The Economic Injury Disaster Loan (EIDL) program provided vital financial assistance to businesses during the COVID-19 pandemic. Issued by the Small Business Administration (SBA), these loans offered a long-term, low-interest solution that helped many cover operating expenses and keep their doors open during unprecedented times.
We’ve now flattened the curve and resumed some sense of normalcy, but many small businesses are still feeling aftershocks of the global health crisis. Along with that, business owners are learning their EIDL loan may not be forgivable, unlike other pandemic relief programs. The very thing that kept them afloat just a few years ago has now become a burden.
So, where do they turn? Let’s explore the facts about EIDL loans, whether forgiveness is an option, and what alternatives might be available for businesses struggling to repay.
Are EIDL Loans Forgivable?
No, EIDL loans are not forgivable. The SBA’s guidelines for EIDL loans explicitly state that they are not eligible for forgiveness. Businesses must adhere to the terms outlined in their loan agreements, which typically include a 30-year repayment term with a low fixed interest rate of 3.75% for businesses and 2.75% for non-profits.
Unlike the Paycheck Protection Program (PPP) loans, which offered partial or full forgiveness if used for specific purposes like payroll, EIDL loans are structured as traditional loans. Recipients are expected to repay the full loan amount with interest, regardless of how the funds were utilized.
What If a Business Can’t Repay the Loan? 3 Options
For businesses struggling to repay an EIDL loan, it’s important to understand the available options. Ignoring repayment obligations can lead to serious consequences, including default, damage to credit, and legal action.
There are three main options: dissolving the business, defaulting on the EIDL loan, or filing for business bankruptcy,
1. Dissolving the Business
If a business is no longer viable and cannot repay the loan, owners might consider closing the company. Dissolving the business can be a great option for some and a poor one for others. The outcome largely depends on the loan amount and the associated collateral or personal guarantees:
- Less than 25,000: The loan is unsecured and not personally guaranteed.
- $25,000 to $200,000: Secured by business assets without a personal guarantee.
- More than $200,000: Secured by business assets and personally guaranteed.
What this means is that if the original loan amount is under $200,000, it is not tied to any personal guarantees, so owners can dissolve the business and be alleviated from the debt with no harm done to any personal assets.
However, if the loan debt is over $200,000, this decision can pose challenges in regards to the resolution of the remaining EIDL loan debt because it is likely personally guaranteed.
2. Defaulting on the EIDL Loan
If a business cannot repay its EIDL loan or close its operations in a structured manner, defaulting on the loan might become unavoidable. However, this can result in significant financial repercussions, such as:
- Collections and Wage Garnishment: The SBA may escalate the debt to the Treasury Department, which could initiate collection actions like wage garnishment or intercept future federal tax refunds.
- Asset Liens: For loans secured by business assets, the SBA could enforce liens, potentially leading to the liquidation of those assets to recover the outstanding balance.
IRS Enforcement: In more critical situations, the IRS might get involved, imposing tax levies or other measures to recover the debt, affecting both the business and its owners on a personal level.
3. Filing for Business Bankruptcy
Wait, what? Bankruptcy is the good option? We’ll explain.
The term “bankruptcy” often carries a negative connotation for business owners, but it doesn’t have to. For those struggling to repay EIDL loans, bankruptcy may offer a practical and effective way to address outstanding debts while safeguarding personal assets.
Rather than viewing dissolution or default as the only solutions, bankruptcy can provide an opportunity to reset and move forward. With over 15 years of experience handling complex business debt cases, The Lane Law Firm has assisted numerous business owners in utilizing bankruptcy to regain control of their finances and pursue a more stable future.
Some of the business and personal bankruptcy options we’ve used to help small business owners facing EIDL repayment difficulties are:
Chapter 11 Subchapter 5 Bankruptcy
Also known as the “reorganization” bankruptcy, Subchapter 5 was added under Chapter 11 of the U.S. Bankruptcy code to make bankruptcy more streamlined, affordable, and accessible to small businesses. By filing Subchapter 5 bankruptcy, small business owners can reorganize debt and develop a plan to pay off remaining debt without halting business operations.
Subchapter 5 bankruptcy also offers a quicker process, no required disclosure statement, and a number of other benefits, which you can read about in more detail here. Time and time again, it has been the most favorable solution for small businesses to find EIDL debt relief.
Chapter 7 Business Bankruptcy
Businesses that have already closed or are in the process of closing could benefit from Chapter 7 business bankruptcy. This type of bankruptcy can resolve a business’s responsibilities by liquidating assets, stopping creditor advances, and clearly showing all parties involved that the business cannot pay its debts.
Something to note here: if the business’s EIDL is more than $200,000 or other debts contain personal guarantees, the business owner's personal assets (e.g. future wages) can be at risk.
Chapter 7, 11, or 13 Personal Bankruptcy
If a business owner signed a personal guarantee for an EIDL, personal bankruptcy may be necessary. Personal bankruptcy is not an easy decision and should not be chosen without the direct support of a trusted attorney, but in some instances, it can reduce or eliminate the debt obligations tied to a business's EIDL.
With help from an attorney:
- Chapter 7 personal bankruptcy can remove any personal guarantee tied to the loan.
- Chapter 11 personal bankruptcy can reduce some of the debt a business owner is responsible for.
- Chapter 13 personal bankruptcy can reduce some of the debt a business owner is responsible for, but has debt limits of $465,275 for unsecured debt and $1,395,875 for secured debt. Anything over these amounts needs to be a Chapter 11.
Get Business Debt Relief Now
If your business is overwhelmed with COVID-19 EIDL debt, and you’re unsure where to turn, The Lane Law Firm is here to help. While EIDL loan forgiveness is not an option, there are viable solutions you can use to address these obligations and protect the future of your business. We’ll get to know your business’s circumstances, figure out the best way forward, and fight on your behalf through it all.
Get the process started by scheduling a free, no-obligation, 100% confidential consultation.
