SBA EIDL Loan Defaults: What Small Business Borrowers Need to Know
The SBA issued approximately $378 billion in EIDL loans to
small businesses during the pandemic. Based on our experience, approximately
70% of borrowers have defaulted or will default on their repayment obligations.
At Shenwick & Associates, we have been contacted by or have represented
over 250 borrowers who have defaulted on SBA EIDL loans. Those loans ranged
from $20,000 to $2,000,000. Loans exceeding $200,000 required a personal
guarantee from the principal borrower, and interest rates were approximately 3%
to 3.2%.
Previously, borrowers experiencing financial hardship could
apply for a loan modification that reduced their required monthly payment to
10% of the scheduled amount for a six-month period. That hardship payment
program has since ended. Borrowers who are more than 90 days delinquent are now
being referred to the U.S. Department of the Treasury for collection. As a
precursor to referral, the SBA issues a 60-day demand letter to borrowers who
are more than 60 days past due, advising that failure to cure the delinquency
will result in referral to Treasury for collection action.
Once a loan is referred to Treasury, the following
collection tools become available:
1.
Seizure of federal tax refunds owed to the
defaulted borrower
2.
Offset of up to 15% of Social Security payments
for individual borrowers or guarantors
3.
Garnishment of up to 15% of wages of individual
borrowers or guarantors
4.
Seizure of federal payments owed to the
borrower, including payments to defense contractors, Medicaid reimbursements,
and payments to medical providers serving Medicaid patients
In addition, a 30% penalty is assessed on the outstanding
loan balance upon referral to Treasury. Treasury has also engaged five
collection agencies to pursue collection action on referred loans.
1.
Act before referral to Treasury.
Borrowers who have defaulted or are struggling to meet their payment
obligations should contact the SBA promptly to explore a workout arrangement.
Resolving the default at the SBA level avoids both the 30% penalty and the more
aggressive collection mechanisms available to Treasury.
2.
Recall from Treasury is extremely difficult.
Once a loan has been referred from the SBA to Treasury, it is very difficult —
as a practical matter — to have the loan recalled. Proactive engagement with
the SBA is far preferable to attempting to unwind a Treasury referral.
3.
Personal guarantees add significant
complexity. If the loan exceeded $200,000 and an individual provided a
personal guarantee, the matter becomes considerably more complex. Any workout
must address the obligations of both the borrower entity and the individual
guarantor.
4.
Tax consequences for LLC members. If the
loan was made to a pass-through entity such as a limited liability company and
the loan balance is discharged or forgiven, the LLC members may recognize
ordinary income under Section 108 of the Internal Revenue Code. Treasury will
issue a Form 1099-C to the LLC members reflecting the cancellation of debt
income.
5.
Exercise caution with three-year repayment
plans. The collection agencies retained by Treasury are actively promoting
three-year repayment workout arrangements. In our experience, these plans are
often economically unworkable for most borrowers and should be carefully
evaluated — ideally with legal counsel — before any agreement is signed.
6.
Ten-year repayment plans are available from
Treasury. Treasury will offer eligible defaulted borrowers a 10-year
repayment plan; however, both the borrower and any guarantor must provide
extensive financial disclosure and documentation as a condition of approval.
7.
Offers in compromise remain elusive. The Times
article references an SBA spokesman who indicated that the agency is accepting
offers in compromise on defaulted loans. However, based on our experience
representing over 250 borrowers, no client has yet been able to successfully
negotiate or obtain an accepted offer in compromise on a defaulted SBA EIDL
balance, although that hopefully will change.
Borrowers and guarantors who have defaulted on SBA EIDL
loans are encouraged to contact Jim Shenwick, Esq. to discuss their situation,
available options, and strategy.
📞 917-363-3391 📧
jshenwick@gmail.com 📅 Schedule a 15-minute telephone
consultation
Please click the link to schedule a telephone call with me.
https://calendly.com/james-shenwick/15min
