• The U.S.

On March 27, 2020, Congress enacted, and President Trump signed into law, the Coronavirus Aid, Relief and Economic Security (CARES) Act to provide financial relief to individuals and small business harmed by the coronavirus disease 2019 (COVID-19) pandemic. The CARES Act included an initial allocation of $349 billion to the Paycheck Protection Program (PPP), a convertible loan program under Section 7 of the Small Business Act (SBA).

As the economic fallout from the COVID-19 pandemic continues to rise – for example, J. Crew recently filed bankruptcy, and the financial press is predicting that Neiman Marcus may also file for relief this week – it seems prudent for secured lenders to consider what steps they can take to prepare for what may prove to be a tidal wave of bankruptcy filings this year.

One of the landmark protections enacted by the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was the Paycheck Protection Program (“PPP”). Under the PPP, small businesses (businesses with fewer than 500 employees) are eligible to receive loans that will be fully forgiven if utilized under the terms of the Program, including applying at least 75% of the loans to payroll. The loans may also be used for payment of interest on mortgages, rent, and utilities. The PPP loans are capped at $10 million for each small business.

Paycheck Protection Program Loans Under the CARES Act

The Paycheck Protection Program (“PPP”), adopted as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which passed Congress on March 27, 2020 and was signed by President Trump the following day, provides forgivable loans guaranteed by the government to certain employers, with forgiveness of the loans dependent upon maintaining certain employment levels for the six months following the loan. A second PPP round was authorized in late April and is currently in process.

The SBA’s Rules Exclude Bankruptcy Debtors from Relief Under the Paycheck Protection Program

The SBA’s Rules Exclude Bankruptcy Debtors From Relief Under the Paycheck Protection Program

Recent bankruptcy court decisions in In re Hidalgo and In re Cosi Inc. indicate that courts are split on whether the U.S. Small Business Administration (SBA) and participating lenders can deny Paycheck Protection Program (PPP) loans to businesses that are debtors in a pending bankruptcy proceeding.

The SBA’s Bankruptcy Exclusion

As businesses of all sizes braces for the impact of COVID-19 over the next several months, and possibly years, the rise of bankruptcy filings is inevitable.

The impact on small businesses in particular is likely to be devastating. While you may be familiar with traditional filings under Chapter 11 of the Bankruptcy Code, you may be less familiar with the recently enacted Small Business Bankruptcy Reorganization Act (SBRA), which was expanded in light of the COVID-19 pandemic.

As the COVID-19 pandemic marches on, more homeowners than ever are seeking assistance from their lenders.