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Barred from PPP loans due to a bankruptcy? Not anymore

The Paycheck Protection Program (PPP) was meant to provide small businesses with the extra cash they needed to maintain their payrolls during the pandemic, when times were bad. The loans are forgivable for those who actually use the money to keep their employees on staff.

Unfortunately, the Small Business Administration, which administers the PPP, initially refused to make any loans to individuals or businesses who had filed for bankruptcy – even a Chapter 11 reorganization meant to stabilize a business.

This was an error. In fact, last December, Congress explicitly authorized the SBA to lend to those currently in bankruptcy, but the SBA continued to refuse. It even took bankrupt companies to court for applying for PPP loans.

In late March, however, the nonprofit newsroom ProPublica published a report about the problem. Then, the National Association of Consumer Bankruptcy Attorneys issued a statement urging the new SBA administrator to change course.

Those voices were heard. On April 6, the SBA issued new guidance on the issue in the form of a frequently asked questions page on its website. It “clarified” that individuals, family farms and businesses seeking to reorganize through bankruptcy are indeed eligible for PPP loans.

The new guidance states that those who file for Chapter 11, 12 or 13 become eligible for a PPP loan once a bankruptcy judge has approved their reorganization plan.

If you could benefit from a PPP loan, apply now

The PPP program is open through May 31. ProPublica estimates that about $50 billion left in the program, however, so the available funds may run out before the deadline.

Accessing PPP funds could help many struggling businesses stay afloat and maintain their staff. It only makes sense to open the funds to those businesses that are struggling the most.

If you have been turned away from the program but have a court-approved reorganization plan, reconnect with your lender or start a new application right away.