Can COVID Relief Funds Be Included in a Debt Settlement?
Many people received COVID relief funds in 2020 and 2021 to help replace income they had lost. The name of the payment is what decides whether any of it can go into a debt settlement.
What those funds were called
The payments sent to households were called stimulus checks. The IRS name for a stimulus check is an Economic Impact Payment. An Economic Impact Payment was an advance on a tax credit. In ordinary cases, that kind of payment does not leave a balance to repay.
With no balance to repay, a stimulus check has no amount to include in a debt settlement.
Some of the relief was a loan or a benefit that a person may still owe. The balances people are most often asked to repay are:
- An Economic Injury Disaster Loan, usually called an EIDL, from the Small Business Administration. An EIDL was meant to be repaid, commonly over 30 years.
- A Paycheck Protection Program loan, or PPP. A PPP loan could be forgiven when the money was used for payroll and other allowed expenses. Any amount that was not forgiven is still owed.
- Pandemic unemployment benefits that a state counted as an overpayment. That balance is owed to the state.
Which debts can go in the proposal
A debt settlement is a proposal to resolve unsecured consumer debts for less than the full balance. The debts that can be included are:
- Credit cards
- Medical bills
- Personal loans, including balances that grew while income was down during those years
An EIDL stays with the Small Business Administration under that agency’s own rules. An unforgiven PPP loan stays with the lender that made it. A pandemic unemployment overpayment stays with the state. The settlement proposal is then built from the consumer debts on that list.
When a large balance points to Chapter 7
When the EIDL or the remaining PPP balance is large, a household can still be left with a payment it cannot carry after the other debts are settled. Attorney Dave Falvey has confirmed that in some of those cases, where a lot is owed, it may be wiser to file a Chapter 7 bankruptcy.
A Chapter 7 can address your personal responsibility for the loan if you borrowed as a sole proprietor, or if you signed a personal guarantee. Owners of 20 percent or more of a business generally signed that guarantee on EIDL loans over $200,000. A discharge can release that personal responsibility.
A lien on business property can remain after the discharge. A personal case leaves the company’s own loan in place when you did not guarantee it. If the loan was obtained with false information, the government can ask the court to keep the debt.
If you have consumer bills and a COVID-era loan, you are welcome to sit down for a free consultation. The consultation can go through the loan papers with you, so you can see whether a debt settlement fits the consumer debts and whether a Chapter 7 is the wiser path for a large balance. You can reach the office at 860-449-1510.
