A survey found that almost 25% of small businesses in the U.S. are considering to permanently close their operations and 12% are facing possible bankruptcy. Some of them are wondering what will happen to their Paycheck Protection Program loans (PPP) or Economic injury Disaster Loans after their permanent closure.
According to some experts, loans less than $25,000 offer relatively favorable terms for borrowers because these loans can be generally discharged in the event of bankruptcy. For PPP borrowers, loans can be forgiven if they comply with program guidelines.
But borrowers should not take loan default lightly. This is because the creditor, which is the federal government in this case, can report the business to credit scoring companies. Also, the federal government can seize federally held assets such as income tax refunds and any other amounts due from the government.
For EIDL loans that exceed $25,000, the situation is different because these loans are collateralized. And as such, the Small Business Administration (SBA) could seize a company’s remaining assets such as warehouse inventory, receivables and equipment to cover a borrower’s outstanding debt. The situation is worse for EIDL loans that exceed $200,000 because they require a personal guarantee. This means the lender can seize the borrower’s personal assets such as cars, investment, personal tax refunds and bank account to cover the outstanding debt.
To avoid loan default, Dallas-based attorney Nick Oberheiden suggests seeking bankruptcy protection. He recommends filing Chapter 11 bankruptcy under the Small Business Reorganization Act because it provides small businesses a really fast and unbureaucratic reorganization while they are in bankruptcy protection.