Many businesses were hit hard by the COVID-19 Pandemic. The Federal Government, through the Small Business Administration, tried to ease the burdens put on these businesses by issuing loans. There were two main types of loans that were issued.
The commonly known Paycheck Protection Program Loans (“PPP Loans”) and the lesser known COVID-19 Economic Injury Disaster loans (“EIDL Loans”)
With the Paycheck Protection Program, these were loans that were given by the federal government to small businesses, sole proprietors, independent contractors, self-employed people, 501(c)(3) nonprofit organization, 501(c)(19) veterans organizations, or tribal businesses to mainly to cover payroll costs including benefits, such as health insurance.
In addition, these funds could cover interest on mortgages, rent, and utilities. If used properly this loan would be forgiven, as long as you apply for loan forgiveness on or before the maturity date of the loan.
COVID-19 Economic Injury Disaster Loans
The Covid-19 Economic Injury Disasters Loans were loans given out to help small businesses survive during the Covid-19 Pandemic. Unlike the PPP Loans, these loans could not be forgiven.
These loans were popular because of the long term of 30 years as well as the low rates of 3.75% for small businesses and 2.75%. for non-profits.
The businesses and companies that took out these loans are now struggling to make payments because they have not recovered as much as they had hoped, inflation and the current financial climate.
Can I Discharge These Loans in Bankruptcy?
Even if you didn’t get your PPP Loans forgiven or have an EIDL loan, you may be able to use the bankruptcy code to get rid of the debt.
Typically, both these types of loans can be discharged in bankruptcy.
However, bankruptcy does not get rid of the debt if the bankruptcy court determines that fraud was committed in order to obtain the loan.
How Does the Bankruptcy Code Differ Between the Two Loans?
For PPP Loans, a personal guaranty was not required and no liens against collateral, such as business accounts or equipment, were required to obtain them.
This means that the person who took out the loan does not need to file a personal bankruptcy if the loan was taken out in the business name and the debt can be discharged in a Business Chapter 11.
What if the Loans were Taken Out in My Name Instead of the Business Name?
If the loan was taken out in your personal name, as long as no fraud was committed then the debt can be discharged in Bankruptcy.
For an EIDL Loan, it is a different story. These loans required collateral or a personal guaranty if they were for more than $25,000.00.
For most people the only property that was offered as collateral was business property. However, in some cases, personal property, including people’s homes, were used to secure the loan.
This means that while a bankruptcy can discharge an individual’s personal responsibility for the debt, the SBA can still take action against that property to repay part or all of the loan.
What if I Am Closing My Business?
If your small business is shutting down the liens against the property are no big deal, as long as only business property was used as collateral.
If no fraud was committed, then letting the SBA have the business property and filing a personal bankruptcy can relieve you from having to pay back this debt.
Can I File Bankruptcy and Continue Running My Business?
If you are still wanting to keep your business running, then it is likely that you will have to pay back the EIDL loan in full.
It may still be in your best interest to file a personal bankruptcy to protect your personal assets even if you are keeping your business running.
It is important to speak with an attorney so you know your options with your loan and what is at risk if you file for Bankruptcy.
At WH Law we have helped individuals and businesses find the best course of action regarding these loans and how to navigate through the bankruptcy process, whether the debtor is closing down their business or reorganizing their debt and continuing operations.