The Short answer is YES!
The question often comes up whether Paycheck Protection Program (PPP) Loans or Economic Injury Disaster Loans (“EIDL”) from the U.S. Small Business Administration (SBA) are discharegeable in Bankruptcy. These loans emerged primarily during the Covid-19 pandemic. EIDLs under $25,000 were unsecured, while those above $25,000 required collateral from the business. Loans over $200,000 also required a personal guarantee, making the guarantor responsible for the debt.
Unfortunately, as these loans come due for payment in 2023 in light of the economic woes of recession, inflation, and ever increasing interest rates, many businesses remain unable to pay these loans. Indeed, $220M worth of covid-related EIDL funds had already been charged off as of SBA fiscal year-end 2022. That year-end of September 30th is before almost any borrower was required to make even one payment on the 30-year loan. The total outstanding principal balance net of charge-offs was $358B at the time. No doubt, massive defaults on PPP Loans and EIDL will only continue throughout 2023.
Yet the good news is that PPP and EIDL loans can be eliminated in bankruptcy, subject to the exceptions(see 11 USc 523) that apply to all other unsecured debts. That means these loans are treated like any other credit cards, personal loans, medical bills, etc. There is NO OTHER SPECIAL EXCEPTION to discharging PPP and EIDL loans in Bankruptcy. Those SBA loans will go away with all the other debts in virtually all cases. Indeed, in all my practice, I have never experienced any SBA loan surviving Bankruptcy.
Keep in mind, if the SBA loan is secured by business collateral, any lien created by the security interest remains after the bankruptcy case. Whether or not such collateral will be pursued is an entirely seperate issue to discuss with yout attorney. Another drawback to discharging SBA government loans is that the government may be able to withold future SBA loans if the balance on the SBA loan is not paid. The government maintains a secret list known as “CAIVRS,” which alerts federal lending agencies when an applicant has a federal lien, judgment, or loan in default or foreclosure, or a claim paid by a reporting agency.
Also be careful in how you file your Bankruptcy Case. Proper notice must be given to effectuate dischargeability so Notice should be sent to the Servicer, SBA, and US Attorney.
For futher information, book a free consultation today.
Written by Michael G. Doan– Owner of the Oceanside Bankruptcy Attorney Office, Michael also manages his business and is a highly skilled Bankruptcy Attorney with nearly 30 years of experience. Michael is currently concentrating his practice solely in Bankruptcy Law and is a Board Certified Specialist in Consumer Bankruptcy Law by the American Board of Certification.