SBA EIDL Loan Defaults: What Small Business Borrowers Need to Know
In these times of high gasoline and diesel prices and high interest rates, many small business owners are facing difficulty in repaying SBA Economic Injury Disaster Loans (EIDL) received during the COVID-19 pandemic.
Background
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.
Treasury Collection Remedies
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.
Comments and Observations from Jim Shenwick
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 with the SBA and/or Treasury
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
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