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Paycheck Protection act

Proceed with Caution: Small Business Bankruptcy and Paycheck Protection

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~3 minute read

The Small Business Reorganization Act

Almost one year into the Covid-19 pandemic, many Virginians are still debating bankruptcy, either individually or for their businesses. Business owners in particular should consult with an attorney about filing under the Small Business Reorganization Act (“SBRA”), which took effect on February 19, 2020. As long as you are still engaged in commercial or business activity and have less than $7.5 million in debt, the SBRA is a much cheaper and faster alternative to the traditional – read more on that hereChapter 11 process.

The CARES Act and Paycheck Protection Act

The SBRA was only in effect for about a month before Covid-19 shutdowns hit Virginia businesses. Shortly thereafter, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) created the Paycheck Protection Act (PPP), a lifeline for mall businesses affected by the pandemic. Unfortunately, the Small Business Administration consistently opposed PPP loans for bankrupt small businesses.

The Consolidated Appropriations Act

You may have heard on the news that bankrupt small businesses can now get PPP loans due to the Consolidated Appropriations Act of 2020 (the “CAA”). While it is true that the CAA amended Section 364 of the Bankruptcy Code to permit certain businesses in bankruptcy to take Paycheck Protection Act loans, there is a catch! 

The Small Business Administration must first provide written authorization for bankrupt small businesses to get PPP money, and as of January 29, 2021, it has not yet done so. This is especially concerning since the second round of PPP loan applications closes on March 31, 2021.

The CAA also does not address how businesses who already obtained PPP loans should be treated under the Bankruptcy Code. Business owners in this situation absolutely must contact an attorney for assistance.

Contact Dunlap Law

Dunlap Law is continuing to monitor the situation. In the meantime, if you need help understanding these new – or old! – rules, PPP loans, or whether bankruptcy may help your business, please get in touch.

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