Lawmakers approved the CARES coronavirus relief act in the spring of 2020. Many of them probably hoped that the worst of the pandemic would soon pass. Clearly, that was not the case. As a result, the short-term relief Congress authorized was insufficient for many individuals and micro-businesses (five employees or fewer) hardest hit by the outbreak.

Part of this relief package included Paycheck Protection Program loans and a temporary addition to the Bankruptcy Code. Chapter 5 is designed specifically for small businesses impacted by coronavirus. This provision expires on March 27, 2021. 

That deadline is rapidly approaching. Additionally, as outlined below, a Chapter 5 bankruptcy might be your last chance to discharge unpaid PPP loans. Since lockdowns and slowdowns persisted through the fall and into the winter, many businesses have been unable to repay these loans. And, only a select number of businesses are eligible for PPP loan forgiveness.

An experienced Philadelphia bankruptcy lawyer can help your family or your business through these tough economic times. But unless you act quickly, you could lose some important legal and financial rights.

Bankruptcy and Immediate Relief

The Chapter 5 subsection altered some parts of the Bankruptcy Code, but it did not alter Section 362, which is the Automatic Stay. The private banks and other institutions which made PPP loans care almost nothing about the plight of individual business owners. They just want their money. And, since the Supreme Court has eliminated some key consumer debt protections, these moneylenders are more aggressive than ever.

Business and personal bankruptcy filings usually trigger the Automatic Stay. This provision immediately halts things like:

• Creditor harassment,
• Bank account levy,
• Lien placement,
• Repossession,
• Eviction, and
• Foreclosure.

In most cases, the Automatic Stay remains in effect as long as the bankruptcy is pending. So, distressed homeowners have plenty of time to erase past-due mortgage payments. And, struggling small business owners have an opportunity to reorganize. 

That reorganization usually includes contract renegotiation. Creditors know that if they do not make a favorable deal, the judge could discharge the obligation. That move would leave them with essentially nothing. So, moneylenders are motivated to make a deal.

Since the Automatic Stay remains in effect, these negotiations occur under the close supervision of the bankruptcy court.

Classifying PPP Loans

Millions of individuals and small businesses borrowed money under the PPP loan program. Unfortunately, as mentioned above, many of these borrowers are unable to repay these loans. 

PPP loans are generally unsecured debts. The loans required no collateral, and there was no personal guarantee. Additionally, lawmakers did not put PPP loans in a protected category, like back taxes or student loans. Essentially, if the debtor files bankruptcy, PPP loan creditors are near the end of the line.

However, fraudulent unsecured debts are not dischargeable. And, fraud was apparently a serious issue in the PPP program. Government prosecutors have already indicted about a hundred alleged fraudsters. Many more investigations are ongoing. So, if there were any irregularities in your PPP application or loan disbursements, prosecutors might target your business.

Standalone fraud is not the only concern. If the business declared bankruptcy after it received a PPP loan, the creditor could argue that the filing was fraudulent and object to discharge. 

Furthermore, there are tracing concerns. PPP funds can only be used for designated purposes, mostly covering payroll disbursements. Using these funds for any other purpose, such as retaining a Philadelphia bankruptcy lawyer, could be fraudulent. The law is very unsettled in this area.

Coronavirus Chapter 5 Cases: A Closer Look

The expansion of Chapter 5 small business reorganization bankruptcies is a significant boon for small businesses.

Lawmakers almost tripled the debt ceiling, from $2.7 million to $7.5 million. Thus, more businesses are eligible for a streamlined Chapter 5. These filers do not need to submit disclosure statements, obtain approval from creditors, or submit complicated plans. 

Much like Chapter 13 repayment plans, Chapter 5 reorganization plans usually last either three or five years. Many businesses are able to emerge from bankruptcy early, as part of a prepackaged reorganization plan.

In other words, Chapter 5 allows small businesses to obtain all the advantages of a Chapter 11 at a fraction of the cost.

If you are unable to repay PPP loans, you have legal options. For a free consultation with a bankruptcy lawyer in Philadelphia, contact Bankruptcy Done Right. After-hours and virtual visits are available.