One of the most important features of the original CARES Act — the federal government’s response to the COVID-19 economic crisis — was the creation of the Paycheck Protection Program (PPP), which allows small businesses to obtain emergency loans to stay in operation. But regulations issued by the Small Business Administration made PPP loans unavailable to small businesses that had filed for bankruptcy. Now, the CARES II Act has made it clear that these loans can be secured by debtors seeking protection under Subchapter V, a simplified form of Chapter 11 reorganization for small businesses.
CARES II, formally known as the Consolidated Appropriations Act of 2021, came after a deluge of Subchapter V filings that resulted in part from the CARES Act’s raising of the debt threshold for eligibility. Businesses with debts of up to $7.5 million can now qualify for Subchapter V — double the original threshold of $2.725 million. However, the unavailability of PPP loans has made it difficult for Subchapter V debtors to get the credit they need to meet overhead expenses while the reorganization proceeding goes on. CARES II has addressed that problem.
The new law amends the federal bankruptcy code to allow a Subchapter V debtor to apply to the bankruptcy court for a PPP loan to help cover payroll, rent and utilities. If the money is used for those purposes, the loan may be forgiven or, if not, may be treated as a “superpriority” administrative expense, which means it can be paid off ahead of other debts. The loan may also be repaid under the Subchapter V plan of organization approved by the bankruptcy court.
CARES II provides further rent relief to small businesses in Subchapter V. It adds an additional 60 days to the existing 60-day grace period within which a debtor must begin paying rent, as long as the debtor has experienced “a material financial hardship due, directly or indirectly,” to the effects of the pandemic. CARES II also allows post-petition rent arrearages to be paid over the course of the reorganization plan, rather than requiring them to be paid in a lump sum prior to plan approval.
Another change is to give Subchapter V debtors additional time to decide whether to assume or reject a lease. The period is now 210 days — up from 120 days — with a potential 90-day extension. This helps small businesses avoid having to make quick, possibly bad, decisions about whether to close stores during the uncertain economic environment caused by the COVID pandemic.
The experienced Georgia attorneys at Rountree Leitman & Klein LLC, in Atlanta guide small businesses through the Subchapter V bankruptcy process. Call us at 404-737-9623 or contact us online for a free consultation.
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