SBA Loan Collection and Bankruptcy Options

Many businesses faced trying times following the COVID-19 pandemic, several of which sought financial help through the COVID loan program implemented by the U.S. Small Business Administration (SBA).

The COVID-19 Economic Injury Disaster Loan (EIDL) was implemented to support business owners and their employees during the pandemic. This program provided financing to nearly four million small businesses and nonprofits. The loans carry a 30-year-term and a fixed interest rate of 3.75% for small businesses and 2.75% for nonprofits. Because many businesses have struggled to repay loans obtained through the SBA, the agency is now ramping up collection of over a million delinquent loans. According to the SBA’s website, all COVID EIDL borrowers must repay their loans. These loans may become quite burdensome in the future, therefore it’s crucial that businesses start evaluating their options now.

Recently, the SBA began referring as much as $20 billion in delinquent COVID loans to the Treasury Department for collection. The Treasury Department has broad power to collect money for the SBA which includes wage garnishment, social security benefit garnishment, and withholding of federal tax refunds. Small businesses and nonprofits who are saddled with EIDL loans would be prudent to explore their options now before these loans become mired in collection and enforcement. Doing nothing may result in an unpleasant surprise when a borrower’s tax refund has been taken by the Treasury and applied to a delinquent SBA EIDL loan.

The bankruptcy process provides relief for business owners to stop collection efforts and deal with the SBA EIDL loan and other debts. Most significantly, the SBA required borrowers to sign personal guaranty for loans greater than $200,000, and for businesses to pledge their assets as collateral for loans over $25,000. Many businesses were forced to do both – they pledged all their available assets as collateral and the business owner(s) signed a personal guaranty(ies). An option is filing for a personal Chapter 7 to eliminate a personal guaranty associated with an EIDL loan. In its simplest form, this chapter will wipe out most of your debts, but in return you may have to surrender some of your property, unless exempted, or it has insufficient equity to provide a return to unsecured creditors, or of de minimis value. In chapter 7, there is no repayment plan as your debts are simply eliminated at the successful conclusion of the case. Another option is for an incorporated entity to file bankruptcy as an operating business under Chapter 11. This is commonly referred to as a “reorganization” chapter as it allows businesses to continue operating while the business owner and creditors reorganize the debts so the business can be profitable once again. In Chapter 11 the business proposes a feasible plan to repay its debts in order to obtain a discharge. A sole proprietor may file a Chapter 11 or 13 to reorganize personal debts and deal with personal guaranty. Such an avenue allows debtors to keep property and pay debts over time through a proposed repayment plan.

Aside from bankruptcy, there are few attractive options. Business owners can seek a deferment plan directly from the SBA, allowing them to defer payments on the loan temporarily. However, the loan would still need to be repaid during the time it’s operating. On the other hand, if a business decides to close its doors, it can apply for an offer in compromise with the SBA to settle the personal guaranty. An offer in compromise would be a viable option if businesses are unable to pay their SBA loans in full, as it would permit the business to settle their SBA debt for less than the full amount owed. But it’s only viable if a business wishes to close their doors.

If your business is currently struggling and saddled with other significant debts, it makes the most sense for you to explore your bankruptcy options now. These current loans may be too burdensome for your business to repay in the foreseeable future, but it’s important for you to know that there are ways to address these debts early on to minimize the damages you may face later!

Bankruptcy is a feasible way to stop collection efforts and deal with the crushing weight of EIDL loans and other debts! MMD&C attorneys are ready and able to guide you through the process and help you find the best option for your business. Call 610-891-8806 today to schedule an appointment.