EIDL LOAN WORKOUTS AND BANKRUPTCY
Recently we have received many telephone calls and emails from clients regarding their default under EIDL Loans and EIDL Grants, from the SBA or related banks and their options with respect to those defaults.
In the way of background, EIDL (Economic Injury Disaster Loans)
and EIDL Grants were provided to small businesses to help them recover from the COVID-19 pandemic.
EIDL loans were supposed to used for working capital and operating expenses.
EIDL loans are not forgivable and must be repaid.
EIDL Grants do not need to be repaid.
The maximum for EIDL Loans was $2 million. The interest rate on those loans was not to exceed 4%.The term was up to 30 years, with no prepayment penalty or fees
In SBA nomenclature, if a borrower does not make payment on an EIDL Loan, the loan can be Delinquent or go into Default.
SBA regulations provide that “Delinquent” means you’re behind on your SBA loan repayments, but your lender still believes you will be able to repay some, or all, of the loan amount
If a lender determines that you will be unable to repay your loan, then you will be classified as a “Default”.
Delinquent on EIDL Loan:
In the typical EIDL loan, the lender will assess a late fee for failure to pay, contact you for repayment, restructure the loan, extend your loan over a longer length of time (to reduce monthly repayments), allow you to repay only the interest portion of your loan, or some blend of the above (typical loan workout strategies).
Lender’s will push for a payment within 30 days of contacting you.
Default On EIDL Loans
If you repeatedly fail to make repayments and cannot reach an agreeable plan with your bank or the SBA, then your loan will go into default.
Consequences of Default:
Any collateral (property) you pledged for the loan is at risk. Depending on applicable state law the lender has the right to take the property and sell those assets to repay the loan.
Any parties or entities that guaranteed the loan can be required or sued to repay the loan balance.
The SBA will send you a demand letter, demanding that the loan be repaid.
The SBA can sue you or the guarantor of the EIDL Loans.
Your business and personal credit reports will show the default and your credit score will decline.
The SBA can lien and levy on federally held assets such as tax refunds
The loan default will be reported to the IRS and you may have to recognize income equal to the amount of the loan default, which is not repaid to the lender.
REMEDIES FOR AN EIDL LOAN DEFAULT:
1. Offer to pay some money towards settling the loan.
2. You can fill out an “Offer in Compromise” form and send it to an SBA Loan Officer, which provides financial information and the amount that you can pay as a final and full payment to satisfy the loan.
3. Prepare for litigation.
4. Consider a bankruptcy filing
GUARANTIES AND COLLATERAL FOR EIDL LOANS
EIDL loans of $25,000 or less do not require collateral or personal guarantees.
EIDL loans between $25,000 and $200,000, require collateral (UCC-1 and a Security Agreement) but generally do not require personal guarantees. In case of a default with respect to loans of this size, collateral such as accounts receivable, inventory or equipment could be seized and sold to satisfy the debt.
EIDL loans greater than $200,000 require collateral and personal guarantees.
EIDL and Bankruptcy
Bankruptcy is a last resort for an individual or a business. However, an individual with an EIDL loan or a company that guaranted an EIDL loan can file for chapter 7, 13 or 11 bankruptcy. Chapter 7 is a liquidation (the business closes), chapter 13 is a 3 to 5 year payment plan for individuals (not businesses) and chapter 11 is a reorganization or a liquidation for an individual or a business.
A business that has an EIDL loan can file for chapter 7 or 11 bankruptcy or chapter 11, Subchapter V bankruptcy (a form of chapter 11 bankruptcy for small businesses).
EIDL loans can be discharged in a chapter 7 bankruptcy filing.
Assets that were collateralized for an EIDL loan, such as equipment or accounts receivable would become the property of the Lender.
Parties who guaranteed EIDL loans can be sued by the EIDL lender and they would need to do a workout (an out of court workout) or a bankruptcy filing.
Clients or professionals with questions about EIDL loan workouts or bankruptcy filing should contact Jim Shenwick, Esq jshenwick@gmail.com 212 541 6224
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FOR MORE BLOG POSTS ABOUT SBA EIDL LOANS SEE:
EIDL LOAN WORKOUTS AND BANKRUPTCY
https://shenwick.blogspot.com/2022/07/eidl-loan-workouts-and-bankruptcy.html
EIDL Loan Default Questions & Answers https://shenwick.blogspot.com/2022/10/eidl-loan-default-questions-answers.html EIDL LOAN DEFAULT DOCUMENT REVIEW, WORKOUT, BANKRUPTCY FILING & OFFER IN COMPROMISE https://shenwick.blogspot.com/2022/07/eidl-loan-default-document-review.html EIDL Defaulted Loans https://shenwick.blogspot.com/2022/07/eidl-defaulted-loans.html New Relief Program for SBA EIDL Borrowers Who are Having Difficulty Repaying EIDL Loans " Hardship Accommodation Plan" https://shenwick.blogspot.com/2023/05/new-relief-program-for-sba-eidl.html EIDL LOANS and SBA OFFER IN COMPROMISE PROGRAM https://shenwick.blogspot.com/2022/07/eidl-loans-and-sba-offer-in-compromise.html PPP & EIDL Fraud https://shenwick.blogspot.com/2022/08/ppp-eidl-fraud.html Better to connect-What small business owners need to know about repaying loans tied to pandemic relief from the SBA EIDL Loans https://shenwick.blogspot.com/2022/11/better-to-connect-what-small-business.html
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