Businesses seeking relief from the pandemic got access to low-interest Economic Injury Disaster Loans (EIDLs) through the Small Business Administration. Business loans below $25,000 were unsecured. Business loans over $25,000 had a security interest against the assets of the business, and loans over $200,000 required a personal guarantee, meaning the guarantor was equally liable with the business. The loans are now coming due for repayment, and many borrowers do not have the funds to pay them, even at the low rate. They’re falling behind on their payments, and some are unable to pay at all.
Requirements for Dischargeability
Can an EIDL be discharged in bankruptcy? Well, mostly yes. Discharging an EIDL loan means wiping out the debt and no longer being required to pay it back. The loan is a SBA loan, and loans from the SBA are not treated any differently than any other loan in bankruptcy. The requirements for dischargeability are the same whether you’re talking about a credit card bill or a hospital bill or a bank loan. If you got the loan with no intention of paying it back, that is fraud, and if proven, the debt is an exception to discharge. But most business owners got these loans to save the business and honestly wanted to pay it back. Many businesses failed anyway. That debt shouldn’t be hard to discharge.
EIDL money was supposed to be used for the business. If the SBA can show that you took the money but did not use it as it was supposed to be used, that might be grounds to object to your discharge. How much the SBA will push on those objections remains to be seen. Suppose you borrowed the money to pay off your credit cards and take a beach vacation instead. That is the kind of case the SBA could challenge.
Personal Guarantee
What’s the use of discharging the EIDL loan in a corporate bankruptcy if there is a personal guarantee on the loan? None whatsoever. If the EIDL loan is guaranteed, then the guarantor (usually the owner or an officer of the business) still owes the loan. So, by signing a personal guarantee, you didn’t just put your company on the hook for the payment; you put yourself on the hook for the payment, whether or not you do business again in the future. If that’s the case, personal bankruptcy should be considered.
An entity — whether it’s a corporation, LLC, S-Corp or C-Corp — can only get a discharge of its debts in a Chapter 11. The amount that needs to be repaid in a Chapter 11 depends on several factors, including cash flow, the value of the assets and projected income. A traditional Chapter 11 has to be accepted by a sufficient number of creditors. Under Subchapter V of Chapter 11, creditor approval is not required as long as other criteria are met.
If you have signed personal guarantees for the loans, or if you don’t have a corporation for the business at all, so it is just a DBA of an individual, then you have to consider Chapter 7, Chapter 13, or Chapter 11 bankruptcy (if the amount of debt is very high). Since the business is liable as well, the corporation may have to file its own bankruptcy, depending on whether it is going to remain in business.
Any lien that is created by a security interest in collateral doesn’t go away in bankruptcy. It stays attached to whatever property the business owned on the day you filed. For a business that means the value of the secured collateral is going to have to be paid over the life of the plan. In other words, if your company took out a $500,000 SBA loan secured by its business assets, and those assets were worth $200,000 on the day the company filed, then the repayment plan will have to pay at least $200,000 in order to get confirmed.
A Federal Database of Delinquent Federal Debtors
There is one catch to wiping out an SBA loan in bankruptcy, though. If you don’t pay, the government can refuse to give you future services, like VA loans or SBA loans. They’ve got a list called CAIVRS, a federal database of delinquent federal debtors. CAIVRS flags participating federal lending agencies when someone applying for credit has a federal lien, a judgment, or a federal loan that is in default or foreclosure.
This seems to run afoul of the discharge injunction, doesn’t it? Yet no court has ruled that a CAIVRS listing violates the injunction. So proceed with caution and consider everything:
- is the debt yours personally or is it just the company’s?
- Is the loan secured or unsecured?
- Are you intending to make use of federal credit in the future?
Those answers will shape which path makes sense for you and for your business.
