Can I get relief from an SBA or EIDL loan my business can’t repay?

The federal government offered SBA EIDLs to help shops and other small businesses stay afloat during Covid-19. The money helped many shops survive. For a lot of owners who took on those loans, though, the other shoe dropped recently, and now, instead of staying afloat, many shops are now treading water or fighting not to drown.

There are still ways to get meaningful relief.

Personal Guarantees

For most of the SBA’s history, loans were handled by SBA-approved banks. Those banks almost always required personal guarantees from shop owners and some form of collateral. In the event of a default, the bank took the collateral, which, for a lot of shops, was their home.

If the collateral fell short of the balance, the SBA sued the owner on the personal guarantee for the difference. With a non-EIDL SBA loan, you’ll likely need to file for bankruptcy or work out an Offer in Compromise.

EIDL loans are more owner-friendly in most ways. What made an EIDL loan easier to take than a bank loan is the fact that any loan under $25,000 was unsecured with no personal guarantee. Loans of $25,000 to $200,000 were secured by business assets, but the SBA required no personal guarantee. Loans for more than $200,000 required personal guarantees and were secured by business assets.

EIDL loans were not handled by banks, so the SBA is now dealing with roughly 4 million borrowers and $387 billion in outstanding loans. Many are in default. Any agency would be swamped.

You can reduce your monthly payment temporarily with an SBA hardship request. Only people who are not yet in default on their EIDL can apply for relief. Make sure you’re current on payments before you apply.

Temporary help might not get you through. That doesn’t mean you’re stuck.

Walk Away from Business Debt

If your EIDL is under $200,000, there’s a good chance you didn’t personally guarantee the loan. Technically that means if your LLC or corporation dissolves, your personal assets won’t be on the hook for whatever you borrowed. If your shop is a sole proprietorship, you alone are responsible for any EIDL the SBA loaned to your shop.

When you dissolve an LLC or S or C corporation, it can be the best way to walk away from business debt, including an EIDL. The catch here is that every EIDL over $25,000 comes with a lien on the company’s assets. In a dissolution, owners sell the business assets they can, pay the SBA the proceeds, and the SBA releases the lien.

The dissolution of a company doesn’t mean you’re automatically in the clear. The SBA can still investigate and, if it finds a problem, come after shop owners personally. The SBA may determine that you’ve misused some or all of the funds you received. If that happens, you could owe 150% of what you borrowed, and the debt becomes a personal debt instead of a corporate or LLC one. Loan fraud is a federal crime.

The SBA is likely to come after shop owners

• in cases where the borrower is a sole proprietorship,
• when the shop took a traditional SBA loan (non-EIDL),
• and with EIDL loans in excess of $200,000.

Possible consequences can include asset seizures and even a referral to the Treasury for collection. Dissolving your business and walking away from the debt is risky in these cases, and you may need to consider a personal debt relief plan, which could include bankruptcy.

Bankruptcy Can Discharge Debt Owed to the SBA

The good news is that bankruptcy can discharge debt owed to the SBA. If you’re trying to walk away from a business, the LLC’s bankruptcy alone will not cancel your liability. Likewise, your personal bankruptcy won’t clear the LLC’s debt. The SBA can continue to collect through the LLC. Ending business operations and shutting down the LLC quickly are a critical part of a personal bankruptcy with an SBA loan.

A dissolution or bankruptcy are ways to address EIDL debt, but they’re not your only options. The SBA also offers the Offer in Compromise (OIC) mentioned earlier, the formal route to loan forgiveness. The process requires full disclosure of income and assets. The amount you can save depends on what you earn and what assets you have.

A lot of shop owners (especially one-man shops) think they won’t be able to work if they dissolve their business or file a bankruptcy. They can. If you dissolve your business, file bankruptcy or work out an OIC, you can restart in a new LLC, Corporation, or sole proprietorship.

Restarting comes with a catch, often involving collateral. If you need much of your old shop’s equipment, you’ll need to negotiate a sale of the asset from your old LLC to the new one. The sale price is paid to the SBA and goes toward the EIDL. The more assets the new shop needs, the higher the price the new company needs to pay.