation in December allowing it to do so.

Referencing ProPublica’s story, the National Association of Consumer Bankruptcy Attorneys wrote a letter to newly installed SBA Administrator Isabella Guzman urging her to follow Congress’ suggestion and tell the Executive Office for U.S. Trustees—a division of the Justice Department that oversees most American bankruptcy courts—to allow debtors to receive PPP loans.

The agency has not yet contacted the Justice Department. 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 “presently involved in any bankruptcy.” Under the new interpretation, debtors who filed under chapters 11, 12 and 13—which cover businesses, family farms and individual consumers, respectively—are eligible for PPP loans once a judge has approved their reorganization plan. A spokesperson for the SBA says the explanation was added for “clarity.”

A reorganization plan specifies the debtor’s path to paying off obligations to creditors, and is monitored by a trustee. In simple cases, a judge can confirm it within a few months of filing. This is what often happens in consumer chapter 13 cases, about 279,000 of which were filed in 2019, as well as in relatively straightforward chapter 11 cases that don’t require extensive litigation. About 5,500 companies filed for chapter 11 in 2019.  See the report.