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SBA Controls Whether Bankruptcy Debtors May Take PPP Loans

January 7, 2021Alerts

Until the U.S. Small Business Administration changes its position and rules, bankruptcy debtors are still unable to obtain PPP loans.

That’s because, under the Consolidated Appropriations Act 2021 (the Act) signed by President Trump on December 27, 2020, none of the provisions relating to bankruptcy are effective until and unless the SBA allows them.

The Act goes into great detail about how bankruptcy debtors, or trustees acting on their behalf, can obtain Paycheck Protection Program (PPP) loans.

But at the end of Section 320 of the Act, Congress states that the bankruptcy provisions allowing debtors in bankruptcy to obtain PPP loans takes effect only when the SBA submits a written determination to the Director of the Executive Office for the United States Trustees that any bankruptcy debtor or trustee that is authorized to operate the business of the debtor “would be eligible for a loan under paragraphs (36) and (37) of Section 7(a) of the Small Business Act,” referring, respectively, to the original Paycheck Protection Program Loans and the Paycheck Protection Program Second Draw Loans.

In other words, the SBA still has the rulemaking power associated with the Second Draw PPP, just as it did with the original PPP.

The SBA has made its position abundantly clear: bankruptcy debtors are ineligible to receive PPP loans. Congress specifically added the PPP program to Section 7(a) of the Small Business Act, which has never allowed debtors in bankruptcy to apply for 7(a) loans, or any SBA loan for that matter. The fourth interim final rule that the SBA made when implementing the PPP was that bankruptcy debtors are specifically ineligible for the PPP. In addition, both the Fifth and Eleventh Circuits have upheld the SBA’s authority to disallow bankruptcy debtors from obtaining PPP loans.

And now, Congress has specifically reaffirmed the SBA’s power by stating that the bankruptcy provisions of the Act pertaining to bankruptcy debtors ability to obtain PPP loans is not effective until and unless the SBA provides written authority to the Office of the Trustee.