What happens if I can’t repay my EIDL loan, even through bankruptcy?

When COVID hit, the Small Business Administration handed out disaster loans (EIDLs) to small and even some larger businesses across the US. Now that the pandemic is largely behind us, many businesses that received such loans may be struggling financially and not able to repay them. Unfortunately, some may be wondering if bankruptcy can get the debt discharged. These loans, unlike PPP loans, are not forgivable but must be repaid.

Who Bears the Responsibility for the Loan

The most important thing to know right off the bat is who bears the responsibility for the loan being repaid. If you’re a small business owner, it can get confusing quickly. So it is good to stop and review your original paperwork for your loan. Generally speaking, you’ll find the borrower’s name at the top of the loan agreement document for the EIDL. Whatever is named in that part of the loan agreement, that is who or what entity will be responsible for repaying the loan. If you signed a personal guarantee, you’re agreeing to become responsible for repaying the entire loan. That responsibility lies with you even if your business itself goes under. If you have signed a personal guarantee on the loan agreement for the EIDL, it gives the SBA the ability to skip straight past the business and go directly to you. One thing to bear in mind, however, is that you might receive notifications about your business’ loan(s) from the SBA and be shocked to see your name on the notification too. This can seem alarming, especially if you believed the loan only existed for your business and not you individually. But the good news is that your name is probably only included on that document so that the SBA can simply direct the notification to the business owner as a kind of “attention of” addressee. The key thing is that you need to ensure the loan agreement did not include a personal guarantee that would make you personally responsible for repaying the debt.

Security Interests

The next question that needs answering is whether the SBA took security interests in the loan agreement. As with many other loans and other debts, your loan agreement will define the collateral on which the SBA has a lien. Unfortunately, you generally can’t sell that asset that’s the collateral for the loan without the SBA signing off. Even if the SBA can and will take your collateral for EIDL loans in default, that doesn’t automatically discharge the debt. Keep in mind that it might be that your collateral sells at a price lower than what was needed to cover the loan. So if the proceeds from the sale of that collateral don’t cover the entirety of the loan’s balance and the costs of collecting and there is a shortfall, then the SBA can still pursue the business or business owner (if a personal guarantee is involved) for that shortfall. Sometimes there is simply no collateral to claim and the loan was unsecured. Then the SBA is nothing but a regular, unsecured creditor in the same position as a credit card company or any other lender you owe. One important thing to understand is that the SBA would still have to sue the business for the EIDL debt in the same way it would any other creditor. Without a guarantee, the business itself is the only entity that is required to repay the loan and not the owner, barring a defectively formed company. A personal guarantee puts you into the exact same situation as the borrower. A personal guarantee also allows the SBA to garnish your wages, take your tax refunds, and offset a part of your Social Security payments. The wage garnishment can happen without a court order. But it can’t place a lien on your home without a lawsuit first, unless the home was pledged as collateral for the loan.

Bankruptcy Discharge

The good news is that you very well may be able to get your EIDL debt discharged in bankruptcy, including if you personally guaranteed it. The only important exception is if you deliberately lied on the loan application. If so, the SBA can fight the discharge of the debt by claiming you committed fraud when you applied for the loan. However, the SBA would have to show up in court to argue it and have the judge rule on it. As for the business, a company only gets a bankruptcy discharge in Chapter 11. If the company itself only owed the money, then unless the company has both the money and the competent management to craft and accomplish a plan, Chapter 11 for the company itself only would seldom be useful for the EIDL issue. If you file a personal bankruptcy case, your personal obligation on the personal guarantee would generally be discharged.