SBA Loans and Bankruptcy: What You Need to Know as a Consumer and Business Owner

If you are a consumer who applied for an SBA disaster loan in order to support your business during the coronavirus pandemic, there are a couple of ways in which Paycheck Protection Program (PPP) loans and the Economic Injury Disaster Loan (EIDL) program ultimately could impact consumers when it comes to personal bankruptcy. We want to tell you more about these loans and how they could come to have an impact on small business owners who are considering consumer bankruptcy.

To explain the potential links between these SBA loans and consumer bankruptcy, we will tell you more about the loans themselves first. Then we will discuss some of the ways in which these loans could impact a consumer bankruptcy case.

What Small Business Owners Should Know About SBA Loans

According to a recent CNBC article, a large number of the U.S. Small Business Administration (SBA) disaster loans, which include PPP and EIDL loans, were paid out to small businesses. Many of these businesses are sole proprietorships in which a single business owner runs a business and has a particular number of employees. Other kinds of small businesses, such as partnerships and LLCs, also received SBA loans.

In general, one of the guiding ideas behind these loans was that they could be forgiven if the business owner met certain requirements. For example, with a PPP loan, the majority of the loan (60% or more) needed to be used for payroll, while the remaining amount could be used to pay a business’s mortgage, rent, or utilities. In addition to those terms, recipients of PPP loans who want to seek forgiveness will need to be able to show that they did not reduce their total number of employees after receiving the PPP loan, and that they did not reduce salaries or wages.

Yet what happens if one of those businesses needs to go out of business and does not qualify for forgiveness? What happens to a business that does not qualify for forgiveness, and the business owner is personally responsible for the business debt?

Sole Proprietors and Bankruptcy After an SBA Loan

Sole proprietors are always personally responsible for business debt since the sole proprietorship and the business owner are not distinct entities as with other types of business structures. As such, if a sole proprietorship cannot remain in business despite receiving a loan, and the loan is not eligible for forgiveness, the sole proprietor may need to file for bankruptcy. The good news, according to the CNBC article, is that most of the disaster loans received by businesses will be eligible for discharge in a bankruptcy case.

When Other Business Owners are Personally Liable

Even if a business other than a sole proprietorship received a loan, the owner could be personally liable for the debt if it is not eligible for forgiveness. Loans of $25,000 or more required collateral, and loans of $200,000 or more required personal guarantees. If those businesses cannot have the loans forgiven, the business owner could be in a position of needing to file for consumer bankruptcy to manage the debt from the business for which she or he is personally liable.

Contact a Bankruptcy Lawyer in Oak Park

If you have questions about loans and personal bankruptcy, one of our experienced Oak Park consumer bankruptcy attorneys can help. Contact the Emerson Law Firm for more information.


See Related Blog Posts:
Sole Proprietorships and Bankruptcy: What are the Options?
Top Reasons to Hire a Lawyer for Your Bankruptcy Case

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