Can a Creditor Garnish My Paycheck Protection Program Funds

Can a Creditor Garnish My Paycheck Protection Program Funds?

Lots of small business owners have received Paycheck Protection Program (PPP) funds during the pandemic to help keep their businesses afloat. But some business owners may be wondering – can a creditor garnish these funds if I have debts or judgments against me? It’s a complicated question with no simple answer, as PPP funds exist in a bit of a legal gray area when it comes to garnishment. This article will break down what we know so far about whether creditors can seize PPP funds.

What are PPP Funds?

First, a quick refresher on what exactly PPP funds are. The Paycheck Protection Program was created under the CARES Act in March 2020 as a way to help small businesses impacted by the COVID-19 pandemic. PPP provides potentially forgivable loans to help businesses cover payroll, rent, utilities, and other expenses. So essentially, PPP provides emergency government funding to keep small businesses operating and workers employed during an unprecedented economic crisis.

Over 11 million PPP loans have been approved totaling nearly $800 billion. So it’s safe to say these funds have served as a lifeline for countless small business owners during extremely challenging times. But could these business-saving funds potentially be taken by creditors?

Can Creditors Garnish PPP Funds?

Whether creditors can seize PPP funds is still an unsettled question. There is no explicit law stating these funds are protected from garnishment. However, there are reasonable arguments on both sides of the debate:

Yes, creditors may be able to garnish PPP funds

  • PPP loans are treated as income for tax purposes – This suggests they could be treated as income for garnishment purposes too
  • CARES Act does not explicitly exempt PPP funds from garnishment
  • Some court rulings have allowed garnishment of PPP funds

No, creditors may not be able to garnish PPP funds

  • PPP funds provide government aid for specific business expenses – Arguably funds are not for general income/debt repayment
  • Allowing garnishment could undermine purpose of PPP funds and congressional intent
  • Some states have passed laws exempting PPP funds from garnishment

So in summary – there are reasonable arguments on both sides, and no definitive answer yet if creditors can seize PPP funds. Some early court rulings have allowed garnishment, while legislative action in some states has aimed to protect the funds.

Court Rulings on Garnishment of PPP Funds

There have been a handful of early court rulings that have allowed creditors to garnish borrowers’ PPP funds:

  • In FBN v. Hans Arens, an Illinois court ruled that PPP funds are not exempt from garnishment by a judgement creditor.[1]
  • In Trustee of the Bankruptcy Estate of DDSC v. PPP Funds Held by Customers Bank, a Pennsylvania bankruptcy court allowed a trustee to garnish PPP assets.[2]
  • In Schuessler et al. v. SBA, a Mississippi court denied an injunction to stop garnishment of PPP funds.[3]

However, it’s worth noting these are lower court rulings and not definitive declarations. Higher courts could still overturn these decisions. But for now, these cases suggest some jurisdictions may allow creditors to seize PPP funds.

State Laws on PPP Garnishment

While federal law remains unsettled, some states have taken action to exempt PPP funds from garnishment at the state level:

  • Virginia amended its garnishment laws to exempt PPP funds.[4]
  • Michigan passed a bill exempting PPP funds from garnishment.[5]
  • Massachusetts’ Attorney General declared PPP funds exempt from seizure in the state.[6]

So in states like these, PPP funds seem to have explicit protections against creditors. But in many other states, the issue remains unclear absent concrete federal legislation.

Using PPP Funds for Allowable Expenses

While the law is unsettled, some attorneys argue PPP funds used for allowed expenses under the CARES Act should be protected. PPP funds are intended for specific uses like payroll, rent, utilities, etc. So if a borrower uses the funds for these costs, a creditor shouldn’t be able to seize them later on. Essentially, the government gave the money for a specific purpose, not for repayment of old debts. This remains a largely untested theory, but using PPP funds properly could strengthen a borrower’s case against garnishment.

Bankruptcy Protection

Filing for bankruptcy can provide another potential option to shield PPP funds from creditors. While bankruptcy law on PPP funds is still developing, some attorneys argue these emergency government loans could be exempt in bankruptcy. This would mean creditors couldn’t seize the assets in bankruptcy court. Always consult an experienced bankruptcy attorney to understand your options.

What Should PPP Borrowers Do?

With the law still unclear, PPP borrowers have a few options to reduce their risk:

  • Spend funds properly – Using PPP money for allowed costs like payroll could bolster your argument that a creditor can’t seize it.
  • Open separate account – Keeping PPP funds in a separate account rather than mingling with other money may help protect it.
  • Talk to an attorney – Consult counsel experienced with debt collection and garnishment laws in your jurisdiction.
  • Consider bankruptcy – For high debt burdens, bankruptcy may exempt PPP funds from creditors.

The bottom line – work closely with an attorney to understand your risks and options. With the law unclear, advanced planning is critical to keeping your PPP funds protected.

The Road Ahead

So in summary, the question of whether creditors can seize PPP funds remains unsettled. Early court rulings have allowed garnishment in some cases. But legislative action in certain states aims to protect the funds, and reasonable arguments exist on both sides. For PPP borrowers, it’s critical to work with experienced legal counsel to navigate this legal gray area and evaluate options like bankruptcy if you face creditor threats. And on the legislative front, keep an eye out for any definitive federal action that could finally provide concrete answers on creditor rights to these vital small business funds.


[1] FBN v. Hans Arens
Trustee of the Bankruptcy Estate of DDSC v. PPP Funds Held by Customers Bank

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