During COVID-19, the SBA created the Economic Injury Disaster Loan (EIDL) program to help small businesses survive the financial impact of the pandemic by providing loans to cover operating expenses. For many companies, this loan was their lifeline and was the reason they were able to make it through the shutdown. However, with EIDL payments due and the SBA becoming more aggressive in its collection efforts, many business owners are feeling overwhelmed.
If you are struggling to make your EIDL loan payments, you are not alone. The government has estimated a 37% EIDL loan default rate among borrowers. It’s important to understand your options and what can happen if your EIDL defaults.
Contact Denbeaux Law to learn more about how our attorneys may be able to help you navigate the EIDL default process, protect your rights, and mitigate the impact on your finances.
What Is An SBA EIDL Loan?
During the COVID-19 pandemic, the SBA created the Economic Injury Disaster Loan (EIDL) to help small businesses survive the financial impact of the shutdown. The loans were designed to cover operating expenses businesses couldn’t afford because of the shutdown, so they wouldn’t have to close permanently.
The Covid EIDL loans were structured as 30-year loans, with interest rates of 3.75% for businesses and 2.75% for private nonprofit organizations. For loans over $25,000, the SBA required collateral, and for loans $200,000, the EIDL loans had to be personally guaranteed.
To help alleviate financial stress during the height of the pandemic, the SBA allowed a loan payment deferment for two years. While business owners did not have to make the monthly payment toward their EIDL loan for the first two years, interest continued to accrue at that time. This meant that the total amount owed on the loan increased before borrowers began making payments. This, along with the fact that some borrowers believed EIDL loans would be forgiven, has made the repayment process difficult for many borrowers.
Are EIDL Loans Forgivable?
Unfortunately, there is no COVID-19 EIDL loan forgiveness program. Unlike Paycheck Protection Program (PPP) loans, EIDL loans are not forgivable. The only exception for EIDL loan forgiveness would be if you received an EIDL advance (up to $10,000). If you received that advance, it was forgiven automatically, but the loan itself still needs to be repaid.
Additionally, if your loan was personally guaranteed, you will have to repay your SBA EIDL Loan even if your business is closed. While there is no EIDL SBA loan forgiveness program, there are a few loss mitigation options available if you are unable to pay back your EIDL loan.
What Happens If I Can’t Pay Back My EIDL Loan?
If you’re struggling to pay your EIDL loan, there are a few loss mitigation options that you may be eligible for to help.
EIDL Hardship Payment Program
The SBA offers a temporary EIDL hardship assistance program that lowers your monthly EIDL payments by 50% for six months. To qualify, your loan must be less than 90 days past due when you apply, and cannot be in “charged-off” status. You’ll also need to explain your financial hardship and why it’s temporary. If approved, your interest continues to accrue, which means your total balance will grow over time and your final payment will be larger.
While this option can provide breathing room in the short term, it’s not a long-term solution. At the time of writing this article, the program is not currently open, but you can check the SBA website to confirm eligibility requirements and if they are currently accepting applications.
Offer in Compromise
In rare cases, the SBA may consider an Offer in Compromise to settle the loan for less than what is owed. However, these are extremely difficult to get approved, and the SBA has strict eligibility requirements.
To qualify, your business must be closed, all assets must have been sold in accordance with SBA guidelines, and you must submit extensive documentation as part of the application. The SBA only accepts an offer in compromise application in limited circumstances. Because approval is uncommon, it’s best to work with an attorney who can help you determine eligibility and prepare your submission to give you the best chance of success.
If you are not eligible for these loss mitigation options or are still unable to make payments even under a hardship plan, your EIDL loan defaults after 120 days of missed payments. At that point, the SBA may transfer your debt to the Treasury Offset Program (TOP) or the Cross-Servicing Program for collections.
What Happens If You Default on an SBA EIDL Loan?
If your EIDL loan defaults, there can be serious consequences. It’s important to understand what could happen next and how it could impact both your business and your personal finances.
Aggressive Collection Efforts
Once your debt has been transferred to the Treasury Offset Program or Cross-Servicing Program, the government has far-reaching powers to collect on the debt that is owed. This includes, but is not limited to:
- Withholding tax refunds, social security, or other federal benefits
- Garnishing wages without a court order
- Levying bank accounts
These collection efforts can happen quickly and are difficult to stop once they’ve begun.
Personal Liability
If the default is on a loan greater than $200,000, you are personally liable for the EIDL loan. If you have an EIDL personal guarantee, the SBA can pursue you directly and go after your personal assets to recover payment, even if your business is closed. This includes placing liens on your property or suing you for the remaining balance. Once the SBA enforces a personal guarantee, your personal assets and income are on the line until the debt is resolved.
Credit Damage & Federal Loan Ineligibility
An EIDL loan default is reported to the major credit bureaus, which can lower your credit score. This impacts both your personal and business credit, which can make getting access to new loans or forms of financing more difficult and expensive. Typically, borrowers who have an EIDL loan default on their record are ineligible for future federal funding.
Fees & Penalties
If you don’t pay your EIDL loan and the government has to take action to collect on the debt, the Treasury may add collection fees to account for the administrative costs associated with the collection efforts. These fees and penalties can significantly increase the amount you owe and make repayment even more difficult.
Defaulting on an EIDL loan can have lasting impacts on your finances. If you’re facing an EIDL loan default, working with an attorney can help you understand what options you may have for relief and what actions you can take to protect your personal financial assets.
EIDL Loan Default Legal Support
If you are facing an SBA EIDL loan default, don’t wait to get help. An attorney may be able to help you apply for an EIDL loan offer in compromise, protect your personal finances if your EIDL loans have a personal guarantee, or challenge the validity of the default if there were any errors or violations in how the SBA handled your loan.
If you are struggling with EIDL loan repayment, contact Denbeaux Law today for a free consultation and learn how we can help.
