Discharging COVID-19 [EIDL] Business Loans in Bankruptcy: Exploring Options and Considerations

Introduction: Amidst the challenging circumstances brought by the Covid-19 pandemic, numerous businesses sought financial support through low-interest loans provided by the U.S. Small Business Administration (SBA). These loans, known as Economic Injury Disaster Loans (EIDLs), served as a lifeline for struggling businesses. However, as the repayment period approaches in 2023, some businesses may face difficulties in meeting their loan obligations, even with favorable interest rates. In this article, we will delve into the possibility of discharging EIDL SBA loans in bankruptcy and examine the available options for both corporations and individuals in California.

Discharging EIDL SBA Loans in Bankruptcy: Yes, it is indeed possible to eliminate SBA EIDL loans through bankruptcy, with a few exceptions. In bankruptcy proceedings, SBA loans are treated similarly to other types of debts and can be subject to discharge. However, if it can be proven that the loan was obtained without the intention of repayment, constituting fraud, an exception to discharge may be applied. Most borrowers obtained these loans with genuine intentions to save their businesses and repay the debt. Unfortunately, due to ongoing economic challenges and inflationary pressures, many businesses have been unable to survive, making it plausible to discharge these debts in bankruptcy.

It is important to note that EIDL loans were specifically intended for business use. If the SBA can demonstrate that the loan was acquired but not used for legitimate business purposes, it could be grounds for objecting to the discharge of the debt in bankruptcy. The extent to which the SBA will pursue such objections remains uncertain.

Bankruptcy Options for SBA Loans in California: Distinctions must be made between corporate and individual bankruptcy options when it comes to discharging SBA loans in California. Understanding these differences is crucial to charting the most suitable path forward.

Corporate Bankruptcy Options for SBA EIDL Loans: Corporations, including LLCs, S-Corporations, and C-Corporations, have the option to seek debt discharge through a Chapter 11 reorganization case. The amount to be repaid in a Chapter 11 bankruptcy depends on several factors, such as cash flow, asset value, and projected income. In a standard Chapter 11 case, the repayment plan requires approval from a sufficient number of creditors. However, filing under the new Subchapter V of Chapter 11 may not necessitate creditor approval as long as other criteria are met.

Individual Bankruptcy Options for SBA EIDL Loans: In cases where personal guarantees are attached to the loans or when there is no separate corporate entity (such as a sole proprietorship), exploring personal bankruptcy options under Chapter 7, Chapter 13, or Chapter 11 (for high debt amounts) becomes necessary.

Handling SBA Loans Secured by Business Collateral: If an SBA loan is secured by business collateral, any existing liens created by a security interest will remain valid even after a bankruptcy case. These liens will continue to apply to assets owned by the business at the time of filing. In a corporate bankruptcy scenario, the value of the collateral must be paid out over time through the proposed repayment plan. For instance, if a corporation secured a $500,000 SBA loan using business assets valued at $200,000 during the bankruptcy filing, the repayment plan must allocate at least $200,000 for approval.

Considerations: CAIVRS and Future Service Limitations. It is worth noting that if the balance on SBA loans is not repaid, the government can withhold certain future services, such as obtaining VA loans or future SBA loans. To facilitate this, the government maintains a confidential database called “CAIVRS” (Credit Alert Verification Reporting System), which alerts federal lending agencies about delinquent federal debtors and enables them to assess risks associated with loan programs. Although this practice may seem contradictory to the discharge injunction, no court cases have yet deemed it a violation.

Consult an Experienced Bankruptcy Lawyer in California: Navigating the complexities of bankruptcy calls for the expertise of a knowledgeable bankruptcy lawyer. If you encounter challenges with SBA loans or any other debt-related issues in California, it is essential to seek professional advice. Our office offers comprehensive consultations to assess your eligibility and explore the optimal bankruptcy chapter for your specific circumstances. Bankruptcy involves various factors, and a thorough analysis of your business or personal situation is crucial to determine the best solution.

Conclusion: As businesses continue to grapple with the financial repercussions of the Covid-19 pandemic, the question of discharging SBA EIDL loans in bankruptcy arises. While it is indeed possible to discharge these loans, certain exceptions may apply, including fraudulent intent or improper loan usage. The available bankruptcy options differ for corporations and individuals, and personal guarantees on loans can complicate the process. Additionally, the presence of collateral may affect the repayment requirements. Understanding potential drawbacks, such as limitations on future services, is crucial. Ultimately, consulting an experienced bankruptcy lawyer will provide the necessary guidance to navigate the complexities and find the best resolution for your specific circumstances.