Economic Injury Disaster Loans (EIDL) Can Be Discharged Through Business Bankruptcy
As the COVID-19 pandemic surged through the United States, the federal government offered Small Business Administration Economic Injury and Disaster (SBA EIDL) loans to help shore up businesses that were struggling during this time. This loan helped many businesses get back on their feet.
However, not all businesses have been profitable, even after these loans were administered, and that’s where a bankruptcy lawyer can help. If you’ve been considering bankruptcy, EIDL loans could end up becoming a cause for concern, because payments are now likely due, and you as the business owner want to know if you have to pay them back.
Even if you haven’t received an EIDL loan, and your business is struggling in another way – for example, you’re struggling with making payments on your commercial lease – we’re here for you at Wink & Wink, the leading business bankruptcy attorneys near you. We are committed to helping people and businesses get the best outcomes for their financial difficulties. That’s why we’re considered experts in our practice area.
Our Bankruptcy Lawyers Weigh In: Can You Discharge Your SBA EIDL Loan?
The answer depends on whether your business files bankruptcy or whether you file personal bankruptcy. In general, businesses such as LLCs and corporations are not eligible for a bankruptcy discharge. While small businesses can liquidate in Chapter 7 bankruptcy or restructure debt in Subchapter 5 bankruptcy, they technically are not receiving a discharge. This is particularly relevant for EIDL loans for $200,000 or less because these debts tend to not be personally guaranteed. With loans of this size, you may well be able to restructure the debt into something affordable for your business in Subchapter 5 bankruptcy.
EIDL loans larger than $200,000 are typically personally guaranteed. This limits the effectiveness of restructuring the loan out of the debt at the business level because you remain personally liable for the portion of the debt which is not paid by the business. In such cases, filing both a business bankruptcy in Subchapter 5 and a personal bankruptcy in either Chapter 7 or 13 could make sense. In such cases, it can also make sense to dissolve the business, become a sole proprietor, and then file personal bankruptcy. Additionally, you may be able to get relief outside of bankruptcy by submitting an Offer in Compromise to the SBA directly. This process is not as straightforward as settling other debt (say, with a bank) but can be worth exploring.
When you work with Wink & Wink for business and personal bankruptcy, you will get a full view of your options on how to most cost-effectively deal with your SBA EIDL loan.
Many factors can come into play when evaluating your options, including how much other debt you have, as well as your income and assets (personal and business). A rundown of key information about small businesses and sole proprietorships, as well as personal guarantees, will help you understand the strategy our team of business bankruptcy attorneys near you will use to ensure the best outcome for you:
There are generally two types of small businesses: sole proprietorships and business entities.
For the former – the sole proprietorship – there is no difference, legally, between you and your business. A good example of this is a contractor who works alone, creates their own invoices, and does not file a separate tax return for a business.
It is important to understand, in the case of a sole proprietorship in the example above, that the contractor is legally responsible for all of the assets related to the business.
In the case of the latter situation – the business entity – you’ve paid formation fees and positioned your business as a legal entity that protects you personally from liability.
Business assets, in the case of an entity like an LLC or corporation, are owned by the business itself. While this means the owner is not liable for the business debt, many creditors get around this by requiring the owner to personally guarantee the business debt. This is what the SBA has done for EIDL loans in excess of $200,000.
Are You a Sole Proprietorship? Bankruptcy Lawyers Can Help You Discharge Your EIDL Loans
As explained above, in the case of a sole proprietorship, you and your business are legally the same. Therefore, you’re personally liable for your EIDL loan and all other debts, such as commercial lease payments you were unable to make.
Although EIDL loans of $200,000 are personally guaranteed, in the case of a sole proprietorship, any loan from the SBA must be personally guaranteed because of the way your business is structured.
While this means personal debt relief is required, it is in many ways more straightforward than if you have LLC or corporate debt that is personally guaranteed. This means that the smartest move for you is to file for personal bankruptcy under Chapter 7 or Chapter 13. You will be able to discharge your debt, including EIDL loans and back payments on your commercial lease, with the assistance of our high-quality business bankruptcy attorneys near you. Keep in mind that Wink & Wink’s business bankruptcy lawyers also can help you secure $60,000 of business-related equipment (“tools of the trade”), which you can keep to restart your business or find another way forward with your gear in hand.
Business Entity? How Bankruptcy Lawyers Can Help with Your EIDL Loans
In most cases, although the protection that comes with forming a corporation or LLC limits some of your personal liability, you generally personally guarantee business loans and commercial leases. This means you are still responsible for your debt.
The option that Wink & Wink often recommends is the dissolution of your corporation or LLC, then filing for personal bankruptcy. Then, your business will be out of debt, and the debts owed can be discharged through bankruptcy, including your commercial lease payments and EIDL loans. This can also enable you to protect your business assets as tools of the trade.
If you’d like to continue building a business in the profession you’ve committed so much to, you can restructure your business as a sole proprietorship. Wink & Wink can help facilitate this for you. Now, you can stay in business out of debt – and work to realize the profits that COVID-19 and other unfortunate circumstances took away. Our team of business bankruptcy lawyers near you are ready to help you restart on the right path forward.
In the case of both the sole proprietorship and the business entity that has been restructured, you will file for Chapter 7 or Chapter 13 bankruptcy. Visit our website to read this comprehensive guide which clearly explains both forms of bankruptcy you may qualify for, as well as the differences between them.
Partner with Wink and Wink, the Premier Denver Bankruptcy Lawyers
Our team knows the Colorado legal system well, and we will work to ensure that the business bankruptcy strategy we develop alongside you will provide the most benefit, and help you thrive in the future.
The effects of COVID-19 on small businesses have been disastrous. As we’ve said, even in “normal” times, small businesses can take an unexpected hit. At Wink & Wink, we’re rooting for our small businesses in Denver, as we believe they are the lifeblood of our regional economy. We look forward to helping you and your business see success in the future.
Call us at (303) 410-1720, or send us a message online. Our bankruptcy attorneys near you offer free consultations where we can further explain and clarify the options available to you, and serve you with the expertise, understanding, and strategy we’re known for.