MANY self-employed people have relied on the Paycheck Protection Program (PPP) and other federal pandemic loans to save their businesses from bankruptcy.

If you notice, many restaurants we go to before the pandemic closed permanently despite using PPP and other loans. Sure, PPP loans have gone a long way in keeping employees employed and allowing the company to continue paying rent for premises, but lockdown after lockdown has decimated many restaurants. What can the business owner do if revenues are cut by more than half? In fact, some businesses had zero income, ranging from $100,000 a month in gross receipts to next to nothing.

Will Uncle Sam come to collect the PPP loans?

Soon Uncle Sam will start collecting PPP loans. I have four clients who are already in this situation. Maybe they can ask for debt forgiveness for PPP loans first, because that’s a feature of these loans. There is certainly a 50/50 chance that all or part will be forgiven; but what about the rest, or anything that is unforgiven? Can bankruptcy wipe out or cancel PPP loans?

To answer this question, we refer to article 523 of the bankruptcy code. It provides for exceptions to discharge. While PPP loans are exempt from discharge by Section 523, they are not dischargeable. Nothing in Section 523 as it currently reads suggests that PPP loans are exempt from the discharge. Therefore, PPP loans are dischargeable in the event of bankruptcy.

$100K PPP loan obtained in 2020

The debtor is a restaurant owner who got a $100,000 PPP loan in 2020. He used the $100,000 to buy a brand new, fully equipped Mercedes Benz S500. Can he discharge his bankrupt PPP? No he can’t. Why not? Article 523 excludes from discharge loans obtained “fraudulently” 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 said 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 pay employees, which is why Uncle Sam granted him PPP loan.

But let’s say the debtor actually used the $100,000 PPP loan to pay its employees and pay the rent for the premises. With the $100,000, he was able to continue operating at a loss for two years. Now that we are in 2022, the pandemic is still there but there is no more containment. His restaurant offers take-out and allows some indoor dining, but sales are still very low and he has no money left to continue operating. He finally decides to close the door and stop working. But here comes Uncle Sam knocking on his door, asking him to pay back the $100,000. What should he do?

Like I said, he can apply for loan forgiveness for all or part of the $100,000 since he actually used the money to pay employees and rent and to run the business for two years. Anything that is not forgiven, he can use bankruptcy to discharge, as PPP loans are not exempt from discharge.

Seven of my high school friends died in 2021. They all went 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 a heart attack, two from cancer. I pray that they will all be in heaven with our Lord and enjoy eternity with their loved ones.

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Disclaimer: None of the above is considered legal advice to 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 over 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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