If you’re behind on your EIDL payments, you’ve probably wondered whether you can just file bankruptcy and be done with it. We get this question all the time from business owners who are overwhelmed and just trying to get through the day. The short answer: yes, you can discharge an EIDL loan in chapter 7. But that answer leaves a lot out. These loans are frightening and stressful, and trying to make sense of all the rules and regulations can be overwhelming. Bankruptcy is a last resort, and before you get there you should make sure you’ve exhausted all other options.
EIDL Loans and Grants
First, let’s talk about what you got in the first place. EIDL loans and grants were given to small businesses to help them recover from the pandemic. Loans were meant for working capital and operating expenses. The loans are not forgivable—you have to pay them back. The grants? You don’t owe those back. EIDL loans could be up to $2 million, with interest not exceeding 4%, a term of up to 30 years, and no prepayment penalty or fees. Now, what happens when you miss a payment? There’s “delinquent” (you’re behind, but the lender still believes you can pay all or part of the debt) and there’s “default” (the lender determines you can’t pay the loan). If your loan is “delinquent,” the lender may charge a late fee, reach out to you, and offer to restructure the loan, extend the loan term to reduce the payment, or allow interest-only payments, or some combination. They’re going to want some money within 30 days of contacting you. If you continue to miss payments and cannot reach an agreement, you’re then in “default.”
When the EIDL is in default, you are at risk of losing the collateral that secures the loan (depending on state law, the collateral can be taken and sold). All guarantors on the loan can be sued. The SBA sends you a demand letter and then can begin a lawsuit against you and/or the guarantors. The default is recorded on the business and personal credit reports, which affects the credit scores. The SBA can apply a lien and levy on any assets held by the U.S. Government (like tax refunds). It reports the default to the IRS and the unpaid amount may be treated as income. That’s a long list, and it’s scary.
What Are My Options if I Can’t Pay the Loan Back
What are my options if I can’t pay the loan back? Offer the lender some amount of money as a settlement. Prepare and submit to an SBA loan officer an Offer in Compromise which includes your financial information and the amount you can afford to pay in full and final settlement of the debt. Or prepare for litigation. None of these is easy, but each one keeps you out of bankruptcy, at least for now.
How much you borrowed also decides what you stand to lose. For loans of $25,000 or less, no collateral or personal guarantee is required. For loans between $25,000 and $200,000, collateral is required (UCC-1 and Security Agreement), but generally no personal guarantee. The lender can seize and sell receivables, inventory, and equipment. For an EIDL of over $200,000, the collateral is required and there is a personal guarantee.
Can the EIDL Debt Be Discharged in Bankruptcy
An individual who has an EIDL or a company which guaranteed an EIDL can file chapter 7, chapter 13, or chapter 11 bankruptcy. In a chapter 7 bankruptcy – known as a liquidation bankruptcy – the business will be closed. In a chapter 13 bankruptcy, which is only available for individuals, the borrower enters into a 3-5 year payment plan. In a chapter 11 bankruptcy, known as a reorganization bankruptcy, either individuals or businesses can reorganize their debts or liquidate (in a chapter 11 liquidation). If your business has the EIDL, it can file a chapter 7, chapter 11, or chapter 11 Subchapter V, which is designed for small businesses.
So can the EIDL debt be discharged in bankruptcy? Yes, the EIDL can be discharged in chapter 7. But if there is collateral attached (like equipment, receivables) it will become the property of the lender. A guarantor can still be sued – it will have to work out an agreement out of court, or file for their own bankruptcy.
Put the pieces together and the picture gets clearer. If your EIDL was $25,000 or less, you didn’t use any collateral or personally guarantee the loan, so there is nothing for the lender to take. No collateral means no collateral. If it was between $25,000 and $200,000, the debt can still be discharged in chapter 7. But remember, the lender can seize and sell the equipment and receivables that were used as collateral. Over $200,000, you also signed a personal guarantee, and a guarantor can still be sued whatever happens to the business.
Whether you’re delinquent on your loan or in default, you probably have questions, but you’re not sure where to turn. We hear these questions and questions just like it from our clients every day. Nobody wants to be in this spot. And you want to move on with your life – run your business, spend time with your family. A settlement or an Offer in Compromise may get you there without a filing. If bankruptcy does look like the answer, you’ll need to consult a bankruptcy attorney to discuss your best options.
