When the pandemic hit, a lot of small businesses borrowed money from the U.S. Small Business Administration in the form of Economic Injury Disaster Loans, known as EIDLs. These loans started coming due for repayment in 2023. Many small business owners can’t pay back the loans, even at the low interest rate. Can they just walk away from the loans? Short answer: no. Even if you don’t make payments on the loans, you still owe the money.
Which Kind of EIDL You Got
Before you decide to stop paying, it helps to know which kind of EIDL you got. If your EIDL was less than $25,000, the EIDL was unsecured. If the EIDL was over $25,000, it was a secured loan, which means that it was secured with the business’s collateral. If the EIDL was over $200,000, you personally guaranteed repayment of the loan. What is a personal guarantee, you ask? It means the business is not the only one on the hook. The personal guarantee is usually signed by the owner or officer of the business. Guarantors make promises and are personally responsible. So, if you stopped paying, the SBA could try to collect not only from the business, but also from the collateral, and from you, personally.
Federal Database
There is also a consequence that many borrowers don’t think about: an unpaid SBA loan can mean a blocked VA loan or future SBA loans. The government maintains a listing, CAIVRS, and here is how HUD describes it: CAIVRS is a federal database of delinquent federal debtors that helps agencies reduce risk to federal loan and loan guarantee programs. It alerts participating federal lending agencies when an applicant for credit benefits, or for a position of trust in a federal credit program, has a federal lien, judgment, or a federal loan in default or foreclosure, or has had a claim paid by a reporting agency.
Bankruptcy Should Be an Option
For owners who simply cannot pay, bankruptcy should be an option. In general, an EIDL debt can be wiped out in bankruptcy. EIDL loans are like any other debt in a bankruptcy, subject to the same rules for discharge as a credit card or medical debt. One exception is a loan taken out with no intent to repay. That constitutes fraud, which if proven, cannot be discharged. Most owners of businesses took the loans to save their business. They most certainly intended to pay the loans. Due to the economic downturn and rising inflation, however, many did not survive, and discharging those debts should not be a problem. But a business owner obtained the EIDL for a business purpose. If the SBA can show that the business did not use the EIDL for a proper business purpose, it could object to a discharge of that EIDL debt. How far the SBA will go in objecting to such a discharge remains to be seen.
The structure of your business matters here. If you have a personal guarantee, you cannot wipe out an EIDL through a bankruptcy of the corporation alone. The debt will not be discharged as to the guarantor, and you’ll still owe it. You should consider a personal bankruptcy. As a corporation (LLC, S corporation, C corporation) you can only get a bankruptcy discharge if you are operating under a reorganization plan in a Chapter 11. In a Chapter 11, the amount you pay will be based upon how much cash flow you have, the value of assets you have, and income that you will have in the future. You will need a certain number of your creditors to vote in favor of the repayment plan. The new bankruptcy rules added Subchapter V of Chapter 11. That doesn’t require a creditor vote as long as other requirements are satisfied.
If your name is on the guarantee, or if you don’t have a corporation at all (just a DBA), then it’s personal bankruptcy time: Chapter 7, Chapter 13, or Chapter 11 if the debt is very high. Because the business is also liable, the company may need its own bankruptcy too, depending on whether it will stay in business.
Collateral is where things get more complicated. When the EIDL is secured by collateral, the lien on that collateral survives bankruptcy. This means the lien exists against the assets existing as of the date of the bankruptcy filing. In a corporate case, the value of the collateral must be paid out over the duration of the plan. For example, if a company took a $500,000 SBA loan secured by business assets, but those assets were worth only $200,000 on the date of filing, the plan would have to pay out at least $200,000 to be approved.
Even a successful bankruptcy has a catch. The CAIVRS database is not erased by bankruptcy. The gov’t can still withhold certain things, things like a new VA loan or new SBA loan, because you didn’t pay your debt. I believe that this is similar to a violation of the discharge injunction, but I haven’t found any court case finding that it is.
For owners, the main takeaway is not to stop payment on your SBA loan and hope it will go away. Be sure to know the terms of your loan, whether you have secured the loan or signed a personal guarantee, and what your options are.
