During the Covid-19 pandemic, many businesses took out low interest loans from the U.S. Small Business Administration (SBA).
These Economic Injury Disaster Loans (“EIDLs”) were unsecured for amounts under $25,000. Those above $25,000 took a security interest in collateral of the business.
Loans above $200,000.00 also required a personal guarantee. This means that it is not only your corporation/LLC/LLP that owes the money, but also the guarantor.
As these loans start coming due for payment in 2023, many will be unable to pay them, even at the low interest rate.
Can EIDL SBA Loans Be Discharged in Bankruptcy?
In short, the answer is “yes”, you can eliminate SBA EIDL loans in bankruptcy, with some exceptions.
SBA loans are treated no differently in bankruptcy than other types of debts. Thus, the same criteria for discharge applies to them as would a credit card or medical debt.
In general, if a loan is taken out without the intent to repay it, that is considered fraud and, if proven, would be an exception to discharge.
Of course, most people took out these loans with the intention of saving their business and fully intended to repay it. Given the continued economic downturn and hyperinflation, many businesses did not, or will not, survive. There should be no problem discharging such debts in a bankruptcy.
However, EIDL loans were specifically earmarked to be used for the business. So if the SBA can prove that you took the loan out, and did not use it for proper business-related purposes, that could be a basis to object to the discharge of the debt in bankruptcy.
It remains to be seen to what extent the SBA will pursue such objections.
Corporate Versus Individual Bankruptcy Options For SBA Loans in California
It is important to understand that if there is a personal guarantee on a loan, discharging the SBA loan in a corporate bankruptcy case will not accomplish anything. The guarantor (usually an officer or owner of the business) will still owe the debt. In those cases, a personal bankruptcy filing should be explored.
Corporate Bankruptcy Options for SBA EIDL Loans
Corporations, including LLCs, S-Corporations and C-Corporations, can only get a discharge of debts in a Chapter 11 reorganization case.
How much would need to be repaid in a Chapter 11 depends on various factors, including cash flow, value of assets, and projected income. In a standard Chapter 11, it requires a sufficient number of votes from creditors to approve the repayment Plan. However, if filed under the new Subchapter V of Chapter 11, creditor approval is not required as long as other criteria are met.
Personal Individual Bankruptcy Options for SBA EIDL Loans
If there are personal guarantees on the loans, or if there is no corporation (i.e. the business is just a DBA of an individual), then you must look into personal bankruptcy options under Chapter 7, Chapter 13, or Chapter 11 if the amount of debt is very high.
Since the business is also liable for the debt, your corporation may also need to pursue its own bankruptcy depending on whether or not it is going to remain in business.
What if the SBA Loan is Secured By Business Collateral?
Any lien created by a security interest in collateral will remain after a bankruptcy case. The lien remains against assets in existence on the date the bankruptcy case is filed. In a corporate setting, this means that the value of that collateral must be paid out over time through whatever plan payment is proposed. For example, if your corporation took out a $500,000 SBA loan secured by the assets of the business, and those assets are worth $200,000 on the bankruptcy filing date, then any repayment plan must pay out at least $200,000 in order to be approved.
CAIVRS: One Drawback For Discharging SBA Loans
The one fly in the ointment for discharging SBA government loans is that the government can withhold future services, such as getting VA loans, or future SBA loans, if you do not pay the balance on your SBA loans.
The government keeps a secret list known as “CAIVRS”. From the HUD website: “CAIVRS is a Federal government database of delinquent Federal debtors that allows federal agencies to reduce the risk to federal loan and loan guarantee programs. CAIVRS alerts participating Federal lending agencies when an applicant for credit benefits, or for a position of trust in support of the administration of a Federal credit program, has a Federal lien, judgment or a Federal loan that is currently in default or foreclosure, or has had a claim paid by a reporting agency.”
This sounds to me a lot like a violation of the discharge injunction, but so far I have not seen any court cases finding this to be a violation.
Get Advice From Experienced Bankruptcy Lawyer in California
As with any debt related decision in California, a consultation with a bankruptcy lawyer is necessary. Our office provides comprehensive consultations to go over eligibility and options for corporations and individuals and to determine which, if any, chapter of bankruptcy is optimal for your situation. Bankruptcy has a lot of moving parts and a business’ or individual’s specific facts must be analyzed to achieve the best solution. Schedule a consultation today to learn your options.