Earlier this year, we wrote about the Small Business Reorganization Act of 2019 (the “SBRA”), which went into effect on February 22, 2020. For a quick recap on the SBRA, click here for our prior post. In this post, we’ll discuss a few ways the CARES Act has affected bankruptcy cases.
More businesses can seek relief under the new Subchapter V of Chapter 11
One of the things the SBRA did not do was change the definition of “small business debtor” to let more businesses qualify as small business debtors under the Bankruptcy Code. The SBRA’s proponents wanted the term “small business debtor” to include businesses with up to $10 million of debt. But Congress rejected their request. When the SBRA went into effect a “small business debtor” needed to have no more than $2,725,625 of “noncontingent liquidated secured and unsecured debts.”
About a month after the SBRA went into effect, Congress passed the CARES Act in response to the economic fallout of the COVID-19 pandemic. In the CARES Act, Congress temporarily increased the debt ceiling to $7.5 million for businesses seeking relief under the new Subchapter V of Chapter 11. As a result, we can expect to see more businesses (and individuals) qualify as “small business debtors.”
Debtors might be eligible to borrow money under the Paycheck Protection Program (PPP)
One interesting issue we’ve seen come up over the past few months is whether small businesses are eligible for PPP loans while they’re in bankruptcy. The SBA says debtors are ineligible. In fact, the official application actually told potential borrowers that their loan requests would be denied if they were in bankruptcy:
Despite the SBA’s position, some courts have held that it is illegal for the SBA to discriminate against bankrupt entities.
The last day for businesses to apply for PPP loans was August 8, 2020. If Congress extends the application deadline, or authorizes a new round of loans, eligible businesses should consider getting PPP loans before filing for bankruptcy.