During the pandemic, the Small Business Administration (SBA) began granting coronavirus-era Economic Injury Disaster Loans (EIDL) to help struggling businesses weather the economic shock. These loans were issued directly from the SBA and featured terms of 30 years with an interest rate of 3.75%. The first two years of payments were deferred. Restaurants, barbershops, trucking companies, and even Uber drivers took advantage of these loans to stay afloat. But now, as loan repayments are due, many business owners find themselves unable to keep up with the payments. Initially, the SBA decided not to pursue debt collection on defaulted loans, but in December 2023, the Biden administration reversed this decision and started aggressively going after approximately $30 billion in delinquent debt through the Treasury Department. The estimated default rate on these loans is around 37%. If you signed up for an Economic Injury Disaster Loan from the SBA, what are your options? Given how dangerous it is to default on a loan, let’s take a moment to explore options for relief, and set realistic expectations for what awaits nonpaying borrowers.
Loan in Default
If the borrower misses payments for three months or more and doesn’t contact the SBA, the SBA may assume the loan is in default. The SBA may also declare a loan in default if the borrower:
- violates any terms of the agreement, such as using the loan proceeds for a non-business purpose;
- fails to pay taxes when due;
- or files for bankruptcy.
What happens after that depends heavily on how much you borrowed. For all loans equal to or less than $25,000, there was no collateral, so the SBA can’t go after business assets, and the business doesn’t have to give SBA a personal guarantee. But only the incorporated business borrowers received that protection. Sole proprietors, unincorporated businesses and the self-employed borrowed in their individual capacity and could be pursued personally for any balance left.
Loans over $25,000, but less than $200,000, are secured by your business assets. If the business defaults, Treasury can liquidate those assets, and then pursue the owner for the rest. So, if you’re an Uber driver, you may not have to worry about this provision because you may not have any assets to seize. For sole proprietors, these loans were made to each individual, so they can be sued individually.
Each loan of $200,000 or more required personal guarantees by the owner. A personal guaranty is a promise to repay a business loan if the business defaults. If you default and your business closes, you will have to pay the balance of the loan from your personal funds. The loans also create a lien against the business assets, including accounts receivable. However, a financially struggling business may not have much of value in these assets and may have other liens placed against them already.
You can’t walk away from this loan. If you are a sole proprietor who borrowed directly, or if you signed a personal guaranty, you can be sued for the balance. If you default, Treasury can divert or withhold federal payments to you, report the debt to the IRS, keep your tax refunds, garnish your wages (or a percentage of your Social Security), without any court order. You can also be ineligible for future federal programs. If you pledged any property as collateral, you might lose that. It will also negatively impact your business and personal credit scores.
The Alternatives
So what are the alternatives? There are three main ones: a hardship plan, an offer in compromise, and bankruptcy.
Does SBA have a way to help? Yes it does. They have a Hardship Accommodation Plan, or HAP. Any SBA loan in repayment (including past-due loans) qualifies, as long as it hasn’t already gone to Treasury for collection (usually after 180 days past due). If the loan is less than $200,000, sign up at the SBA loan portal. If $200,000 or more, you will need to call a loan specialist. You will pay 10% of the normal payment for six months. You don’t have to catch up the missed payments first. It’s renewable if hardship persists. Interest continues to accrue, so the balance of the loan can still increase. This is only for short-term hardship.
The second route is an offer in compromise. You can ask the SBA to settle your EIDL for less than you owe. Many times, the offer in compromise amounts to much less than what you owe. Before you can make an offer in compromise, your collateral has to be liquidated. You have to establish financial hardship. This does make you ineligible for other federal programs. You cannot be in bankruptcy proceedings when you make an offer in compromise. In any case, you’ll need a lump sum of money to propose a settlement. The forgiven debt could be considered taxable income (a 1099-C may be issued).
Finally, you can eliminate your EIDL debt in bankruptcy. When you file a bankruptcy petition, the “automatic stay” kicks in right away. That means all collection efforts against you must stop. You’ll need to list every debt in your bankruptcy case, including your SBA loan. You can’t pick and choose; you must include everything. Now, the first question: is the business owner filing, or the business itself? If the business is closed or has no realistic chance of remaining open, the owner may elect to file for Chapter 7 bankruptcy. In a Chapter 7 case, you can discharge business debt—including SBA loans that you personally guaranteed or that you owed individually—while keeping any exempt assets.
If you have assets you can’t protect (called “non-exempt”) or you make too much money to qualify for Chapter 7 bankruptcy, Chapter 13 bankruptcy will let you manage your debt by paying it back over time in an affordable way, using a payment plan that is approved and controlled by the court, and is binding on all creditors (usually interest free, and sometimes for only part of what you owe). There are certain debt limits. A business owner who wishes to keep their business open and can afford to do so can choose to file Chapter 11 bankruptcy or Subchapter V, where the creditors will vote on a proposed plan of reorganization and if it is approved, the court will confirm it.
Whichever chapter you file under, the case ends with a discharge and a fresh start. In bankruptcy, unlike an offer in compromise, no taxes are due on the debts that are cancelled. But how you spent the SBA money may come under scrutiny; misuse can lead to an adversary proceeding contesting the discharge (and worse). In one case a debtor used $71,000 of SBA money on a 2012 Bentley and the court denied his discharge.
Get Advice
Please don’t ignore the loan. It’s not fun, but it beats staying silent. The HAP only helps you get through short-term trouble, but interest keeps on adding up. An offer in compromise has certain requirements which you need to be able to meet, and it takes a lump sum of money which many business owners don’t have. Bankruptcy is available to all borrowers and all creditors are bound by the bankruptcy, so for a personally guaranteed EIDL loan, bankruptcy may be the best option for you, but that is up to you to determine depending on your individual situation. Don’t sit on the fence. Get advice on how to deal with the loan, ASAP.
