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The Paycheck Protection Program (PPP) enabled many US employees and businesses to squeak by during the initial months of the COVID lock-down.


Allegations of PPP fraud have begun to creep into the legal landscape in the United States. This means that, sooner or later, issues related to this Federal criminal charge will arise in the context of Chapter 7 and Chapter 13 bankruptcy as well.

This Article will review the rules regarding debt dischargeability in Chapter 7 and Chapter 13 bankruptcy. The focus, here, will be on the question of allegations of fraud in the incurring of a debt, as well as the question of dischargeability of criminal penalties.

Can you discharge a debt related to PPP fraud in Chapter 7 or Chapter 13 bankruptcy? We will answer this question in our conclusion, below.

First, what is PPP fraud?


PPP Fraud under US Federal Law


The Paycheck Protection Program (PPP) enabled many US employees and businesses to squeak by during the initial months of the COVID lock-down.

This Small Business Administration (SBA) program did not simply hand out free money. It extended loans to employers who, in turn, were obligated to retain employees on their payrolls that might otherwise have been released due to COVID hardship.

The funds loaned under the PPP were intended to be 100% forgivable, so long as the borrowers met various conditions over certain time periods following receipt of the funds.

These conditions were not arduous or difficult to meet.

Instead of direct oversight ensuring that borrowers’ statements were truthful and accurate, the  SBA and the banking institutions facilitating and servicing the loans largely relied upon the veracity of borrowers.

In some cases, it is now being revealed, this “checkbox and signature” approach was less than successful in ensuring that PPP fraud was not occurring.

So what constitutes PPP Fraud?

The tricky part of the concept is that there is no Federal or Michigan state statute specifically defining PPP Fraud as a criminal offense.

Instead, it is a criminal offense that is being charged under a variety of other Federal statutes.


Which Federal Statutes Are Used to Prosecute PPP Fraud?


Just as the PPP program was hastily devised and implement, the crime of PPP Fraud is being developed in Federal criminal court cases in just as ad hoc a manner.

Clearly, Federal prosecutors view a misstatement or untruth in a PPP loan application to be in violation of the law. Thus, the question raised is, “Which law exactly?”

There is no shortage of applicable Federal criminal statutes available for government prosecutors, however.

A few examples are:


  • Wire Fraud


Given that PPP applications were filed, by and large, through electronic means, the Federal felony crime of Wire Fraud is applicable.

Under Federal law, Wire Fraud is any attempt, means, or effected scheme to obtain money or property by means of false or fraudulent pretenses though “wire,” radio, or television communication.

Conspiracy to Commit Wire Fraud is an available charge for corporate employees facilitating phony PPP loan applications.

In addition to the 20-year prison sentence possible for a conviction on a charge of Wire Fraud, a $1 million maximum fine is also available.

Chapter 7 or Chapter 13 bankruptcy, as discussed below, will not generally be available to help with related fines and financial liabilities.


  • Conspiracy to Defraud the United States


This Federal crime is available when two or more people plan and do take steps toward defrauding the United States. (It is not a crime of intent.)

Any act of fraud implicating the Federal government can underpin a charge of Conspiracy to Defraud the United States.


  • Money Laundering


The Federal crime of money laundering can be charged against anybody conducting a financial transaction utilizing the proceeds of a criminal enterprise across state lines with the intent to conceal the source of the money.

The penalty for money laundering is 20 years in prison and up to $500,000 or twice the value of the property involved in fines.


  • Bank Fraud


Since private banks and credit units facilitate and service the PPP loans, any representations made to that bank, if false, can constitute the Federal crime of Bank Fraud.

Bank Fraud carries a potential 30 year imprisonment as well as a maximum fine of $1 million.


  • Mail Fraud


Any scheme to defraud that is carried out via the US mail system can be prosecuted as Mail Fraud. If your PPP application was conducted entirely electronically, Wire Fraud is the PPP Fraud charge you’d to worry about it.

However, if you used the U.S. mail to do it, you are facing, again, a potential 30-year prison sentence and maximum $1 million fine.


  • Other Federal Charges


A variety of additional Federal charges have also been levied at those accused of PPP Fraud. Some of these include identify theft, filing false and fictitious claims, and more.


Debt Dischargeability in Michigan Bankruptcy


So can a Chapter 7 or Chapter 13 bankruptcy shelter those accused of PPP Fraud under these or related Federal statutes?

The short answer is, “Probably not,” but, as always, some explanation is required and some nuance is possible.

Most debts are dischargeable in bankruptcy.

However, some are not.

Like PPP Fraud, the bankruptcy process in the US is a creature of Federal law. When a debt is non-dischargeable in bankruptcy, it is because the US Bankruptcy Code says that it is.

It is not because of an inherent quality of the non-dischargeable debts.

Thus, the debts that are not dischargeable in Chapter 7 or Chapter 13 bankruptcy are simply those listed as such in the Bankruptcy Code.

What types of debt related to PPP Fraud are listed as non-dischargeable, then?




Most debts incurred through some level of fraud are not dischargeable in Chapter 7 or Chapter 13 bankruptcy.

The Bankruptcy Code excludes from dischargeability the following:

  • Debts owed for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by—
    • False pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition;
    • Use of a statement in writing that is materially false; respecting the debtor’s or an insider’s financial condition; on which the creditor reasonably relied; that caused the debt to be made with intent to deceive;


  • Debts owed for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny;


  • Debts owed to the extent that such debt is for a fine, penalty, or forfeiture payable to and for the benefit of a governmental unit other than certain tax penalties;


  • Debts arising from any final judgment, unreviewable order, or consent order or decree issued by any Court or a Federal depository institutions regulatory agency, or any settlement agreement, arising from any act of fraud or defalcation while acting in a fiduciary capacity with respect to any depository bank or credit union;


Among others. (“Defalcation” is the misappropriation of funds by a fiduciary responsible for the funds of others. An allegation of defalcation is often an allegation of fraud—but unintentional defalcation is possible.)

A close read of these exceptions to bankruptcy discharge will reveal opportunities for “devil in the details” arguments by a good bankruptcy lawyer.

However, if you owe money for a PPP debt and have been accused of fraud of any sort, your road to bankruptcy discharge of that debt will be an uphill climb to be sure.


Criminal Penalties


Criminal penalties are not dischargeable in bankruptcy. This exception includes not only PPP Fraud criminal fines but even parking tickets. (Contrary to the assertions of some Detroit-area bankruptcy attorneys.)

In particular, debts arising from orders for criminal restitution are non-dischargeable. Likewise, case, motion, and appeal court filing-fees owed are not dischargeable for prisoners of the US government.

What is not included here?

In some cases, court orders for civil, non-criminal restitution or other payments are dischargeable. That is, if the ordered payment is for the compensation of a loss of some sort and not a punitive damages award or payable to the Court or another governmental body.


Automatic Stay Issues


In addition to the non-dischargeability of criminal penalties in bankruptcy, a crime-based debt faces another challenge: exception from the Automatic Stay of Collections that otherwise activates upon the filing of a Chapter 7 or Chapter 13 case.

The Automatic Stay is a Federal injunction that prohibits the collection of any debt during the pendency of the bankruptcy case. Creditors who violate the Automatic Stay are subject to sanctions and monetary damages awards.

Very few debts are immune to the power of the Automatic Stay. Child support and spousal support payments, for example, are not subject to the Automatic Stay.

Likewise, the Automatic Stay does not prohibit the collection of criminal fines, restitution, or any other items discussed above.

Further, the Automatic Stay will not stop the government from filing or initiating or continuing a new or ongoing criminal proceeding for PPP Fraud or any other charge.


Can Bankruptcy Help with PPP Fraud At All?


Non-dischargeable debts can still be paid through a Chapter 13 bankruptcy payment plan. That is, you can still pay the debt off as part of your 3-5 year Bankruptcy Court-enforced payment plan.

The difference will be that, at the end of the Chapter 13 proceeding, if you have not paid the debt off in full, you will emerge from the Chapter 13 still owing the remaining, unpaid balance. Other commercial debts are, in contrast, discharged with no further payment required on any remaining balance at the end of a Chapter 13.

For criminal penalties not subject to the Automatic Stay, this may be of limited usefulness. The filing of the Chapter 13 will not stop the direct collection of your PPP Fraud or other criminal debt.

However, for other debts or liabilities related to PPP Fraud charges—such as those third party compensation orders noted above—Chapter 13 may provide an excellent means of dealing with the debt.


PPP Fraud and Michigan Bankruptcy: The Bottom Line


The bottom line is that if you are shouldering debt related to PPP fraud charges or convictions and are considering filing for bankruptcy, you need to consult a highly experienced Michigan bankruptcy attorney.

Attorney Walter Metzen is a Board Certified Bankruptcy Expert who has successfully represented Metro Detroit Chapter 7 and Chapter 13 clients for over 30 years.

A complex situation requires the right level of assistance.

Contact us now to schedule your free initial consultation.


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