If your business is closing, or has already closed, and it still owes an Economic Injury Disaster Loan (EIDL), you might be wondering what will happen. First, how much of this is common? According to some statistics, approximately 37% of all EIDL loans are either in default, liquidation, or charge off status. The first thing to understand is that you are not done with this loan just because your business is closed or failed.
Did the SBA have your personal guarantee? The SBA generally waived personal guarantees for advances and loans under $200,000. But if your business is a sole proprietorship, you’re personally liable anyway regardless of whether the SBA got a personal guaranty. For business loans over $25,000, it’s likely that the SBA will have a lien on all business collateral. Those assets will have to be turned over to the SBA or sold with SBA permission. For loans over $200,000, the SBA may require a personal guarantee even if you never signed one, which means your non-exempt personal assets, tax refunds, and federal payments like Social Security or military retirement will be at risk.
A lot of owners I talk to assume that if their business failed and they closed it, they’re out from under this loan obligation. But that is not true. Your business may be legally closed, but your liability still exists. You can cease operating and follow the procedure under state law to legally close your business. How do you close the business? Start with what’s in the contract. You’ll want to notify the SBA that your business is closed. Before you do anything else (like liquidating or selling any of the equipment with collateral on it), get with the SBA. The SBA is going to have to give you written permission to sell or transfer assets outside of the ordinary course of business. And don’t throw away your records! Your best bet is to preserve them all, but at least make sure you have an accurate log of how you used the loan money. If you have money to pay the SBA, you should pay them before paying your owners/members/shareholders.
In practice, shutting down is rarely a single event. More often there is a period of struggle as the business survives at low profit or even in the red until it reaches a tipping point and has no other choice but to shut its doors and close shop. Each business owner should reach out to the SBA and have a conversation with an attorney who knows what they’re doing before walking away. What happens if you already sold or transferred assets under lien without permission? If you sold or transferred any secured assets before you closed your business without permission from the SBA, it’s important to talk to a business or bankruptcy attorney to explore your options.
Can you get some debt relief if you’re having trouble with payments? Yes, the SBA offers a hardship program where it will reduce the payments by 50% for six months, although the interest will still accrue. To qualify, the loan must be less than 90 days past due, it can’t have been referred to the Treasury, the business must be open and operating, and the inability to pay can’t be due to long-term insolvency. That means a closed business won’t qualify for the hardship program. There is no offer in compromise or forgiveness program in place, although the SBA has been sending out offer in compromise forms. Contact an attorney before filling one out.
Sue the Business or the Guarantor and Get a Judgment
The SBA can go to court and sue the business or the guarantor and get a judgment. Then the Treasury can start seizing bank account funds, garnishing up to 15% of wages, levying non-exempt property, or entering the borrower’s Social Security number in the CAIVRS database. They have 20 years to enforce the judgment. But the SBA generally has six years to sue you (28 USC 2415(a)), which runs from the date of default or last payment. However, in the case of fraud, the statute of limitations is 10 years (COVID-19 EIDL Fraud Statute of Limitations Act of 2022). Even if the SBA can’t sue because the statute of limitations has expired, it may be able to use administrative offset to seize tax refunds (10-year limit) or garnish most government benefits, including up to 15% of certain Social Security or military retirement benefits, as well as VA benefits in some cases.
Bankruptcy Discharge
Can you discharge the loan through bankruptcy? The answer depends. If you are a sole proprietor or a personal guarantor for an LLC, you may be able to get an individual bankruptcy discharge. A Chapter 11 bankruptcy can discharge the liability of the business entity. If the business is still operating, you could consider reorganization under Chapter 11 or Chapter 13 to reduce the principal balance.
It also matters how the money was spent. EIDL loans can be used for working capital to cover regular operating expenses like payroll, rent/mortgage, utilities, and other ordinary business expenses. It can also be used to pay any business debt incurred at any time - past, present, or future. Later the rules extended the use of the funds to pay and prepay non-federal business debt and federal debt. However, if the owner has misused funds for purposes other than working capital, operating expenses, or business debt, it’s best to have a frank conversation with a bankruptcy attorney, because bankruptcy may not be the best option.
There are additional state law complications in Texas. Under Texas law, a homestead is protected from a SBA judgment lien as long as the owner is alive. Once the owner dies, the estate may have to pay, depending on the circumstances. Texas law may also create a personal liability for the owner if the business is closed and still has debt.
The reality is that you or your business may still owe money on an EIDL loan even after it has closed. Understanding the terms of the loan and communicating with the SBA is crucial. Working with a knowledgeable attorney can help navigate the various options available.
