[COLUMN] Are PPP and other federal pandemic loans dischargeable in bankruptcy? 

MANY self-employed individuals have relied on the Paycheck Protection Program (PPP) and other federal pandemic loans to rescue their businesses from going under.

If you notice, many restaurants that we go to pre-pandemic have shuttered up permanently despite using up PPP and other loans. Sure the PPP loans helped a lot to keep employees employed, and for the business to continue paying rent for the premises, but lockdown after lockdown has decimated a lot of restaurants. What can the business owner do if revenues are cut by more than half? In fact, some businesses had zero revenue, from $100,000 a month of gross receipts down to almost nothing.

Will Uncle Sam come to collect PPP loans?

Soon enough, Uncle Sam will start collecting on the PPP loans. I have four clients who are already in this situation. Maybe they can ask for debt forgiveness first for the PPP loans since that’s a feature of these loans. There’s certainly a 50/50 chance that all or a portion may get forgiven; but what about the rest of it, or all of it that is not forgiven? Can bankruptcy wipe out or discharge the PPP loans?

To answer this question, we refer to Section 523 of the bankruptcy code. It provides for exceptions to discharge. If PPP loans are excepted from discharge by Section 523, then it’s not dischargeable. Nothing in Section 523 as it is currently worded suggests that PPP loans are excepted from discharge. Therefore, PPP loans are dischargeable in bankruptcy.

$100K PPP loan obtained in 2020

The debtor owns a restaurant that obtained a $100,000 PPP loan in 2020. He used the $100,000 to buy a brand new Mercedes Benz S500, fully loaded. Can he discharge his PPP in bankruptcy? No, he cannot. Why not? Section 523 excepts from discharge loans that were “fraudulently” obtained by the debtor. Obviously, if the debtor had indicated in the PPP loan application that he was going to use the PPP loan to buy an expensive car, Uncle Sam would not have given him the loan. But his PPP loan application stated that he was going to use the $100,000 to continue running his restaurant, specifically the funds were going to be used to pay rent and to pay employees, that’s why Uncle Sam gave him the PPP loan.

But let’s say, the debtor actually used the $100,000 PPP loan to pay his employees and to pay rent for the premises. With the $100,000, he was able to continue operating at a loss for two years. Now that it’s 2022, the pandemic is still around but there’s no more lockdown. His restaurant does take-outs and allows some indoor dining, but sales are still way low and he doesn’t have any more money to continue operating. He decides finally to shut the door and stop operating. But here comes Uncle Sam knocking on his door, asking him to pay back the $100,000. What should he do?

As I said, he can ask for loan forgiveness for all or part of the $100,000 since he actually used the money to pay employees and rent and to keep the business going for two years. Whatever is not forgiven, he can use bankruptcy to discharge because PPP loans are not excepted from discharge.

Seven of my high school classmates passed away in 2021. They have all gone to meet their creator. I would like to mention their names here: Ricardo A, Victor Y, Jerry L, George C, Jimmy G, Edward N and Ricardo D. Three died of COVID, one slipped and fell in the bathroom, one of heart attack, two of cancer. I pray all of them are in heaven with our Lord enjoying eternity with their loved ones.

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Disclaimer: None of the foregoing is considered legal advice for anyone. There is absolutely no attorney-client relationship established by reading this article.

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Lawrence Bautista Yang specializes in Bankruptcy, Business, Real Estate and Civil Litigation and has successfully represented more than five thousand clients in California. Please call Angie, Barbara or Jess at (626) 284-1142 for an appointment at 20274 Carrey Road, Walnut, CA 91789 or 1000 S. Fremont Ave., Mailstop 58, Building A-10 South Suite 10042, Alhambra, CA 91803.

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