The Paycheck Protection Program (PPP) originally created by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) in March of 2020 was a lifeline for many small businesses. As a combination of government shutdowns, consumer caution, and depressed consumer spending threatened the survival of businesses around the country, PPP loans offered companies a way to keep operating and keep employees on the payroll.
The loans were designed to be affordable: low interest, fee-free, and–best of all–forgivable if the business met certain requirements. The key requirement involved keeping employees on the payroll.
Unfortunately, the pandemic continued. Many businesses that took PPP loans and made a good faith effort to retain their employees were ultimately forced to downsize, or even close their doors. Now, many small business owners are uncertain about whether they still qualify for forgiveness, or know they’ll be expected to repay at least part of their loans. But, with economic recovery slow and uncertain, that may not be possible.
Seeking PPP Loan Forgiveness
Requirements for PPP loan forgiveness include:
- Maintaining employee and compensation levels during the 8-24 week qualifying period
- Spending loan proceeds on payroll costs and other eligible expenses; and
- Spending at least 60 percent of the proceeds on payroll costs
It’s important to provide accurate information in your application for loan forgiveness and be certain you can document it. While loans under $2 million won’t be automatically audited, there will be random “spot checks” to ensure that PPP proceeds are being used as intended.
Under some circumstances, businesses that don’t qualify for full loan forgiveness may be eligible for partial forgiveness. For example, a business that didn’t spend 60% of its loan proceeds on payroll cost may be eligible for partial forgiveness, as long as at least 60% of the amount forgiven went to payroll costs.
What if I’m Not Eligible for Forgiveness?
Depending on the structure of your business and whether you plan to continue operations, bankruptcy may offer a solution for those with unmanageable PPP loans.
Chapter 7 Bankruptcy
PPP loans are generally dischargeable in a Chapter 7 case. But, exactly how this plays out will differ depending on factors like the way the business is organized. For a sole proprietor, that means personal bankruptcy, with the unsecured PPP loan being treated like any other unsecured debt. In this situation, personal income and assets will be a factor, so it’s wise to talk with a local bankruptcy attorney before making any decisions.
If the business is a separate entity, such as an S-Corp, the entity itself can file Chapter 7. This won’t work for everyone, because a corporate Chapter 7 dissolves the business. But, if the company is closing its doors, Chapter 7 can be a clean way to wrap up operations and ensure that debts, including PPP loans, are dispensed with. PPP loans don’t require personal guarantees, which means the business owner or owners generally won’t be on the hook for payment if the company is dissolved or files for bankruptcy.
However, Economic Injury Disaster Loans (EIDL) may be treated differently. That’s because some EIDL loans require collateral. And, large EIDL loans require a personal guarantee. If the loan is secured, it won’t be dischargeable in bankruptcy unless you surrender the property securing the debt. And, if a loan to a business entity is personally guaranteed, filing a business bankruptcy or dissolving the company won’t make the debt go away.
Other Bankruptcy Options for PPP Loans
If the company is a sole proprietorship, it’s not a separate legal entity from the business owner. So, the owner may be able to include a PPP loan and other business debts in a personal Chapter 13 repayment plan. On the other hand, a larger, established business entity with more extensive and complex debts and assets may be able to use a Chapter 11 reorganization to manage debts.
In short, bankruptcy may offer a solution for those unable to repay unforgiven PPP loans, and in some cases may also help resolve EIDL loans. However, the borrower should first explore the possibility of forgiveness–the requirements are less stringent than when the program was first created.
If forgiveness isn’t an option, the right type of bankruptcy and the extent of the solution will depend on a variety of factors, including:
- The type of loan
- The amount of the debt
- The type of business entity
- Whether the company plans to continue operations
Talk to a Los Angeles Bankruptcy Attorney
If you don’t qualify for PPP loan forgiveness and are unable to make payments, or those payments are throwing the rest of your budget into chaos, your next step should be to talk with an experienced Los Angeles bankruptcy attorney. At Borowitz & Clark, we offer free consultations to help you find the right solution for you. Schedule yours right now by calling 877-439-9717, filling out the contact form on this page, or clicking in the bottom right corner of the page to chat with an agent.
Barry Edward Borowitz is the founding partner of Borowitz & Clark, LLP, a leading bankruptcy law firm that represents clients petitioning for bankruptcy protection under Chapter 7 and Chapter 13 of the bankruptcy code. Mr. Borowitz has been practicing bankruptcy law exclusively for more than 15 years. View his full profile here.