Since the start of the COVID-19 pandemic, the SBA has provided over $1 trillion in loans to small businesses, with a significant portion qualifying for forgiveness. However, almost $400 billion was allocated as Economic Injury Disaster Loans (EIDL), which cannot be forgiven.
Unfortunately, many businesses did not successfully make it through the pandemic and owe the Federal government. So, what happens if your business used an Economic Injury Disaster Loan but is now closing?
Here's what you need to know about getting out from under that SBA EIDL loan, in three straightforward steps.
Step 1: Understand what the EIDL was for
The purpose of an Economic Injury Disaster Loan (EIDL) from the Small Business Administration (SBA) is to meet financial obligations and operating expenses that would have been met had the disaster — in this case, COVID-19 — not occurred.
The funds your business received through the EIDL program initially offered as much as 6 months of your business's working capital. As the pandemic continued, the SBA offered additional assistance for up to 24 months of working capital.
Economic Injury Disaster Loans are usually available on a 30-year term, which means they're given with the expectation that the business will pay back the loan and are not designed to be forgivable. This is what creates problems when a business closes.
So, let's take a closer look at just what happens to an SBA EIDL loan if your business closes.
Step 2: Identify how much was taken out for the loan
What happens to your business's SBA EIDL depends on the size of the loan and how your business spent the money received. In general, smaller loans have reduced consequences and lower personal risk than larger loans under the EIDL program. Assuming you kept receipts to show how the money was spent, here's how your business EIDL may be resolved, depending on the size of the loan.
If the SBA EIDL Loan was less than $25,000
If your business took out less than $25,000 in an SBA EIDL, it is good to know you and the business have negligible risk.
Smaller loans like this don't require collateral or a personal guarantee, which means there's not much the SBA can do if a business closes. The government may seize federally held assets like income tax refunds, but they will not be able to seize your personal funds or assets owned by the business.
If the SBA EIDL Loan was more than $25,000 but less than $200,000
At these levels, the SBA requires collateral from the business and will put a "blanket lien" on all company assets, current and future. If, or when, the business ceases to operate or otherwise defaults on the loan, the SBA will have the right to seize business assets.
For example, if your business owns real estate, machinery, or vehicles, the government has a lien against them and will seek to seize these assets to satisfy the outstanding debt.
If your business has few assets or receivables with which to pay the SBA debt, you need to diligently document the use of the money and expect the SBA to ask tough questions, review your business and personal bank records, and verify that the terms of the contract was followed.
If the SBA EIDL Loan was more than $200,000
If your business took an EIDL for more than $200,000, a personal guarantee was required. This means that if the business can't make payments, the business owner is financially responsible.
In addition to the blanket lien on the business and all business assets used as collateral, the SBA can seize many of the business owner's personal assets. If your business is closing, and it has took an EIDL greater than $200,000, the business owner's personal assets and finances are at extreme risk.
Step 3: Determine the Best Way to Handle an SBA EIDL Loan if Your Business is Closing
If your business is closing, then it may be too late to consider a Chapter 11, Subchapter 5 bankruptcy, which would help reorganize the business debt, and potentially help the business owner retain personal assets. (If your business hasn't closed, but is worried about making payments on an SBA EIDL, talk to The Lane Law Firm's attorneys to see how Subchapter 5 reorganization can support your business.)
When a business is ready to close, there are three main ways to deal with an SBA EIDL debt: an offer-in-compromise (see below), stringently following the SBA's guidelines for business liquidation & dissolution, or bankruptcy (business or personal).
OPTION 1: Offer-in-Compromise [NO LONGER AVAILBLE AS OF JUNE 2023]
An EIDL offer-in-compromise (OIC) may be available once the business has officially closed and all assets not encumbered by the SBA have been liquidated. An OIC is an agreement between the borrower (the business) and the lender (the SBA), where the borrower agrees to pay the SBA a lump sum less than the debt owed, in exchange for the SBA to consider the debt settled.
An offer-in-compromise is not guaranteed. You have to apply for an OIC through the SBA, and your business (and you, if personally guaranteed) must meet a range of criteria to be considered eligible for an offer-in-compromise.
One very uncomfortable and unique criteria is that the amount offered must be at least as much as the SBA could expect to receive through “enforced collection proceedings.” This could include levying liens on assets, bank accounts, wage garnishments, and obtaining a judgment. What's more, an OIC usually requires a lump sum payment within 60 days of approval.
Unfortunately, the SBA is currently reporting that it is taking 6 to 12 months for an offer-in-compromise decision. This makes it a near-impossible option for most businesses and business owners who need answers fast.
Unfortunately, the SBA is no longer processing Offer-in-Compromises and has explicitly stated that debt forgiveness is unavailable for COVID EIDLs of any loan amount.
If you have a personal guarantee you will need to: ask for hardship/reduced payments and make payments hoping that one day they'll allow a settlement, pay it off, or consider bankruptcy.
OPTION 2: BANKRUPTCY
If the business is closed or closing, bankruptcy might be the best option to ensure that an SBA EIDL loan does not affect your personal finances any more than it has to.
Business Bankruptcy - Chapter 7
For any business with an SBA EIDL and which has any of the following: assets, equipment, inventory, or outstanding accounts receivables, business bankruptcy is an option. Specifically, a Chapter 7 business bankruptcy could be used to liquidate the business, stop adversarial creditors, and show all parties that the business legitimately cannot pay its outstanding debts.
A business Chapter 7 can resolve the business's responsibilities, but if your business's EIDL was $200,000+ or other debts contain personal guarantees, the business owner's personal assets can be at considerable risk.
Personal Bankruptcy - Chapter 13, 11, or 7
If the business owner signed a personal guarantee for an SBA EIDL, or other similar debts, a personal bankruptcy may be necessary. While bankruptcy is never an easy choice, and not a decision to be made without the direct support of your trusted attorney, personal bankruptcy can reduce or eliminate the debt obligations tied to the business's SBA EIDL. There are a three personal bankruptcy types that can eliminate or reduce SBA EIDL debt:
- Chapter 7 Personal Bankruptcy — Will typically eliminate 100% of the debt the business owner is responsible to for the SBA EIDL.
- Chapter 11 and Chapter 13 Personal Bankruptcy — Both of these types of personal bankruptcies will reduce or eliminate the debt a business owner is responsible for through the SBA EIDL.
Worried Your Business Can't Afford SBA EIDL Payments?
The forbearance period is over for COVID-19-related SBA Economic Injury Disaster Loans. Businesses across the country are unable to make those payments, or worse — these payments are forcing the business to consider closing. If your business isn't sure where to turn, the business debt relief and bankruptcy attorneys at The Lane Law Firm are here to help.
We can help your business restructure debt or reorganize through a Chapter 11, Subchapter 5 bankruptcy, or worse case, file for a Chapter 7 business or personal bankruptcy. No matter your concern, know that we're here to help with a team of experienced legal professionals.
