Paycheck Protection Plan Forgiveness Terms to Help Businesses
Are you looking for ways to pay your employees during the COVID-19 pandemic? Did you know that small businesses in the United States are receiving $659 billion worth of financial aid?
Since the beginning of May 2020, more than two million loans have already been handed out. The credit terms for these loans are incredibly affordable. Some of the loans will even be eligible for complete forgiveness.
What is the Paycheck Protection Plan?
The Paycheck Protection Plan was one of several acts passed into law to help small businesses combat the negative impacts of COVID-19. It was included in the Coronavirus Aid Relief & Economic Security Act (CARES Act), which went into effect in March 2020.
The initial act allowed $349 billion to be used for the PPP. After those funds were used up, an additional $310 billion was added to the program.
During the second round of funding, more than 2.4 million loans were approved for small businesses across the United States. Some of these loans will be fully forgiven when used for essential overhead, like payroll, rent, and utilities. If the loan payments aren’t fully forgiven, initial payments won’t need to be paid for six months.
While loans can be made in increments of up to $10 million, the U.S. Treasury has stated that loans over $2 million will be under strict review to ensure an authentic allocation of funds. Also, a PPP loan cannot exceed 2.5 times the debtor’s average monthly payroll, which is calculated based on the monthly average throughout 2019.
PPP loans are administered on a first-come-first-served basis. The federal government or lenders will not charge fees on these loans.
Who Qualifies for the Paycheck Protection Program?
The Paycheck Protection Program was created to help businesses with fewer than 500 employees. It includes the following types of businesses:
- Sole Proprietors
- The Self-Employed
- Private Non-Profits
- Some Veteran Organizations
- Independent Contractors
- Small businesses with under 500 employees
In addition to the above, you need to have been in business before February 15, 2020. You’ll also need to verify that you’re experiencing financial uncertainty due to the current economic lockdowns in place for COVID-19.
If you receive a PPP loan, you will not be able to receive a second loan under the same program.
It’s also worth noting that certain business models are not eligible for the loan. Some of the ineligible business models include:
- Passive businesses
- Political lobbyists
- Gambling businesses
- Household employers
- Investment companies
- Marijuana businesses
What are the terms for the Paycheck Protection Program?
The PPP loan might be fully forgiven if you meet the criteria and allocate assets properly.
All your employees need to be on your payroll for eight weeks. Within that time frame, 75% of the PPP loan needs to be used for payroll. Aside from payroll, the loan can only be used for mortgage payments, rent fees, and utilities.
If you’re unable to meet these requirements, there are still attractive credit terms for PPP loans. As previously stated, an initial loan payment isn’t due for six months, and you have two years to pay everything off.
Imagine you maintain almost all the requirements for your loan to be fully forgiven. In this situation, most of your PPP loan will be forgiven. The more you spend on overhead costs outside of the ones listed above, the more you’ll have to pay back before the two-year deadline.
Regardless of how much is forgiven, the loan can only be used for salaries up to $100,000, vacation time, medical leave, retirement costs, cash tips, state taxes, and health care benefits.
You won’t be able to use the loan to pay:
- Income or payroll taxes
- Employees outside the U.S.
- Independent contractors
- Any salary that exceeds $100,000
- Shareholder distributions
- Family Medical Leave (FML) pay that’s covered by the Families First Coronavirus Response Act
What documents are needed for the Paycheck Protection Program?
You’ll need to prepare a few documents before you apply for a PPP loan on the U.S. Treasury website.
The main information you’ll need to verify is for your average monthly payroll costs. This includes the following information:
- State Payroll Taxes
- Retirement Plans
- Insurance Premiums
- Net profit for the self-employed
- Possibly more information (depending on your lender)
You’ll also need to fill out some basic information about your business like your mailing address, information about owners with at least 20% stake, and how the money will be used.
Once you’ve gathered this information, you can take it to a lender approved by the Small Business Association (SBA) that you’ve worked with in the past.
When can I apply for a PPP loan?
Applications for a PPP loan are currently being accepted.
Remember, funds are allotted on a first-come-first-served basis. Make sure to get your documents gathered as soon as possible so you can apply right away.
The deadline for your PPP loan application is June 30, 2020.
What If a PPP Loan Isn’t Enough?
If you’re restructuring your business strategy to survive the COVID-19 pandemic, then a PPP loan might be exactly what your business needs to stave off bankruptcy.
However, it’s worth mentioning that there’s nothing in the CARES Act that would prevent you from filing for bankruptcy after being awarded a PPP loan. After your bankruptcy, the SBA would simply be left with an unsecured loan.
The Small Business Reorganization Act (SBRA) added Subchapter V to Chapter 11 of the Bankruptcy Code. Subchapter V includes substantial changes that benefit small business owners. The terms of this option include:
- Retain the ownership of your business: Unlike traditional chapter 11, Subchapter V allows you to keep your business as long as you commit all of your company’s projected “disposable income” to paying creditors via a 3- to 5-year payment plan. Once this plan is complete, the remainder of your debt will be discharged.
- Streamlined relief: Before the SBRA, Chapter 11 cases required a disclosure statement and plan. Subchapter V forgoes the disclosure requirement and saves substantial time and expenses. The process can now be completed in months rather than years.
Your payment plan also no longer requires the support of creditors if it meets the other requirements for confirmation under the Bankruptcy Code. As previously, at least one of your creditors had to approve your plan, this change removes a substantial impediment to plan confirmation.
- Lower upfront costs: With a Chapter 11 Bankruptcy under Subchapter V, you can pay administrative expenses over the life of your payment plan rather than at plan confirmation.
- Put a stop to collection efforts: Once you file for Chapter 11, creditors will be unable to collect payments. This buys you time to renegotiate your credit terms, which makes it easier to survive the damage caused by the global economic lockdowns.
Considering bankruptcy? You should always consult with a lawyer before taking action. Every attorney at The Pope Firm is an expert at filing for business bankruptcy in East Tennessee. We identify the best course of action for small business owners and walk you through your options. Contact us today to find the support you need.
The Different Types Of Bankruptcy
Depending on your situation, there are different types, officially known as “chapters” of bankruptcy, that you can file for. These different chapters of bankruptcy provide different results for different cases, and it’s important to have some knowledge on these chapters before filing for bankruptcy.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy is a commonly filed for chapter of bankruptcy and is intended for use by low to moderate income individuals with more debt than they’ll ever be able to repay. If properly executed, this chapter of bankruptcy can eliminate most or all of a person’s unsecured debt. If you’re eligible, Chapter 7 could be a great debt relief solution for you.
Chapter 13 Bankruptcy
Another great debt relief solution is Chapter 13 bankruptcy, that works great for people that aren’t eligible for chapter 7 bankruptcy. This chapter allows the debtor, or person that has borrowed money, to restructure their payment plans to be more manageable. At the end of this payment plan, most unsecured debts are discharged, or eliminated. This is sure to provide some much-needed breathing room for those people that feel in over their head, and are in need of some debt relief.
If you need assistance with personal or business bankruptcy and filing in Tennessee, reach out to The Pope Firm and Charles Pope, Attorney At Law.
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Frequently Asked Questions
Bankruptcy occurs when an individual, business, or other entity declares the inability to repay its debts. If you file for bankruptcy, that means that debt collectors must pause attempting to collect debts from you. Bankruptcy often allows you to erase most, if not all, of your debts.
There are two types of debts, unsecured and secured. Some examples of unsecured debts are credit card bills, medical bills, or taxes. Secured debts can include car loans or mortgages, which use the purchased item as collateral. In many cases, filing for bankruptcy can keep this collateral protected and prevent foreclosure of your home or repossession of other assets.
Bankruptcy is governed by federal legislation under the Bankruptcy Code, which falls under the greater United States Code. Both federal law and local law inform the bankruptcy procedure. Federal bankruptcy judges, appointed by the United States court of appeals, preside over court proceedings in these cases. In court, the judge and a court trustee, review your finances to determine whether or not to discharge the debts at hand.
Each state has one or more bankruptcy courts. Tennessee has six bankruptcy courts throughout the state.
Filing for bankruptcy can be a daunting process, and working with a firm with expertise in the field can provide you with necessary guidance.
There are several types of bankruptcy. Most individuals, married couples, and small businesses choose to file under Chapter 7 or Chapter 13.
What are the Differences Between Chapter 7 and Chapter 13?
The primary difference between these two types is that Chapter 7 bankruptcy allows an entity to fully discharge its debts in a short period. A Chapter 13 bankruptcy involves reorganizing debts and creating a plan to repay those debts over an allotted time. After that time, Chapter 13 eliminates most of the remaining debts.
Chapter 7 bankruptcy is typically filed by those with very limited income and unsecured debts, the most common of which is medical bills. Chapter 13 bankruptcy is most often filed by higher income bracket individuals and those with more assets, such as a car or a home. The motivation for filing Chapter 13 bankruptcy is often preventing assets from being repossessed or home foreclosure due to outstanding debts.
What Other Types of Bankruptcy Are There?
Two other types of bankruptcy are Chapter 11 and Chapter 12.
Chapter 11 primarily applies to larger companies and corporations, but sometimes it is the right choice for small businesses as well. Chapter 12 applies to those who are considered family farmers.
Various considerations get factored into who should file bankruptcy. Filing bankruptcy may be the right choice for you if you are overwhelmed by debt. Regardless of what type of bankruptcy you file, as soon as the process begins, you are granted an automatic stay. A stay is an injunction that prevents creditors from collecting any debts for an allotted time. An automatic stay halts the process of, for example, foreclosing on a home or repossessing a vehicle.
A Chapter 7 bankruptcy will discharge most of your debts. Filing Chapter 7 is appropriate for those who make less than the median household income in Tennessee and whose assets would not be at risk. In this situation, your non-exempt property is sold to pay off creditors.
Chapter 13 bankruptcy allows you to create a plan to repay your debts. If you have non-exempt property used as collateral in secured loans, you can restructure your finances to pay off any relevant debts over the next three to five years. Chapter 11 functions in a similar way, but is exclusively for businesses.
Filing for bankruptcy can provide a fresh start for those bogged down with debt, either by restructuring finances or discharging debts entirely.
How bankruptcy affects business depends upon the type of bankruptcy filed.
Businesses classified as corporations, partnerships, or LLCs can file Chapter 11 bankruptcy. Chapter 11 allows for debt restructuring, while the business stays open. As in Chapter 7 and Chapter 13, an automatic stay activates as soon as your bankruptcy period begins. In an automatic stay, creditors cannot try to collect money or other assets from you.
During this period, you work with your lawyer to restructure your debts and develop a plan to get your business back on track. This plan must be approved by some of your creditors and a bankruptcy court to go forward. You will be able to repay your debts over several years.
Filing Chapter 7 bankruptcy discharges all of your business’s debts by liquidating your assets. The entire process can be completed quickly, often in several months. Chapter 7 allows for the discharge of most debts, excluding government taxes and fines.
Only individuals can file for Chapter 13 bankruptcy. Thus, although businesses cannot file, you can file Chapter 13 as the sole proprietor of your business.
When you decide to begin the bankruptcy process, the first step is to find a lawyer who is an expert in filing bankruptcy in Tennessee. Hiring a bankruptcy lawyer can indeed be expensive, but it is worth the cost. This professional can guide you through what type of bankruptcy is best for your situation and what to expect throughout the process.
- Collect your documents: It is important to have everything from your paystubs to your credit report available before starting.
- Take the means test. This test will determine if you are eligible for Chapter 7 bankruptcy and help guide you in making a repayment plan for Chapter 13 bankruptcy.
- Meet with a credit counselor. In the state of Tennessee, most individuals must meet with a credit counselor from an approved provider before filing for bankruptcy.
- Fill out bankruptcy forms. If working with a lawyer, you can expect they will use online programs to help you file your paperwork.
- Pay your filing fee. It costs $335 to file for bankruptcy in Tennessee. Waiver of the fee is possible in some cases, but it is uncommon. However, it is possible to pay the fee in several installments instead of the entire balance upfront.
Declaring bankruptcy wipes out many debts, but not all.
What Debts are Usually Covered by Bankruptcy?
Bankruptcy can clear most unsecured debts, including:
- Credit card bills
- Medical bills
- Overdue utility payments
Bankruptcy can also clear many secured debts, but it depends on whether you file for Chapter 7 or Chapter 13 bankruptcy. For Chapter 7, you will have to give up any non-exempt items you put up for collateral. For Chapter 13, they will become part of your repayment plan.
What Debts Are Not Covered by Bankruptcy?
- Child support
- Alimony obligations
- Those related to personal injury or death in a drunk driving case
- Any debts not listed on your bankruptcy papers
No type of bankruptcy covers these debts. If you file for Chapter 7, they remain outstanding. Under Chapter 13, you pay these debts along with your other debts.
What Debts May Be Covered?
Bankruptcy rarely covers student loan debt. However, it may be in some cases with proof of undue hardship.
Tax debt is also rarely covered, but bankruptcy may cover certain old unpaid taxes.