SBA Loan funds were intended to be used for normal operating expenses such as rent, inventory, employee payroll, working capital, purchasing products, purchasing equipment, and paying off business debt.  If you have misapplied those proceeds and used them to pay your personal bills or only pay yourself disbursements under the loan then the SBA can request an audit.  If you do not respond within to their inquiry within 30 days, it will be considered an admission that the loan funds were misapplied.

Penalties include having to pay 1 ½ times the amount of the loan, collections, or even criminal prosecution.  Ordinarily SBA loans are dischargeable in bankruptcy.  However, if funds were misapplied then you could face a 727 action wherein the United States Trustee’s office will contest the dischargeability of the debt.  I would only recommend filing a bankruptcy on those funds if you did in fact use the proceeds for business purposes and your business was still unable to be sustained and you have a bank trail of how the money was spent.

I also look at how much of the loan got disbursed to you personally. For example, if your salary was normally $30,000 annually then you start paying yourself $100,000 salary once you got the EIDL funds those funds that could be considered misapplying those funds.  The same if you only paid yourself a salary and distributions and paid no other business expenses. If you have more specific questions, it is best to consult with an attorney.


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