Covid-era EIDL loans are starting to come due. A lot of them. Despite the fact that the COVID pandemic is over, that doesn’t mean business is back to normal. This is true for a lot of businesses, and normal before the pandemic was hard too. If you aren’t sure whether your business can bear the additional burden of the EIDL loan, you need to understand a few key details: Who owes the debt? Is it secured or unsecured debt? What happens if you don’t pay? Can it be wiped out in bankruptcy?
What’s an EIDL loan? It’s the Economic Injury Disaster Loan, a government loan made by the Small Business Administration during the pandemic. They were offered to many small (and medium and some large) businesses in response to the pandemic. The loans weren’t the same as the Paycheck Protection Program loans; the PPP loans were paid to keep your business afloat during the pandemic, and you could get most or all of them forgiven. But the EIDL loans were just regular old loans you had to pay back, with payments starting about a year after you took out the loan. Some of these loans were really big and are secured by business assets. Or by a personal guarantee from the owner.
Who Owes the Debt
If you can’t make the payment, the first thing to do is to figure out who the borrower on the loan actually is. That tells you who owes the debt in the first place. The identity of the borrower is spelled out in the first paragraph of the loan agreement. Is it a corporation or an LLC, or is it you? If the borrower is a real person, then yes, you’re on the hook personally for all of the debt.
If the borrower is a corporation or LLC, look for a personal guarantee in the loan documents. If there is one, the guarantor is liable for repayment of the loan. The borrower and the guarantor are equally liable and the SBA does not have to go after the borrower first, the guarantor can be hit first.
A collection letter addressed to “YOU, YOUR BUSINESS” is just an “attention of” designation. It does not mean that the SBA thinks you are personally liable for the loan. Just look at the first paragraph of the loan agreement to see who the borrower is.
The next question is whether the loan is secured. A secured loan means that you give your lender a lien on stuff you own. The stuff, which is called collateral, is listed in the agreement. The lien gives the lender a property interest in the collateral itself (in addition to whatever contractual rights the lender has against you). You need to describe the collateral in the loan agreement. The lien is typically perfected by filing the appropriate documentation with the appropriate government office, as directed by state law. If your EIDL loan was unsecured, you did not provide any collateral.
What Happens if You Just Stop Paying
So what happens if you just stop paying? To answer the question, we first have to know whether the borrower is an individual or an entity. If the borrower is an entity, then it’s quite possible that it might shut down, with or without filing for bankruptcy. Once it is out of business, then there are limited remedies for the SBA.
If the loan is secured by collateral, SBA can foreclose on the collateral, sell it, and apply the proceeds to the loan. If the loan isn’t secured, SBA is just another unpaid creditor of the entity. Its remedy is to sue the entity for the amount owed and hope to get something. Unless there is a personal guarantee or a defect in the formation of the company, nobody is personally liable for the debts of the entity, not even the shareholders and managers.
If you’re liable as an individual (borrower or guarantor), the picture is much more complicated. Between you and me, it doesn’t get much scarier than SBA debt collection. The business may be gone, but the person might have other jobs and other sources of income when the business closes. But the SBA can garnish wages. Without ever bothering to sue. It can also seize tax refunds until the loan is paid. And part of your Social Security benefits. And that’s a non-trivial amount of money.
The SBA could put a lien on your home and other assets, but only if you specifically pledged that collateral when you got the loan. Otherwise, the SBA would have to file a lawsuit against you first.
Can Bankruptcy Wipe Out an EIDL Loan
Can bankruptcy wipe out an EIDL loan? It depends on who you are. An entity can only get a discharge of its debts in bankruptcy in Chapter 11, the reorganization chapter. To reorganize is only worth doing if you can do it, if the business is viable on a going forward basis, if you can anticipate having enough funds to actually pay creditors a meaningful amount, and if you can devote the management time and energy to negotiate a plan with your creditors.
On the personal side of things, good news! If you are personally liable on the EIDL loan, you can get a discharge of that debt in bankruptcy. There is one exception. The law says that if you deliberately lied on your loan application, you won’t get a discharge of that debt. The SBA can try to stop the discharge of the loan claim in bankruptcy, but will have to prove fraud at trial in bankruptcy court. I have not seen anyone do that so far, but we shall see.
In 2020, the EIDL loan was a lifeline to keep the business afloat. But for some, now the loan is an anchor holding it down. How do you know if the loan is an anchor? Step one: check the loan agreement. Who’s the borrower? Is there a personal guarantee? What does the security interest say?
If you owe it yourself, look out for potential wage garnishment, seizure of tax refunds and offsetting of Social Security benefits. But don’t worry, you can discharge personal liability through bankruptcy – unless you lied to get the loan. Chapter 11 may be an option for a business that’s still viable and has the money and time to manage creditors. Finally, don’t sugarcoat the situation or be delusional. Decide with clear eyes if the loan is a lifeline or an anchor.
