SBA Loan Forgiveness and Bankruptcy | PPP Loan Discharge
Many small businesses in the Tampa Bay area applied for and have received SBA loans, including funding that has come from the Paycheck Protection Program (PPP) and the Economic Injury Disaster Loan (EIDL) program. In theory, if these businesses meet the requirements outlined by the U.S. Small Business Administration (SBA), they can be eligible to have those loans forgiven after a period of time. However, as a CNBC report underscores, even with federal funding, many businesses that received PPP and other SBA loans will not be able to make it through the coronavirus pandemic. To be sure, many retail establishments, as well as restaurants and bars, ultimately will end up having to close their doors due to the financial toll of the COVID-19 emergency. At the very least, a variety of small businesses that received coronavirus-related loans will need to file for Chapter 11 bankruptcy in order to remain open.
If you have a small business in the Tampa Bay area, it is critical to understand how loan forgiveness works for these SBA loans, and to learn more about whether these loans can be discharged in a business bankruptcy if necessary.
How PPP Loan Forgiveness Works
The Paycheck Protection Program has been closed since August 8, 2020, but businesses in Tampa, FL and across the country received these SBA loans. According to the SBA, these loans are eligible to be fully forgiven “if the funds are used for payroll costs, interest on mortgages, rent, and utilities.” In order for the loan to be forgiven, most businesses will need to have used at least 60 percent of the amount forgiven for payroll. Businesses that received these loans have deferred payments for six months from the date of the loan, and the loans have a maturity of either two years or five years (depending upon whether they were issued prior to or after June 5, 2020).
The amount of forgiveness can be reduced if the business needs to reduce the number of its employees or needs to reduce wages. Even if a business does not meet the requirements for forgiveness, these loans only have an interest rate of 1 percent.
Are SBA Loans Dischargeable in Bankruptcy?
According to the CNBC report, currently about 12 percent of the businesses that received loans through the Paycheck Protection Program or the Economic Injury Disaster Loan program are “facing potential bankruptcy,” and about 25 percent are considering closing despite getting funding. About 14 percent of the businesses that received PPP funds report that they expect they will need to have layoffs, limiting their ability for loan forgiveness.
What happens if these businesses do close and if they file for bankruptcy? Generally speaking, SBA loans can be included in a business bankruptcy case. And since the PPP, and many of the EIDL loans made through the SBA ,do not require any collateral or personal guarantees, business owners cannot be held personally accountable for the debt. Moreover, EIDL loans of more than $25,000 do require collateral, and any SBA disaster loans in excess of $200,000 require a personal guarantee. In such cases, business bankruptcy may be the only logical option to avoid business owners facing personal consequences for a default if the loans are not forgiven.
Yet, as the report underscores, any errors in the loans could “put the ability to have a loan discharged at risk.” As that report highlights, many of these loan applications were made quite hastily, and errors may have been made in the applications. If the business ultimately files for bankruptcy and includes the SBA loan, the application may be examined closer and there could be problems for the business owner. In addition, for EIDL loans of more than $200,000, the personal guarantee could require the small business owner to file for personal bankruptcy in addition to the business bankruptcy in order to have the obligation discharged.
Contact a Tampa Bankruptcy Lawyer for Assistance
If you have a small business in the Tampa Bay area and you were the recipient of an SBA loan, you may have a variety of questions surrounding loan forgiveness and bankruptcy. If your business is struggling, and you are considering either Chapter 7 or Chapter 11 bankruptcy, it is important to seek advice from a Tampa bankruptcy lawyer about your options. An attorney at our firm can clarify whether you can be eligible to have your loan forgiven or, if necessary, whether you can have the debt discharged through a Chapter 7 or Chapter 11 business bankruptcy filing. Contact Samantha L. Dammer today to discuss your situation.