If you closed your business and still owe on an Economic Injury Disaster Loan, you are in a lot of company. Roughly 37% of EIDL loans are in default, liquidation or are being charged off. So the question of whether the SBA will take a reduced amount on a closed business comes up constantly, and the honest answer is disappointing. There is no offer in compromise program for EIDL loans, and no EIDL forgiveness program. But the SBA is mailing out offer in compromise forms anyway. Before completing one, speak to an attorney.
Just because the business closes does not mean that the EIDL is canceled. It just means the loan still exists but the business is out of the picture to repay it. Closing down your business is not a real reason to stop paying the EIDL. Neither the business nor you individually is relieved of liability by shutting down.
Nor can a closed business lean on the one relief tool the SBA does offer, SBA short-term payment assistance, a program to cut the monthly payment of an EIDL in half for 6 months, with the interest still running up the balance. To qualify,
- the loan must be less than 90 days past due;
- the loan must not have been referred to the Treasury Department for collection;
- the business has to be open and operating;
- and the borrower’s need must be for cash flow, not because the business was long-term insolvent.
A borrower with a closed business thus does not qualify.
So what are you actually exposed to? It depends on how the loan was set up. Generally, the SBA has waived personal guarantees for loans and advances under $200,000. However, if the business structure is a sole proprietorship, the owner may still be on the hook for the loan regardless. What about loans over $200,000? If the business assets are insufficient to satisfy the loan, the SBA most likely required a personal guarantee. The SBA appears to take this position even if the guaranty was not signed. Non-exempt personal assets are at risk, along with a tax refund and certain federal payments such as Social Security and military retirement payments.
The SBA may also have a lien on business assets. In loans over $25,000, the SBA most likely took a lien on all business collateral. The collateral must be turned over or sold with the SBA’s permission. Can the business liquidate the assets? Not without written permission from the SBA. You need written permission to sell or transfer the business assets outside the ordinary course of business. Have you already sold the assets? You should speak with a business or bankruptcy attorney.
So you’re getting the picture - the SBA doesn’t mess around. The SBA can file a lawsuit to recover its money. If the owner signed a personal guarantee, the SBA can sue the owner individually, as well as the business. Suppose the lawsuit is successful. The court enters a judgment. The judgment gives the Dept. of Treasury authority to go directly to your bank and take whatever cash you have there. Treasury can garnish up to 15% of wages. It can take non-exempt property. Treasury can enter the owner’s Social Security number into CAIVRS. The SBA has 20 years to collect on the judgment.
For a lot of owners the scariest question is the house. In Texas, it’s tough to put liens on the homestead. If the SBA gets a judgment against you individually on the personal guaranty and records it in the land records, then the SBA has the same rights as any other creditor against your home. And SBA can’t take your homestead, at least while you are living. After you’re dead, whether your estate will have to pay the judgment before your home can be sold is a little more difficult to figure out, and it depends on the other circumstances.
The statute of limitations on SBA loans is generally 6 years (28 USC 2415(a)); it begins to run at the point of default or date of the last payment. In cases of loan fraud, the limitation period is extended to 10 years by the COVID-19 EIDL Fraud Statute of Limitations Act of 2022. Waiting out the clock is not a plan, though. Even when the statute of limitations has expired, and even if the SBA lacks a judgment, the agency can still collect some of the debt via administrative offset. For example, the SBA can seize your federal tax refunds (10 year limit), garnish up to 15% of certain Social Security or military retirement pay, and collect veterans benefits in limited cases (e.g., where veteran waived military retired pay to obtain a VA disability award).
That leaves bankruptcy. If you received an EIDL as an individual (e.g., as a sole proprietor), you may be able to discharge your liability for it in bankruptcy. You might be able to discharge the personal liability you might have incurred by personally guaranteeing the loan. Chapter 11 bankruptcy may also discharge the business entity’s loan liability. There is one catch: the money could only be spent on permitted purposes. Proper uses include working capital, paying employee payroll, rent, mortgage, utility bills, ordinary expenses, and business debt. If the loan proceeds were not used for a permitted use, then the answer is that you need to be honest with your bankruptcy attorney about it. The bankruptcy may not be the right solution.
Talk to an Attorney Before Winding Down
If you are winding down now, the order of operations matters. Closing your business is governed by your state’s laws. Be sure to follow the rules and procedures for closing your business. However, if there’s outstanding debt left to be paid, the owner might have personal liability for the debt, in some circumstances, under state law. (Texas is one such state). Also, the owner would have to comply with the terms of the contract with the SBA by providing notice that the business is closing, and they should still try to pay the SBA before distributing to members, owners, or shareholders. Preserve all records, especially those showing how the funds were used. Talk to an attorney before winding down.
So, back to the question in the headline. The answer: no. The SBA has no offer in compromise program and no forgiveness program for EIDL. In fact, the SBA has been sending out OIC forms, but having a form does not a program make! Do not fill out an OIC without advice. Whether an offer in compromise or other options make sense (depending on whether there is a personal guarantee, whether it is a sole prop vs LLC, the amount of the loan, the collateral pledged, how the funds were spent, etc.) will depend on the facts in each case. The message: Keep communicating with the SBA. Don’t ignore the SBA.
