COVID Economic Injury Disaster Loans
Nearly four million small businesses received COVID Economic Injury Disaster Loans. They’re due now, nearly six years and multiple deferments later. Hundreds of thousands have already defaulted. The loans were dispensed quickly and with minimal underwriting. Then inflation, cost increases, supply chain disruptions, and tariffs hit. Now owners everywhere are asking the same things. What happens if we can’t pay? Can we lose our homes? Can I just walk away? If you can afford to pay, of course the answer is to pay. But many business owners can’t afford to pay. Business owners who can’t repay their EIDL are people with genuine challenges. They’re doing what they can to survive, to keep their doors open, to keep the lights on. Here is what happens to them next, and what they can still do about it.
Your Loan Will Be in Default
Default doesn’t happen the day you miss a payment. When your EIDL payment is late, the loan is “delinquent.” The SBA sends you notices of the delinquency by email, mail or the MySBA Loan Portal, usually every 30 days, until you make a payment, and interest keeps accruing. After 120 days of nonpayment your loan will be in default, at which point the SBA hands it off to the U.S. Treasury for collection. That means the Treasury will add a 30% collection fee to the loan balance, turning $1,000 owed into $1,300. It can seize your paycheck, offset your tax refunds or Social Security benefits, and sue you for the money. It can also report the default to commercial and consumer credit bureaus, and it can take up to seven years to rebuild a consumer credit score. A default may also keep you out of future SBA financing, not to mention doing business with the government.
Whether the government can reach past the business and into your own pocket depends on how much you borrowed. Every single COVID EIDL of more than $25,000 demanded collateral, and the SBA claimed a blanket UCC lien on the business — essentially, the right to seize any of the business’s assets if you defaulted. If you took out more than $200,000, you also had to sign a personal guarantee, so the government can come after the guarantor’s personal assets, bank accounts, and wages. The SBA typically pursues the business assets first, but it doesn’t have to. And even without a guarantee, misuse of the funds or failure to maintain required records can be treated as fraud or breach of contract, which can still put personal liability on the owner.
A lot of owners assume they can lock the doors and let the loan die with the business. And it turns out that just closing your business doesn’t mean your EIDL magically goes away. The SBA (and after, the Treasury) could take the remaining business assets — and depending on how the loan was structured, your personal assets, bank accounts or even your wages. The agreement you signed requires you to notify the SBA that you’re closing, and that you’ll work with them to find a resolution to the debt. If you don’t follow that process, you could be in breach of contract and open to being sued by the government. Hold on to the loan documents, your financial statements and every piece of communication from the SBA or the Treasury, and make sure you get legal or financial advice early.
Communicate Early and Often with SBA Staff
The key for many of our distressed borrowers is learning to communicate early and often with SBA staff. Tell the SBA about payment problems as soon as you can, by email or through the MySBA Loan Portal. EIDL payments were already deferred for 30 months, so hardship relief options are limited. An SBA payment assistance plan can reduce payments by up to 50% for six months, and you can get it once every five years. The loan needs to be less than 90 days delinquent and active – not charged off – and you will have to explain the reason for your hardship and why the situation is temporary. You will continue to accrue interest over those six months, and the balloon payment at the end of the loan will be increased. If you’re already pretty far behind and you can’t see an easy way out, you should still call. If you can show the SBA that you have suffered significant financial hardship, you may be able to negotiate a modification, such as extending the loan term or reducing the monthly payment.
Last Resorts
When none of that is enough, what is left are last resorts. An offer in compromise will extinguish the debt for less than the amount owed, either as a lump sum or through a payment plan, but only after the business has ceased operations, liquidated all assets and applied the funds to the debt. It’s a slow process that requires extensive paperwork, and it’s not guaranteed to be accepted. Some borrowers posting online say they haven’t seen an offer accepted for a COVID EIDL.
Bankruptcy is the other one, and the chapter you file under matters. If you have no personal guarantee on your EIDL, Chapter 7 is an option to erase the debt. With a guarantee, you’ll have to file both a business and a personal bankruptcy. You must demonstrate a hardship and that you didn’t commit fraud, and the business typically closes and sells its assets. Chapter 11 allows the business to keep operating while it restructures under a court-approved plan. As long as payments are current, the government can’t come after the debt or seize collateral. Chapter 13 is available only to individuals, like a sole proprietor, and not to LLCs or corporations. It lasts three to five years, stops collection, and may discharge remaining eligible debt.
Whichever way you go, get organized first. Gather the loan agreement, promissory note and any personal guarantee, the payment history, collection notices, the past two years of your business and personal tax returns, any financial statements, recent bank statements, proof of how the loan was used, and a letter explaining why you’re in financial difficulty. Contact the Treasury only if you’ve received a letter saying the loan was transferred to them. Otherwise, work with the SBA. You can find help for free or at low cost through nonprofits like SCORE and Small Business Development Centers, and with an accountant or attorney who’s worked with EIDLs on hardship requests, settlement applications and negotiation.
Unlike PPP loans, these COVID EIDLs don’t offer forgiveness. Yours is not a gift. It is a loan. Ignoring it is the worst choice of all. The bottom line here is that you need to keep paying if possible and/or have a plan for resolving the debt somehow.
