Bankruptcy and SBA Loans – Including PPP and EIDL

by | Oct 5, 2023 | Blogs By Mark A. Carter, ​Consumer Bankruptcy

The Small Business Administration (SBA) has traditionally issued loans that have helped fund small businesses for many years before the world had heard of COVID-19. These loans would be used to start a new business or to expand an existing business.

When the COVID-19 pandemic hit in 2020, many business owners had to look to the Small Business Administration for help keeping their business afloat. In 2020, the SBA quickly created two new programs to help small businesses remain operating.

Several years later, I am hearing from more and more small business owners that were not able to survive the pandemic, yet their loans remain and they need to know what they can do. Many of these business owners looked to the SBA for loans to help with the costs of maintaining their businesses – employees, supplies, rent, etc. until their profit and loss margins improved.

Can I Get Rid of SBA, PPP and EIDL Loans in Bankruptcy?

Although many businesses were able to survive the pandemic, many others could not. They have been left to wonder “what will happen to me if my company cannot repay my SBA loan, EIDL loan or PPP loan?” I have consulted with many people that own, or used to own, a small business that cannot afford to repay their loans. These people need to know their options and whether bankruptcy may help them. A business owner that is not able to repay their loan and chooses to do nothing is at risk of legal action being taken against them. A lien may be placed on their property and wages garnished. You, as a business owner that is struggling to keep up with the loan payments, or as one that has been forced to close your business due to the economic struggles suffered by so many, have an option in bankruptcy. SBA loans can be discharged in bankruptcy.

Three Separate Loan Programs

The SBA has had three types of loan programs for small businesses. The traditional SBA loan to assist a person in starting or expanding a business. The Economic Injury Disaster Loan (EIDL) program provided long-term, low-interest loans to help business owners maintain the operating expenses that arose when COVID-19 occurred. The Payroll Protection Plan (PPP) was designed to primarily assist businesses in covering their employee payroll and rental costs.

EIDL Loans Have Come Due

Although the terms on the EIDL loans were favorable to the borrowers (long-term loans at lower interest rates), it was not enough for all business owners to have revenue return to pre-pandemic levels. Because of this, the SBA granted multiple deferrals on when the initial payment would become due. Those deferrals have not ended and many businesses have either closed, or are now struggling and do not have enough profit to cover the EIDL payment. As interest has continued to accrue during these deferral periods, many borrowers now owe more than when they originally received the loans.

My Business Has Closed/is Closing, and I Cannot Afford to Repay the Loan – Can Bankruptcy Help?

As these loans are not all the same, and many borrowers are in different situations, the answer is not an easy “yes” or “no”. More information will be needed, but generally, bankruptcy is likely an option for many borrowers. The first question I ask any business owner, or former business owner, that took out an EIDL loan is whether the borrowed funds were used for their intended purpose in supporting the business. The business owner will need to be able to trace the usage of the borrowed funds and be able to show that the funds were used to pay business expenses. You may have heard the stories about several unscrupulous people that used EIDL and/or PPP funds to purchase exotic cars, go on extravagant trips or just pay their mortgage and ongoing personal expenses. These people do not qualify for a bankruptcy discharge and, in fact, are at risk of criminal prosecution.

I Used the EIDL/PPP Funds Properly – May I File Bankruptcy on Them?

If the borrowed funds were used as designed by the EIDL, the follow-up questions are how much was borrowed, were the loans secured by business assets, and was a personal guarantee issued?

Secured vs. Unsecured SBA Loans

EIDL loans up to $25,000 are generally unsecured (not secured by any property/assets). Loans of more than $25,000 are usually secured by business assets (such as accounts receivables, machinery, and other equipment). EIDL loans greater than $200,000 are generally secured by business assets and require a personal guarantee from the business owner. PPP loans are unsecured loans (not attached to any property) that the government has or will forgive if it is shown that the funds were used for the purposes intended – primarily employee wages and business rent. If the loan has not been forgiven, these loans can be included in bankruptcy.

I Need More Information About My Options – What Now?

If you are, or were, a small business owner that took out one of these loans and are now unable to repay them – the first step is a consultation with a professional. I offer an initial no-cost consultation where we will discuss these issues and what options are available with regard to a potential bankruptcy filing. Assuming the loan proceeds were used as intended, a business bankruptcy may help or a personal bankruptcy may be necessary – it will depend on your personal circumstances. 

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Please contact me at Navigate Law Group if you find yourself in this situation and would like to schedule a consultation to discuss your specific situation.
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Disclaimer

Every legal issue is very unique. Accordingly, the information in this blog is intended as general education material and not as legal advice. If you think you may have a legal issue, you should consult an attorney.