The pandemic caused an unprecedented disruption in the U.S. economy. Many businesses were thrown into chaos by pandemic shutdowns, supply chain problems and labor shortages. In response to the pandemic, the Small Business Administration set up two programs to keep small companies afloat. One, the Paycheck Protection Program, was aimed at keeping workers employed. The other, the Economic Injury Disaster Loan, offered cheap long-term loans to help businesses cover the bills and operating costs they’d have had if it weren’t for the pandemic.
The SBA offered EIDL terms that were exceptionally generous. The money would have to be repaid, but it would be given as a 30-year loan at 3.75 percent interest. And perhaps best of all, it seemed fair to assume that most businesses would recover long before the first payment came due.
For some companies, and some industries, the recovery is taking longer, even though the broader economy is growing again. The SBA let borrowers put off payments on their loans at first. That relief is ending.
After deferrals and extensions, repayment is finally restarting, and it’s putting pressure on companies. Some businesses found they were falling further behind than they’d realized, because the same problems that created losses in 2020 stayed in place, now with the added pressure of inflation. And interest kept accruing on the debt, so many EIDL borrowers found themselves deeper in debt than when they started.
Can bankruptcy help with that debt? It depends, and it’s complicated. When it comes to dealing with that debt in bankruptcy, every case is different. A lot of it comes down to the terms of the loan, especially whether it is secured by collateral and whether it’s an SBA loan, a Paycheck Protection Program loan or an Economic Injury Disaster Loan, because those are treated very differently. It’s worth speaking with an experienced bankruptcy attorney about whether bankruptcy can help with pandemic-era debt.
Some SBA loans were structured like mortgages: borrowers pledged real property as collateral, or else valuable business assets, such as equipment or accounts receivable. It seems obvious if your debt is secured by a property or piece of equipment, that is what’s on the line, but for assets other than real estate, the SBA files a UCC lien. Unsecured debt, of course, can often be discharged, while secured debt can often be restructured.
In general, EIDLs of $25,000 or less are unsecured loans, but anything above that typically requires collateral, which can take the form of either business assets or property. Amounts over $200,000 typically require a personal guarantee from the owners of a company. Those would all go into bankruptcy along with all the other debts that company was carrying.
PPP loans were unsecured, and meant to be forgiven when spent on payroll and eligible expenses. A PPP loan the SBA does not forgive can be included in bankruptcy, and the amount that is not forgiven is typically treated as an unsecured claim paid pro rata like all the other unsecured claims.
Beyond these pandemic programs, the SBA sets the guidelines for how lending programs work and how borrowers need to qualify. It makes the loans safer for lenders. If a small company wants a loan, it can apply with an approved bank, which decides whether to give it. If borrowers default, the SBA reimburses part of the money. That lowers lender risk and makes it easier to qualify. Borrowers still owe money to the U.S. government, however, which can pursue companies and their owners aggressively to recover what it can.
Repayment terms vary depending on the loan and how it’s structured, but defaulting is serious. It damages your credit report and it can make future borrowing difficult or more expensive.
If you default, the SBA can seize and sell business assets such as equipment, furniture, computers and vehicles, putting the money toward the debt.
The SBA can refer the debt to the U.S. Treasury Department for collection. If the loan is secured, Treasury can garnish wages, and seize money owed to the business, such as income tax refunds.
Failing to repay an Economic Injury Disaster Loan of over $200,000 can put personal assets at risk. Those include real estate that was pledged as collateral, money in bank accounts, investments and cars.
A lender can sue you even if the loan was unsecured.
Bankruptcy Can Be Used to Address Those Debts
In some situations, bankruptcy can be used to address those debts, but you might not have as much time as you think. Deciding what to do, and when to do it, requires making a decision quickly. In a Chapter 11 Subchapter V reorganization, for example, the SBA’s secured claim could be limited to the current value of whatever was pledged as collateral, with the excess treated as an unsecured claim. The bankruptcy would then allow the secured part to be repaid with reasonable interest, while the unsecured portion might only get a percentage and the balance discharged. In other words, in a hypothetical scenario where, for instance, a business had $20,000 in assets and owed the SBA $200,000, $20,000 would be repaid as a secured claim and the remaining $180,000 would become unsecured. Only a percentage of that would get paid, while the rest would be discharged, which can dramatically improve cash flow.
Closing might feel tempting. And shutting down the business might help get away from the losses and all the stress that’s piled up. But it does not end the debt. Unless it is discharged in bankruptcy, the loan may still have to be repaid, and if it was collateralized, that could be a problem. You may still face foreclosure on the pledged assets.
About Delancey Street
Delancey Street is a premier, and award winning, business debt settlement company that helps business owners nationwide. Our goal is simple: help you escape debt in a safe and legal manner. Based out of New York, we can help in 49 of 50 states. We tell you how it is; because your business and future is on the line.
