Are you one of those small business owners whose businesses were severely affected by the COVID-19 pandemic and had to take out an Economic Injury Disaster Loan (EIDL) to keep your business afloat?
The federal government introduced the Economic Injury Disaster Loan program to support small businesses during the pandemic. The EIDL program provided a $10,000 non-repayable, tax-free advance grant to cover expenses and stay businesses afloat. However, no one anticipated that a $10,000 grant would turn into a 30-year loan.
Read this blog post if you are experiencing financial trouble and grappling with EIDL loan payments. It discusses what happens if you default on an EIDL loan and how to overcome this crisis.
Consequences of Defaulting on EIDL Loans
The consequences of defaulting on an EIDL loan vary depending on your situation. It can be categorized into three situations to understand it better.
Situation 1: Borrowed up to $25,000 in SBA-backed loan.
If you took out only $25,000 or less in an SBA (small business administration) backed loan and default, the consequences are less severe:
- SBA loans up to $25,000 are unsecured. It means the lender cannot seize your assets as nothing is collateral.
Situation 2: Borrowed more than $25,000 in SBA-backed loan.
If you borrowed more than $25,000 but up to $200,000 and default, the consequences are severe:
- SBA loans of more than $25,000 are secured and have your business assets collateral. The lender will likely seize your business assets to satisfy the debt.
Furthermore, the consequences vary depending on how you obtained the loan:
- As your business is a separate entity, if you obtained your SBA loan through an EIN (Employer Identification Number), it won’t affect your personal credit record. It only affects your business.
- However, it will significantly affect your personal credit score if you are a sole proprietor and obtained your SBA loan through a Social Security number.
Situation 3: Borrowed more than $200,000 in SBA-backed loan.
If you borrowed more than $200,000 and default, the consequences are even more severe:
- The lender will likely seize business assets and dispose of them to satisfy the debt, as these assets have collateral charges attached.
- SBA loans of more than $200,000 involved personal guarantee conditions.
Business owners with stakes up to 20℅ or more had to provide personal guarantees to receive more than $200,000 in SBA loans. So, if they default on the SBA loan, they will be personally liable.
As a result, business owners will likely face attachment of personal assets, such as bank accounts, vehicle repossession, and even foreclosure to collect the debt. It will also significantly impact their personal credit score as they have given the personal guarantee.
General Consequences Applicable to Every Defaulter of EIDL Loan
Federal Payments Withheld
When you default on an SBA loan, the SBA sends your record to the U.S. Treasury Department. The U.S. Treasury Department withholds all your federal payments and benefits to satisfy the debt. It includes
- Tax refunds
- A portion of social security payment
Ineligible for Other Federal Programs
The U.S. Treasury Department also disqualifies you from enrolling in other federal programs in the future and receiving any government benefits.
Administrative Wage Garnishment
The U.S. Treasury Department garnishes your wages to satisfy the EIDL loan debt. It sends an administrative order to your non-federal employer and asks them to withhold 15% of your wages. Your employer will garnish your wages and send them to the U.S. Treasury Department accordingly. The U.S. Treasury Department doesn’t need any court order to garnish your wages.
Clearly, the consequences of defaulting on Economic Injury Disaster Loans are severe.
Don’t Confuse SBA Loan Default Status With the Occurrence of One or Two Missing Payments
Failing to pay one or two installments doesn’t automatically put you in default status.
When you fail to make payments, the lender considers it delinquent and contacts you to repay your installment payment. The lender believes you might be going through temporary financial difficulties and provides you with time to make repayments.
If you fail to make payments for around 3 to 4 months and don’t contact your lender, then the lender may characterize your loan as default.
Other circumstances that trigger SBA loan defaults include:
- Violate any terms and conditions of the loan agreement, such as using funds for purposes other than business financing
- Failing to pay any taxes
- Death
- Change of ownership
- Filing for bankruptcy
What Are Your Options to Overcome the EIDL Loan Crisis?
If you are in extreme financial hardship and unable to repay your EIDL loan, you can consider:
- Submitting an offer in compromise
- Filing for bankruptcy
Offer in Compromise
An offer in compromise is an offer you make to the SBA and ask them to settle your debt for a specific amount that is less than the amount you owe. If SBA accepts your compromise offer, your loan repayment obligation becomes satisfied when you pay the agreed amount.
As a result, you are no longer responsible for the remaining balance and don’t have to face the enforced debt collection process by the U.S. Department of Treasury. Your EIDL loan becomes closed.
Eligibility to submit a compromise offer
- You can only submit it after the liquidation of your collateral assets.
- You or your business should not be involved in bankruptcy proceedings.
You must prove your financial hardship to get approval of your offer in compromise. Furthermore, it still affects your financial credibility and makes you ineligible for further federal programs.
Bankruptcy
Filing for bankruptcy might be the best option for dealing with EIDL loans and even other debts if you are overwhelmed with financial difficulties.
Benefits of filing for bankruptcy include:
- The moment you or your business files for bankruptcy, it stops all collection efforts of your lender against you or your business. It’s for a temporary period, so filing for bankruptcy before the lender seizes your collateral business assets would cease them temporarily.
- It can help you either eliminate your EIDL and other debt obligations or discharge them. As a result, you would have a fresh start.
- It can also help you protect your business and personal assets from being seized by your lender.
However, bankruptcy is an immensely complex process. It requires expertise to achieve the best financial solution for you.
Contact Macco & Corey P.C, if You Are Unable to Pay Your EIDL Loan
Macco & Corey P.C. have been assisting New Yorkers to get rid of their debts and achieve financial freedom for almost a decade. As we have hundreds of EIDL loan cases, our SBA EIDL loan default attorney understands the intricacies of EIDL loans and the challenges they propose to small business owners. We can help you end 30 years of endless EIDL loan debt while protecting your best financial interests.
Listen to what other New Yorkers have to say about us:
“Very professional and answered all my questions until I was satisfied. Prompt at return calls and general feedback. Would recommend it. Simplified a stressful event.” Bernadette Molyneux
If you are located on Long Island, contact us today to schedule a free consultation and discuss your case with one of our experienced EIDL loan attorneys. They can assess your situation and help you explore the best options for dealing with your EIDL loan.