NH Legal Perspective: A Primer on PPP Loan Forgiveness, Forbearance Agreements and Small Business Bankruptcy

Last week, the Paycheck Protection Program (PPP) was suspended after the $349 billion earmarked for PPP loans was fully distributed. If you were approved for a PPP loan, there are several loan forgiveness points to bear in mind. First, ensure that the PPP loan proceeds are used for approved costs only – payroll costs and interest on eligible mortgages, rent, and utilities. Use of PPP loan proceeds for unauthorized costs will disqualify the borrower from loan forgiveness and expose the borrower and/or its principles to collection actions. Second, borrowers will be required to submit a request for loan forgiveness to the lender that is servicing the loan.

The CARES Act expressly requires that the borrower be able to adequately document the use of the loan proceeds in order to obtain loan forgiveness. Therefore, it is critical that a borrower maintain documentation to verify the number of full-time employees and their pay rates, as well as documentation to prove expenditures on eligible mortgages, leases, and utility obligations. Finally, borrowers will need to stay informed of SBA rules. For example, on April 2, six days after CARES was signed into law, the SBA announced that no more than 25% of the PPP loan forgiveness amount can be attributable to non-payroll costs.

Forbearance agreements

Forbearance agreements are agreements between a debtor and creditor that result after a debtor has defaulted on its payment terms with its creditor and the debtor has asked the creditor to forbear from exercising its collection or foreclosure rights. Under such agreements, the creditor agrees not to take collection action or to foreclose for a period of time in exchange for modified payments from the debtor, or, other concessions if payments are suspended. For a debtor, it is critical that the agreement include, among things, a) specific provisions regarding the defaults, b) attainable benchmarks including feasible payments; and, c) a clear time-frame of forbearance.

For a creditor, it is critical that a forbearance agreement include, among other things, i) specific provisions regarding the defaults; ii) statements that the lender has no obligation to lend further money or extend/renew the agreement; and, iii) release language. While a forbearance agreement is not a long-term solution, it can be designed to assist a debtor that has financial issues caused by unforeseen circumstances such as Covid-19.

Bankruptcy

Chapter 11 of the bankruptcy code has historically been the manner through which struggling businesses have attempted to reorganize while retaining control of their assets and operations. Chapter 11 provides invaluable tools for a business to restructure debt and do away with burdensome contracts, among other things, but chapter 11 also often involves slow and expensive processes that prohibit smaller businesses from utilizing chapter 11.

In February, this problem was addressed with the enactment of the Small Business Reorganization Act (SBRA). SBRA amended the Bankruptcy Code to add subchapter V, a new streamlined Chapter 11 process for small businesses. Subchapter V aims to make bankruptcy proceedings more expeditious and less costly by, among other things, eliminating certain procedural hurdles, expediting time frames within which a business-debtor must file its plan of reorganization and by eliminating certain fees.

For a debtor to be eligible to file a subchapter V case, a debtor (whether an entity or an individual) must be engaged in business and have total secured and unsecured debt not exceeding $2,725,625. However, the CARES Act amended SBRA and Subchapter V by temporarily increasing, for the next year, the debt limits from $2,725,625 to $7,500,000, thereby expanding the eligibility for these new streamlined Chapter 11 cases to many more small businesses.