The Clock is Ticking on Small Business Debt FORGIVENESS
JUST BEFORE THE Pandemic, Congress had revolutionized the Small Business Reorganization System by enacting Sub Chapter V into Chapter 11 of the Bankruptcy Code. For the first time this section allowed Small Businesses and their owners to Jointly reorganize their debts, shed excess loans on overleveraged collateral, retain personally exempt properties, and pay a fraction of their trade debt on both direct business debt and personal guarantees. The law was designed to provide relief in situations where the total combined debt was less than $2,725,625 and only required the debtor to provide for a 3 to 5 year plan. Anyone with more debt than that had to look at traditional Chapter 11 with its “absolute priority rule” and its 5 year minimum plan.
In the flurry of activity which became the CARES act passed during the first few weeks of the pandemic, the debt limit for Sub Chapter V was extended to $7,500,000. This meant that a whole host of medium size family owned businesses had access to these laws. But, the law was set to sunset in March, 2021. By the first week of February 2021, Congress was already working on extending CARES into 2022, and they did until March 2022. But not this year!
Of course, In the meantime, Congress managed to get most business owners into a posture where once the $7.5mm limit sunsets, most business owners will no longer qualify for Sub Chapter V. Here’s how.
If you have a business and took SBA EIDL loans up to $2,000,000, and have outstanding PPP liability that has not been forgiven, there is a fairly good chance that you and your company combined own more than $2,725,625 in combined debt. This is certainly true if you add in your home mortgage, business mortgage, car loans and equipment debt. The SBA under EIDL is a secured creditor of your business, but only to the extent of the value of the collateral. Your personal guarantee to them is unsecured. What this all adds up to is that Small Business owners are about to miss out on their one and only opportunity to convert their EIDL into a government “grant,” shed their excess debt and rebalance their balance sheets in one 3 year Plan when the $7.5 mm limit sunsets in just over 1 month.
If you have been drifting through the fog of EIDL, PPP, Covid slow down, it is time to re-evaluate. Payments on EIDL loans are about to kick in. The Pandemic MAY come to an end, but, at least for now, for sure the $7.5mm extension to Sub Chapter V is ending. See a Bankruptcy Specialist now for an evaluation of your pre and post sunset options before it is too late.
This article is written by an attorney at Attorney Donald Wyatt PC. Always consult an attorney before making any legal decisions. To make an appointment today, please click here to contact us.