Right now, one of the largest base of clients are contacting us to determine if they can wipe out their SBA loans. The government was giving out these SBA loans and PPP loans during the time when many business were shut down due to Covid. We have been successful at wiping out these debts and helping clients press the Restart Button®.
As many small business owners know, starting a business is no easy task. Growing that business and keeping it profitable is even more challenging. According to the U.S. Bureau of Labor Statistics, approximately 20% of new businesses fail during the first two years of being open, 45% during the first five years, and 65% during the first 10 years. Oftentimes, this is due to circumstances out of the business’s control, such as economic factors.
The COVID-19 pandemic impacted many Orlando and Kissimmee businesses. The Coronavirus Aid Relief & Economic Security Act (CARES Act), which went into effect on March 27, 2020 provided temporary relief and expanded access to Chapter 11 Bankruptcy for Central Florida small businesses. Several programs fell under this act, including the Paycheck Protection Plan (PPP) and Economic Injury Disaster Loans (EIDL).
Some business owners took out Small Business Administration (SBA) loans to pay for their overhead costs and stay afloat during this time. However, what happens when these resources are not enough, and you and/or your business still needs to file for bankruptcy? The business owner is often left wondering, “What will happen to my Small Business SBA loan, PPP loan, or EIDL loan?” “Can I get rid of it in bankruptcy?” “Will I lose my collateral?”
If you are a business owner struggling right now because you can’t keep up with these loan payments, there is a way out. The good news is SBA loansCAN BEDISCHARGED IN BANKRUPTCY. However, if you default on the loan or choose to do nothing, the lender can take legal action against you. This can include placing a lien on your property or garnishing your wages, which is why it is important to consult with an experienced Orlando bankruptcy attorney.
Small Business Administration Loans (SBA)
For many people starting a business, or expanding their existing business, if they do not have the capital or investors to fund this endeavor, they will take out a Small Business Administration (SBA) Loan. The question of whether an SBA loan can be discharged in bankruptcy depends on several factors, including whether you pledged collateral to take out the loan.
One common misconception surrounding SBA loans and bankruptcy is the belief that because SBA loans come from a federal agency, it means these loans will stick with you (similar to the way student loan debt is treated in bankruptcy). This is absolutely FALSE, and should not hold you back from attempting to discharge your SBA loan in bankruptcy.
The key question in discharging this debt is: are they unsecured or are they connected to another asset? If you happened to pledge collateral to take out the loan, a bankruptcy case will treat this loan as a secured debt. If you did not pledge collateral, the debt will be treated just like any other unsecured debt in a bankruptcy case, and it will be discharged at the end.
Paycheck protection payments or PPP loans were created with the intent that they would be forgiven. Businesses were able to apply for these loans during the COVID-19 pandemic to help them stay afloat during widespread shutdowns. In the event these loans are not forgiven or if your business needs to file for bankruptcy prior to your loan being forgiven, the good news is they are dischargeable in a bankruptcy case, including both business bankruptcy and personal bankruptcy. PPP loans are treated like any other unsecured debt in a bankruptcy case and are not given higher priority over other debts.
Certain complications can arise with respect to PPP loans if the SBA or bank looks into the original application for the PPP loan, and they find errors that make it non-dischargeable. However, these situations are rare and are the exception and not the norm. Additionally, there is the argument that had Congress intended these PPP loans to not be discharged in a bankruptcy case, they arguably would have included language enforcing this in the original law creating them. Since there is no language in the original CARES Act that would indicate otherwise, you can assume that they are dischargeable in bankruptcy.
EIDL loans can be a bit more complex. If a business needs an EIDL in the amount of $25,000 or more, the business owner will need to pledge collateral to secure the loan. Just as with an SBA loan, if the businessowner then files for bankruptcy, he or she is on the hook when it comes to that secured debt and the lien associated with it. You can assume the asset can be seized to satisfy the debt, instead of having the debt be discharged.
If the loan is in the amount of $200,000 or more, a personal guaranty must accompany the loan application, which can make it even more complicated. However, if the EIDL loan is less than $25,000, the debt does not require collateral and will be treated as an unsecured debt. It can be treated similar to the PPP loan and is not given any priority over other unsecured debts in a bankruptcy case. If all goes well, at the end of a bankruptcy case, your EIDL loan that is less than $25,000 will be discharged.
Because of the nuances and the fact these loans are so case-sensitive, we always recommend you consult an experienced bankruptcy attorney before proceeding with any type of bankruptcy case. In a free consultation, you will receive the guidance you need to determine how to proceed and to understand how your various business debts will be affected.
If you have questions on this topic or are a small business struggling with debt, call us today to schedule a free consultation. The Benenati Law Firm has eliminated nearly a billion dollars of debt for its bankruptcy clients, making the firm one of the top twenty filers of bankruptcy in the nation. We have helped thousands of individuals and businesses eliminate their debt and get a fresh start financially. The day you hire our firm, we will contact your creditors to stop the harassment and collection calls. We make our hours convenient for our clients and offer FREE digital sign-ups and consultations on Saturdays (9:00 a.m. – 3:00 p.m.) and throughout the week until 5:00 p.m. If you or your business are in a financial crisis and considering filing for bankruptcy, contact an experienced Orlando bankruptcy attorney who can advise you of all of your options.