What Happens When a Business Got SBA Loans and Later Went through Bankruptcy?
In Spring of 2020 and later, many businesses throughout the Tampa Bay area received SBA loans as a form of COVID-19 relief. Those loans included loans through the Economic Injury Disaster Loans (EIDL) program and Paycheck Protection Program (PPP) loans. For some of those businesses, the loans were sufficient to cover the significant losses incurred by COVID-19 closures and related losses. However, for many businesses, EIDL and PPP loans were not enough to keep the businesses afloat. In some cases, those businesses have already filed for bankruptcy. For other businesses, bankruptcy may be on the horizon. What happens when a business received SBA loans tied to coronavirus relief and later needs to file for business bankruptcy?
A “second draw” PPP loan became available which some businesses used as well. Let’s go through some of the key things that you should know. First of all, this information is not deemed as legal advice to any particular situation. One of the complications that we are seeing lately is businesses who applied for, and used the proceeds, of the PPP loans while they are financially struggling. Assuming a truthful online loan application was submitted to the SBA lender, all is not lost.
Many PPP Loans Can Be Discharged in Bankruptcy
If a business in the Tampa Bay area, such as a retail store or a restaurant, needs to file for bankruptcy, PPP loans generally can be discharged. A majority of PPP loans were for less than $25,000, and the loan program was created through the CARES Act back in March. PPP loans came with an interest rate of only 1 percent, and any loans that were issued prior to June 5 have a maturity of two years. PPP loans issued after June 5 (but before August 8, when the PPP program closed) have a maturity of five years. As such, the PPP loan terms were generally favorable to businesses and were designed to ensure that businesses receiving those loans would be able to repay them if they were not eligible for forgiveness.
Nearly 70 percent of all PPP loans were for $50,000 or under, and more than 80 percent of all PPP loans were for less than $100,000. For many businesses that received these loans, the money was not enough to allow the business to remain open. As such, a number of those businesses already have filed (or are currently considering filing) for bankruptcy. These PPP loans can be discharged in a Chapter 7 bankruptcy, and they can be included in a Chapter 11 bankruptcy plan and ultimately eligible for discharge.
Complications of EIDL Program Business Loans in Bankruptcy
PPP loans did not require any collateral or personal guarantees. As such, individual business owners cannot be held responsible for the balances of PPP loans in the event of a business bankruptcy. However, the situation is a little bit different for business loans through the EIDL program.
If a business received a loan through the EIDL program of up to $25,000, then the loan did not require collateral or a personal guarantee from the business or from one or more of the business owners. However, EIDL loans for more than $25,000 required collateral or a personal guarantee from a business owner. As such, a business bankruptcy could result in the loss of the collateral, or the individual business owner becoming personally liable for the debt even if other business debt has been discharged in a Chapter 7 bankruptcy.
Defaulting on Loans Prior to Bankruptcy
If you own a Florida business and you are considering bankruptcy to discharge a PPP loan or a loan through the EIDL program, in addition to the issues we have discussed above, it is critical to think about the risks of default prior to filing for bankruptcy. Depending upon the type of loan and loan amount, defaulting on the loan (but not filing for bankruptcy) could have significant ramifications for your business. More specifically, the federal government could attempt to seize business assets and business income tax refunds, among other actions, to collect on the debt. The business owner is well advised to have a professional control the information flow to the SBA and/or its lender, whether it be NewTek, First Citrus Bank, Pilot Bank, or another banking institution.
Contact a Tampa Business Bankruptcy Lawyer
Do you have questions about bankruptcy after receiving one of the recent SBA loans? Our experienced Tampa business bankruptcy lawyers can help you. Contact Tampa Law Advocates, P.A. to learn more about how we can assist your business. You can reach us at 813-288-0303 or Contact Us here.