Be Careful With PPP and EIDL Loans When Thinking About Future Bankruptcy Options

Be careful with PPP / EIDL Loans when considering possible bankruptcy

Business owners that were heavily affected by the restrictions put in place after the onset of the Covid-19 pandemic are now facing financial difficulty that’s putting not only their business but also their personal finances at risk.

To save their business, a lot of owners are looking into the PPP and EIDL loans, which are immediate funding solutions given by the Small Business Authority to help businesses pay for their company expenses.

But because the whole Covid situation is not yet getting better, the financial strain on businesses is still very much present. And those who’ve used up the funds they were granted in a PPP or EIDL loan are thinking that they have to resort to bankruptcy.

Although a bankruptcy filing is permitted shortly after receiving a PPP or EIDL loan, business owners need to be very careful in making decisions about filing for bankruptcy after obtaining a loan from the SBA. Filing for bankruptcy after being granted a PPP or EIDL loan can look suspicious to the SBA and the bankruptcy courts.

So a business owner must make sure that these requirements are met before making a decision about bankruptcy.

1.  Make sure that the PPP or EIDL funds were used for a legitimate business purpose.

If the SBA has granted a PPP or EIDL loan for a business owner and the latter files for bankruptcy later, this can mislead the SBA into thinking that the money from the loan was not used for a business purpose.

During the review of a bankruptcy petition, the SBA will look deep into where the funds from the PPP or EIDL were used, so a business owner has to make sure that they were used for the business and other purposes permitted by the regulations.

2.  Make sure that the information in the bankruptcy petition is accurate.

Because it is in the best interest of the SBA to ensure that the loan they extended would be paid back, they may try to contest a bankruptcy petition filed after the business owner obtained a PPP or EIDL loan.

Hence, the debtor must make sure to submit correct and accurate information that won’t mislead the SBA or the courts. Otherwise, they can risk personal liability down the road. When the court makes their thorough review, fraud or misrepresentation in the loan application can easily be spotted. So it’s highly important to ensure that everything declared is correct and accurate.

Should You File for Bankruptcy After Obtaining a PPP or EIDL Loan?

As long as the business owner ensures that everything from applying for the PPP or EIDL loan, spending it, all the way to filing for bankruptcy is done properly, there should be no problem. If financial situations have not improved, a business owner is free to file a bankruptcy petition. 

It’s worth noting that in a Chapter 11 reorganization, there are provisions that extend debtors the ability to take out additional funds in a PPP or EIDL loan. However, the SBA has not yet implemented regulations for these provisions to come into effect. But it may be possible down the road.

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