Many small businesses relied on the Paycheck Protection Program (PPP), which was originally established by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) in March of 2020. PPP loans provided businesses with a way to continue operating and keep staff members on the payroll as a combination of government shutdowns, consumer caution, and decreased consumer spending threatened the survival of businesses across the nation.
The loans were created to be cost-effective; they had low interest rates, no fees, and, best of all, were forgiven if the company met certain criteria. The key requirement involved keeping employees on the payroll.
Unfortunately, the pandemic continued. Numerous companies that took out PPP loans and made an honest effort to keep their staff members eventually had to downsize or even close their doors. Many small business owners are currently unsure of their eligibility for loan forgiveness or are aware that they will be required to repay at least some of their loans. But given the sluggish and uncertain economic recovery, that might not be possible.
Seeking PPP Loan Forgiveness
PPP loans aren’t forgiven automatically. To pursue forgiveness of your PPP loan, an application is required. If you’re a small business with no employees, you can use this simplified application.
Requirements for PPP loan forgiveness include:
Your loan forgiveness application must contain accurate information, and you must be able to prove it. There will be sporadic “spot checks” to make sure PPP proceeds are being used as intended, even though loans under $2 million won’t automatically be audited.
Under some circumstances, businesses that don’t qualify for full loan forgiveness may be eligible for partial forgiveness. For example, a business that didn’t spend 60% of its loan proceeds on payroll cost may be eligible for partial forgiveness, as long as at least 60% of the amount forgiven went to payroll costs.
What if I’m Not Eligible for Forgiveness?
Bankruptcy may be an option for those with unmanageable PPP loans, depending on the nature of your business and whether you intend to carry on with operations.
PPP loans are generally dischargeable in a Chapter 7 case. But the specifics of how this works out will vary depending on things like how the business is structured. That entails declaring bankruptcy as a sole proprietor, with the unsecured PPP loan being treated similarly to any other unsecured debt. Before making any decisions in this situation, it is advisable to speak with a local bankruptcy attorney because personal income and assets will be taken into consideration.
The business itself may file Chapter 7 bankruptcy if it is a separate entity, such as an S-Corp. Due to the fact that a corporate Chapter 7 dissolves the company, this won’t be possible for everyone. However, Chapter 7 can be a tidy way to wrap up operations and make sure that debts, including PPP loans, are discharged if the business is closing its doors. Due to the lack of personal guarantees required for PPP loans, the business owner or owners are typically not liable for repayment in the event that the company is dissolved or files for bankruptcy.
However, Economic Injury Disaster Loans (EIDL) may be treated differently. That’s because some EIDL loans require collateral. And, large EIDL loans require a personal guarantee. If the loan is secured, you must give up the assets used to secure the debt in order for it to be discharged in bankruptcy. Furthermore, if a loan to a business entity is personally guaranteed, either declaring bankruptcy for the business or dissolving the business won’t eliminate the debt.
Other Bankruptcy Options for PPP Loans
If the business is a sole proprietorship, the owner of the business is its only legal representative. Consequently, the owner might be able to include a PPP loan and other business debts in a Chapter 13 personal repayment plan. A larger, more established company, on the other hand, might be able to use a Chapter 11 reorganization to manage debts if it has extensive and complicated debts and assets.
For those unable to repay PPP loans that have not been forgiven, bankruptcy may provide a solution. In some cases, it may also help with EIDL loans. Although the criteria are less strict than they were when the program was first established, the borrower should still investigate the possibility of forgiveness.
If forgiving the debt is not an option, the appropriate bankruptcy filing and the scope of the solution will depend on a number of factors, such as:
Talk to a Los Angeles Bankruptcy Attorney
Your next course of action should be to consult with a knowledgeable Los Angeles bankruptcy attorney if you are unable to make payments because you are not eligible for PPP loan forgiveness or if those payments are causing the rest of your budget to fall apart. We at Borowitz & Clark provide free consultations to assist you in determining the best course of action. Call 877-439-9717, complete the contact form on this page, or click the chat button in the bottom right corner of the screen to schedule yours right away.
FAQ
What happens if PPP loan isnt forgiven?
In the event that your loan is not entirely forgiven, you will have five years to repay any remaining balance at 1% interest. However, the loan payments will be postponed for six months, but interest will accrue immediately. Moreover, PPP loans have no fees and no prepayment penalties.
What happens if you dont payback a PPP loan?
There are no collateral requirements or personal guarantees from the business or business owner for any PPP and EIDL loans up to $25,000. Therefore, if a borrower defaults on a loan and is unable to pay it back, the lender typically would not be able to seize either personal or business assets.
Are PPP loans required to be paid back?
Borrowers have until the loan’s maturity date to submit a request for forgiveness. PPP loan payments are no longer deferred and borrowers must start making loan payments to their PPP lender if they do not apply for forgiveness within 10 months of the end of the covered period.
What happens if I can’t pay back my SBA loan?
Your Loan Will Default If you stop making loan payments, your loan will become delinquent. The terms of your SBA loan contract will determine how long you have to make payments before defaulting. Although generally speaking, you’ll have 90 to 120 days to start making payments