Discharging SBA Loans in a Small Business Bankruptcy

As the COVID-19 pandemic raged its way across the world, lockdowns and the fear of leaving home left many small businesses in despair. To combat a potential economic crisis, the Small Business Administration began offering loans to keep small businesses afloat. Among these were the PPP and EIDL loans.

Unfortunately, not all businesses survived the pandemic, even with the assistance of these loans. With new spikes in coronavirus cases, some places are considering a new wave of lockdowns. Many small businesses are finding that they must file for bankruptcy.

Bankruptcy is a way of going “back to zero.” Your debts are wiped clean, and your finances start from the beginning. When a business files for bankruptcy, it often means that it can no longer operate. This leaves many to wonder, “If the government helped support my business, and the company went under, do I still owe the government for these loans?” The good news is, in most circumstances, you can discharge these loans in a bankruptcy.

PPP Loans

The Payment Protection Program (PPP) was designed with forgiveness in mind. Essentially, it was given to help people stay in business with the hope that they could eventually rebuild. If the business could not survive, much of the loan would be easily discharged.

Fundamentally, if a business owner can prove that loan money was used for the business, that portion of the money is forgivable upon repayment. This applies to any amount of the loan, even if there is money left over. Business owners can simply apply for forgiveness for the portions they used. If they choose bankruptcy, they can simply discharge any left-over portion of the PPP.

Whether you are applying for forgiveness or bankruptcy, you should allow a bankruptcy lawyer to inspect your paperwork first. Any little mistake can cause an issue, and the guidance of a legal professional could prove invaluable.

EIDL Loans

Economic Injury Disaster Loans (EIDL) were also created and issued to help small businesses during the pandemic. If you need to file for bankruptcy, first double check which type of EIDL you received. It may have been a grant, not a loan. Government grants are essentially “free money” to be used for a specific purpose. If you received a grant, check to make sure that you met all necessary conditions for its use. If so, it does not need to be repaid.

EIDL loans require collateral. If you received an EIDL loan, you probably used some portion of the business to secure the loan. Perhaps you used business equipment or property. It is possible that these items will be repossessed in a bankruptcy. If the business is going bankrupt anyway, having these assets repossessed should not be devastating.

Large EIDLs are given through a personal guarantee. A lien against your personal property could still be valid, depending on your circumstances. If you are concerned about losing your personal assets, contact a skilled lawyer today. There are many options available to help keep you in your home, car, etc., and your attorney can work toward getting you back on your feet.

If you need help discharging an SBA loan, contact us today. Our number is (718) 340-3385, or you can click here for an online contact form.