Can I Discharge PPP & EIDL Loans During Bankruptcy?
As the Covid-19 pandemic surged across communities in the U.S. many businesses were forced to shut their doors or drastically restrict their services. The federal government provided aid to many businesses in the form of two loan options through the Payment Protection Program (PPP) Loan & the Economic Injury Disaster Loans (EIDL).
EIDL & PPP Loan Assistance
Many business owners rushed to apply for these government-backed SBA loans in the hopes of saving their businesses from the significant impacts of the pandemic. Unfortunately, this unprecedented and unexpected crisis has caused many individuals to face financial losses beyond that which can be covered by the loans received through the PPP and EIDL assistance.
Bankruptcy, is one of the most powerful tools available to American businesses and to American business owners for dealing with loans. And it works quite well for the Coronavirus assistance loans.
Is My PPP or EIDL Loan Dischargeable in Bankruptcy?
If you are a business owner that has received a PPP or EIDL loan and you are facing financial losses beyond your control it may be in your interest to consider bankruptcy. The PPP and EIDL loans are in fact dischargeable during bankruptcy proceedings.
What does dischargeable mean? It meas that you don’t owe the loan anymore, and don’t have to pay it back. The basic benefit of bankruptcy is that it discharges many types of loans so that you can get on with your life.
Distinguish Between EIDL Grant versus EIDL Loan
As part of the EIDL loan application business owners also applied for the EIDL grant. In most cases, businesses were approved for a $1k grant per employee up to 10 employees. If your business received an EIDL grant advance it is important to note that this portion of the EIDL assistance does not have to be repaid so long as the grant was used to as working capital to pay things such as payroll, rent, mortgage, etc .
In some cases, businesses may have received the grant and not been approved or proceeded with the loan portion of the application. In those cases no amount of the grant would have to be repaid to the SBA so long as the conditions of the grant advance were met.
Loan Forgiveness Terms for the PPP
The main appeal for the PPP loan by business owners was the promise of forgiveness of the loan for those portions of the loan used to pay authorized expenses. If you feel your business used this loan or a portion thereof for the delineated authorized expenses you should proceed with an application for forgiveness to have some or all of the PPP loan forgiven. Any remaining amount not forgiven would then be dischargeable in bankruptcy.
Was Collateral Required For Your Loan Approval?
It is important to note that although the EIDL and PPP loans are dischargeable in bankruptcy it does not mean the SBA is not able to act on any secured portion of the debt.
The PPP loan program does not require borrowers to submit any collateral or personal guarantee as part of the application or for loan approval.
However, the EIDL loan application requires collateral for loan applications above $25,000. If your loan was above $25,000 you likely pledged some type of collateral to the SBA in most cases this was done through a UCC filing on your business’ assets. If your EIDL loan was in excess of $200,000 a personal guarantee was also required.
The collateral for the EIDL loan is generally only the equipment that the business uses, and the money that customers owe to the business. EIDL loans do NOT take a second mortgage against the owners’ home. Regular SBA loans often take a second mortgage on someone’s home, but EIDL loans do not.
If the business is closing anyhow, then it is not too dangerous if the government takes back the business equipment because the business doesn’t need it anymore. For most businesses we see in Minnesota, the equipment is things like computers and office furniture.
Take Action to Prevent Further Financial Impacts
If you are facing financial difficulties and are unable to repay either of your SBA loans bankruptcy is an option you may want to take advantage of. At the moment the SBA loans go into default, the SBA may proceed with actions to recover the amount owed through garnishment, lien, or lawsuit. Although a bankruptcy proceeding can help you with the management and discharge of your outstanding debt any liens held against your property would still be valid.
At Walker & Walker, Law Offices PLLC we understand the difficulties business owners in our community are facing. If you have received a PPP or EIDL loan and are facing overwhelming debt and losses contact us for a free consultation to discuss the bankruptcy options available to you.
