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A PPP Lender’s Dilemma: What to Do If a PPP Loan Is in Default?

A PPP Lender’s Dilemma: What to Do If a PPP Loan Is in Default?

The CARES Act established the Paycheck Protection Program (“PPP”) under Section 7(a) of the Small Business Act (Section 7(a)) to provide forgivable loans that are fully guaranteed by the Small Business Administration (“SBA”) in order to aid qualified small businesses to keep workers on the payroll. As created by the CARES Act, if a borrower uses its PPP loan proceeds to fund payroll and other eligible operating expenses during a designated time period (“Covered Period”), that portion of the loan proceeds up to the entire loan amount will be forgiven, resulting in a PPP loan becoming essentially a grant.

Indeed, a debtor subject to a Chapter 11 Bankruptcy is usually allowed to continue to use PPP loan proceeds to pay payroll and other permitted operating expenses

The PPP Flexibility Act (H.R. 7010) (the “Flexibility Act”) enacted earlier this month makes the forgiveness requirements of the PPP more flexible by increasing the amount of time a borrower has to spend loan proceeds, lowering the amount of proceeds that are to be used for payroll costs and providing additional safe harbors for full-time-equivalent employee reductions.