What Happens If a Small Business Cannot Repay a PPP Loan?

Financial Relief Law Center

How Small Businesses Still Reeling from COVID-19 Can Expect to Deal with PPP Loans

COVID-19 has wreaked havoc on the American economy, forcing many business sectors to close entirely while reducing others to limited operation. These restrictions, combined with an unprecedented unemployment rate and limited consumer spending, have left many businesses contemplating filing for bankruptcy or on the brink of outright failure. Indeed, one survey discovered nearly 25% of small businesses are considering closing permanently as a result of the economic downturn, with another 12% facing likelihood of bankruptcy.

These grim numbers persist despite the United States government’s attempts to limit the economic impact of the pandemic, primarily through EIDL (Economic Injury Disaster Loans) and PPP (Paycheck Protection Plan) loans offered through the CARES Act legislation passed in March 2020. Millions of small businesses procured hundreds of billions of dollars in loans and grants yet still face extinction.

The business owners granted PPP loans are now concerned about the consequences of shutting down or filing for bankruptcy. Below, we break down some of the basics on how outstanding PPP loans can affect the shuttering of your business.

Defaulting on Your PPP Loan

If your business is struggling to the extent where you may not even be able to pay back the entirety of your PPP or EIDL loan, the consequences vary with the size of the loan. If your loan was in the amount of $25,000 or less, you did not have to provide any collateral or personal guarantees. In other words, your business or personal assets will not be seized in most cases.

That does not mean defaulting on a PPP or EIDL loan of $25,000 or less is consequence-free. Defaulting on your PPP loan will likely prompt the federal government to report your business to credit scoring companies, meaning your personal and business credit is likely to take a substantial hit. This can make obtaining new loans in the future significantly more challenging, and you are likely to incur higher interest rates on future debts.

Because in this case the federal government is your “lender,” they also have a unique means of seizing any of you or your business’s federally held assets. This is a somewhat narrow category that includes your business’s income tax refunds.

EIDL loans greater than $25,000 and up to $200,000 could face stiffer consequences in default. Because these debts are typically collateralized, the federal government has the right to seize assets through the Small Business Administration to help make good on outstanding debts. That means any remaining inventory or company machinery, for example, could be seized if your company goes into default. However, your personal assets – your home, belongings, non-company vehicle – are generally safe.

Businesses with EIDL loans greater than $200,000 are in an even more precarious situation. Loans of this size require personal guarantees, meaning that default can trigger the federal government seizing your personal assets in addition to any remaining business assets. In other words, everything you own – both personally and through your business – is up for grabs. This is a worst-case scenario for many, as it can leave you without a home, prompting some businesses to explore filing for bankruptcy.

How Filing for Bankruptcy Affects Your PPP Loan

Businesses hoping to avoid consequences of loan default may instead consider filing for bankruptcy, including the protections filing offers. Many small businesses likely qualify for Chapter 11 bankruptcy under the “Small Business Reorganization Act,” which offers the typical protections while giving companies an expedient, uncomplicated means of reorganizing.

However, PPP loans cannot be discharged in all Chapter 11 bankruptcy scenarios. Applications and regulations governing PPP loans were hastily developed in an effort to get emergency funds to businesses as quickly as possible, meaning banks may have differing policies on whether the loans can be discharged and, if so, under what circumstances.

For example, banks could object to a discharging effort if they discover any errors on your business’s PPP application. It may be possible to work out this sort of objection, but it will likely be subject to costly and lengthy litigation. Those with EIDL loans should avoid this problem, as those loans are procured directly from the Small Business Administration.

A separate problem emerges, however, for EIDL loans in excess of $200,000 due to the personal guarantee. In this scenario, business owners would likely need to file for personal bankruptcy in conjunction with their business filing for bankruptcy to fully protect their assets. This is also likely the only way to see the debts discharged.

It is possible the federal government extends leniency toward borrowers and forgives loans of failing businesses that otherwise complied with the emergency program’s guidelines. That sort of clemency is by no means guaranteed, and the specific consequences of filing for bankruptcy will likely shift with the circumstances of the timing of your business’s filing.

Get Your Business an Experienced Advocate

These turbulent times can be frightening for any business struggling to make ends meet. If you were the beneficiary of a PPP loan but are still in a scenario where filing for bankruptcy or default may be necessary, we at Financial Relief Law Center, APC can help. Our bankruptcy and debt relief attorneys have substantial experience in helping businesses navigate financial crises, and we are committed to giving our clients the compassionate, individualized service their business deserves.

Our legal team is prepared to handle every challenge the COVID-19 pandemic throws at your business. Call (F:P:Sub:Phone} or contact us online to request your free consultation today.

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