If you are having trouble paying an EIDL loan, you are far from alone. Roughly 37% of all those loans are either in default, in liquidation or charge off status. So the first question people ask is, “Am I personally liable for this loan?” Whether you are personally on the hook for an EIDL depends on a lot of factors, like how big the loan was, the form of business, and what you signed. A personal guarantee is a promise by a person (you!) to take responsibility for a loan or debt on behalf of your business. In this context, it means that if your business can’t pay the loan back, you personally will have to pay the loan back. What exactly does this mean and what are you on the hook for?
The SBA generally waived personal guarantees on EIDL advances and on loans of less than $200,000. But if you are a sole proprietor, the SBA will say that you and your business are the same, and you can still be held personally liable for your business debts.
If you borrowed over $25,000 in an EIDL loan, the SBA probably took a lien on all your business collateral. On default, you would have to turn over your business assets to the SBA, or only sell them with its permission.
If you took an EIDL loan of more than $200,000, and your business assets would not cover the loan, SBA probably required a personal guarantee, although it appears to take the position that you are bound whether or not you signed one. In either case, you are at risk for non-exempt personal assets and possibly any federal payments you receive such as a tax refund, social security or military retirement.
Whether you could lose your home depends on state law. In Texas, liens on a homestead are limited. If the SBA gets a judgment against you on a personal guaranty and records it in the land records, the SBA has the same rights as any other creditor. But it can’t take your homestead while you live in it. After your death, your estate may or may not have to pay the judgment on your home before it can be sold.
If You Stop Paying
If you stop paying, the SBA can sue your business, and can sue you personally if you signed a personal guarantee. After getting judgment against you, the Treasury can freeze your bank account and take the money, garnish up to 15% of your wages, seize non-exempt property, and put your social security number in CAIVRS, the federal debtor database. The SBA has 20 years to enforce a judgment.
The usual statute of limitations to sue you on an SBA loan is 6 years, beginning at the date of default or the last payment. But if you have a loan fraud claim against you, like for fraudulently obtaining an EIDL, then the statute of limitations is extended to 10 years by the COVID-19 EIDL Fraud Statute of Limitations Act of 2022.
The SBA also has a tool called administrative offset. Even if the SBA does not get a judgment against you, or the statute of limitations expires, it may still seize tax refunds, as long as the debt is within a 10 year statute of limitations. The SBA can also garnish most government benefits, including up to 15% of certain social security or military retirement pay. In limited cases, it can garnish veterans benefits, where the veteran waived retired pay to get VA disability.
Short-term Payment Assistance
The SBA does offer short-term payment assistance to borrowers who can’t make their EIDL payments. It will reduce your monthly payments by 50% for 6 months, and yes, the interest will still be adding up. In order to qualify, the loan has to be less than 90 days past due, in current status (not referred to Treasury for collection), the business still open and operating, and the need for help must be to provide short-term cash flow help, not to paper over long-term insolvency.
The short-term payment relief lasts for six months, but what about after? If you cannot afford your loan payments in the long-term, that’s a bigger problem. At this point, the SBA does not have an offer in compromise or debt forgiveness program in place for EIDL loans. Nevertheless, it has started sending out offer in compromise forms to EIDL borrowers. Get your attorney to help you think about whether filling out the form is a good idea.
In bankruptcy, if the loan was made to an individual as the owner of a sole proprietorship or if the individual guaranteed it for an LLC or other entity, the individual’s liability on the loan may be dischargeable. Chapter 11 may discharge the business entity’s liability on the loan. If the business is still operating, the owner may be able to reorganize the debt under Chapter 11 or Chapter 13 and reduce the principal of the loan.
One warning before you go down that road. The SBA requires EIDL recipients to use its funds for working capital and to pay normal operating expenses. That includes payroll, rent, mortgage, utilities, and paying business debt. It was later expanded to paying non-federal business debt and federal debt. If you used the EIDL for something else, you should have an honest talk with a bankruptcy attorney about your situation. Bankruptcy may not be the best choice for your business, but it could be.
If Your Business Has Closed Down
If your business has closed down, get in touch with the SBA. If you haven’t already sold your business or business assets outside the ordinary course of business, you will need written permission to do so from the SBA. If you have sold assets that are subject to SBA’s liens, you will need to consult with a business or bankruptcy lawyer. Hold on to all your records, especially the one that shows exactly how you spent the loan proceeds.
You can shut your business down using your state law procedures. In Texas, shutting your business down while still owing debt could potentially open you up to personal liability. Follow your loan contract and notify the SBA that your business is shut down. If your EIDL is secured, contact the SBA before you sell the secured equipment. And, if you have any cash on hand, pay the SBA before any owner, member or shareholder gets paid. Closing your business will not excuse your business, or you, from the obligation to repay the SBA.
There are lots of ways the SBA can collect a debt. Many of these don’t require the SBA to ever file a lawsuit against you. You have options. Don’t ignore the problem. And get advice before you sign anything the SBA sends you.
