Many clients contact us after they have defaulted on their SBA EIDL loan and it is transferred to the Department of Treasury (“Treasury” ) or Treasury Offset Program (TOP) for collection. Seven payments must have been missed for the loan to be transferred to Treasury and when the loan is transferred, a 30% penalty is added to the loan balance.
What will occur, and what can a client do when the loan is sent to Treasury by the SBA?
I Borrowers can seek a “recall” back from Treasury to the SBA in limited circumstances.
A. Procedural/notice defects: If the borrower never received the required 60‑day notice from SBA before TOP referral (e.g., bad address, no notice in portal), you may be able to argue the referral was improper and request recall based on lack of proper notice. Also if you made your payments or were in default for fewer that 7 months you may have grounds to recall the loan.
B. Hardship: In some cases, documented hardship (permanent disability, closure of the business, bankruptcy, disaster, or offset of income that would create an inability to meet basic living expenses) can be used to request recall or, at minimum, a suspension or limitation of offsets.
C. Intent and ability to cure: If the borrower can promptly cure arrears and credibly stay current going forward, SBA may agree to pull the loan back for servicing rather than keep it at Treasury.
In our experience, recall is very hard to do and we will not handle those cases for clients.
II What can Treasury do to collect the defaulted loan?
Once the debt is at Treasury (usually via the Treasury Offset Program, or “TOP”), the government adds a 30% penalty fee to the outstanding balance increasing the amount due.
Treasury or TOP can offset federal payments, including federal income tax refunds, some state tax refunds (in participating states), and certain federal payments such as 15% of Social Security benefits payable to an individual borrower or a guarantor of a defaulted SBA loan.
Those businesses that do work for the Federal government, may see a portion of the receivables due from the Federal Government taken by TOP to repay the defaulted loan.
Treasury can administratively garnish wages from an individual borrower or guarantor without first obtaining a civil judgment, subject to statutory notice and hearing requirements.
The outstanding debt can be reported to credit bureaus, negatively affecting personal and/or business credit.
Treasury can refer the matter to private collection agencies and, in certain cases, to the Department of Justice for litigation to reduce the debt to judgment and pursue enforcement remedies (e.g., execution, liens, etc.).
Where there is a personal guaranty for the defaulted loan (COVID EIDLs over $200,000.00), the government can pursue the guarantor and reach personal assets, subject to usual exemptions and procedural protections.
III. What can a borrower do after the defaulted loan has been referred to Treasury?
Negotiate with Treasury (or its contractors)
If recall is not viable, your main tools are negotiation and structured resolution under Treasury’s collection framework. Forms will need to be filled out providing detailed financial information to the Treasury or the collection agencies.
Installment agreements: Treasury (or its collection contractor) may accept a monthly payment arrangement based on verified financial information, sometimes in conjunction with partial resumption or limitation of offsets.
Lump-sum compromise/Settlement: Treasury and DOJ have compromise authority for federal debts; in practice, compromises generally require showing inability to pay in full, limited assets, and that the compromise yields more than enforced collection is likely to produce.
Suspension or modification of offsets: For debtors in financial hardship, TOP has procedures to challenge the offset or request suspension/reduction, typically via written objection and documentation (income/expense, medical issues, etc.).
IV. Bankruptcy: In an appropriate case, a business, individual borrower or guarantor may want to file bankruptcy to stay collection activity, discharge the debt or seek repayment thru a Bankruptcy plan, approved by the Bankruptcy Court.
V. Use of hardship and “uncollectibility” status
Where the debtor is effectively judgment‑proof one can argue for “currently not collectible” status with limited or no active collection measures, based on age, disability, income below certain thresholds, or absence of non‑exempt assets.
Borrowers or their advisors who have questions about defaulted SBA EIDL Loans and their transfer to the Department of Treasury should contact Jim Shenwick, Esq.
Jim Shenwick, Esq 917 363 3391 jshenwick@gmail.com
Please click the link to schedule a telephone call with me.
https://calendly.com/james-shenwick/15min
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