SBA EIDL Loans to Nonprofits: Workout Strategies, Treasury Risk, and Bankruptcy Options

At Shenwick & Associates, we are seeing a sharp increase in nonprofit borrowers seeking relief from COVID-19 Economic Injury Disaster Loans (EIDL). Unlike traditional commercial workouts, there is no standardized SBA workout program for nonprofit EIDL borrowers. The result is an opaque, discretionary process that requires a disciplined, well-documented approach.
This post outlines the available paths: out-of-court workouts with the SBA, Treasury referral issues, and bankruptcy as a last resort.

I. Statutory Framework and Loan Characteristics
EIDL loans were issued under 15 U.S.C. § 636(b)(2). For nonprofit entities, these loans typically:
Did not require personal guarantees (contrast with for-profit borrowers  with SBA EIDL loans over $200,000.00)
May or may not be secured, depending on loan size and documentation.
Once in default, the SBA has authority to pursue administrative collection, including referral to Treasury for offset under 31 U.S.C. § 3716.

II. No Formal “Workout Program” — Practical Reality
There is no codified EIDL modification program. Instead:
Borrowers must request relief directly from SBA servicing.
The SBA’s institutional position is to seek full repayment.
Concessions are discretionary and heavily documentation-driven.
Despite this, the SBA has continued to consider hardship-based modifications prior to Treasury referral.

III. Core Workout Strategy (Pre-Treasury)
The primary opportunity is an out-of-court loan modification.
Required submission typically includes:
Current financial statements (balance sheet and P&L).
Cash flow projections.
Last three years of IRS Form 990.
Board resolution authorizing negotiations.
Narrative explaining financial distress and mission impact.
Effective requests include:
Temporary reduced payments.
Interest-only periods.
Six-month review/reset periods.
Re-amortization where permitted.
The key leverage point is demonstrating that enforced collection will impair a functioning public-benefit mission.

IV. Distressed but Viable Nonprofits: Structured Workout Package
Where the nonprofit is insolvent but operational, a formal workout package should be submitted:
Narrative:
Cause of revenue decline.
Current programming and beneficiaries served.
Public harm resulting from liquidation.
Financials:
Three years of Form 990.
Current balance sheet and income statement.
Cash flow projections.
Settlement Proposal:
Lump-sum payment (often donor-funded).
Discounted payoff.
Structured settlement over time.

V. Treasury Referral: Escalated Risk
Recent SBA activity reflects aggressive referral of delinquent EIDL loans to Treasury.
Consequences include:
Administrative offset (tax refunds, federal payments).
Additional fees and penalties.
Loss of direct negotiation access with SBA servicing.
Critical objectives at this stage:
Obtain and verify the Treasury balance.
Challenge improper fees or accounting errors.
Attempt to recall or return the loan to SBA servicing.

VI. Bankruptcy Considerations
When workouts fail, bankruptcy becomes the final option.
Chapter 11:
Allows nonprofit reorganization and continued operations.
SBA debt can be restructured through a plan.
Chapter 7:
Provides liquidation.
EIDL obligations are dischargeable as unsecured federal debt.
Secured collateral, if any, will be administered for the benefit of the SBA.
Unlike for-profit borrowers, the absence of personal guarantees limits guarantor exposure.

Early engagement with SBA servicing materially improves outcomes and can prevent a referral to Treasury.

A structured, evidence-based submission is essential.

Treasury referral significantly reduces flexibility.

Bankruptcy remains a viable but last-resort tool, particularly where mission preservation is not feasible.

Shenwick & Associates continues to advise nonprofit borrowers navigating these issues, with a focus on pre-Treasury resolution and strategic positioning for compromise.

Jim Shenwick, Esq  917 363 3391  jshenwick@gmail.com 
Please click the link to schedule a telephone call with me.
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We help individuals & businesses with too much debt! & creditors in Bankruptcy cases

Pre-Bankruptcy Planning: What's Permitted and What Will Get You in Trouble

 

Pre-Bankruptcy Planning: What's Permitted and What Will Get You in Trouble By James (Jim) Shenwick, Esq. | jshenwick@gmail.com | 917-363-3391 | Bankruptcy Attorney | Scarsdale, NY

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One of the most common questions I get from clients headed toward bankruptcy is: "Can I give my house to my sister before I file?" or "Can I sell my car to my brother for $1,000?"
The short answer: Pre-bankruptcy planning is legal. Fraudulent transfers are not. The line between the two is where most people get into trouble.

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What the Bankruptcy Code Permits
Debtors may engage in pre-bankruptcy planning. Converting non-exempt assets into exempt ones — paying down a mortgage on a homestead, funding an exempt retirement account, purchasing tools of the trade — are recognized strategies courts have upheld.
What the Code prohibits is transferring property for nothing, or for far less than it is worth, to put it beyond creditors' reach. Chapter 7 Trustees have powerful avoidance tools to reverse exactly those moves.
Under 11 U.S.C. § 548, a Trustee can avoid transfers made within two years of filing if the debtor received less than reasonably equivalent value while insolvent. State fraudulent transfer law, incorporated through 11 U.S.C. § 544(b), can extend that look-back period to four to six years, depending on the state.

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A Recent Case That Draws the Line
In re Albrecht, from the United States Bankruptcy Court for the Eastern District of North Carolina, illustrates precisely where pre-bankruptcy planning crosses into fraudulent transfer territory.
The Facts
Lucas Albrecht was insolvent and approaching a Chapter 7 filing. He co-owned a Raleigh home valued at $420,000 with his domestic partner, Kirsten Moore, held as joint tenants. His half-interest was exposed to his individual creditors.
Under North Carolina law, property held as tenants by the entirety — available only to married couples — is shielded from the individual debts of either spouse. Albrecht and Moore married. The following day, they re-deeded the property from joint tenancy to tenancy by the entirety. Weeks later, Albrecht filed Chapter 7.
The Chapter 7 Trustee moved to void the transaction. The court agreed — on two independent grounds.

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Ground One: Constructive Fraudulent Transfer
Constructive fraud requires no proof of bad intent. The Trustee must establish only:
1.     A transfer occurred;
2.     The debtor was insolvent; and
3.     The debtor received less than reasonably equivalent value.
The court held the transfer was constructively fraudulent as a matter of law.

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Ground Two: Actual Fraudulent Transfer
The court also found actual fraudulent intent — that Albrecht acted with intent to hinder, delay, or defraud creditors. Because debtors rarely document that intent, courts apply the "badges of fraud" analysis.
The badges present here:

• Transfer to an insider — a spouse married one day before the re-deeding

• Debtor retained possession and control after the transfer

• Substantially all non-exempt assets were transferred

• Debtor was insolvent at the time of transfer

• Less than reasonably equivalent value was received

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What This Means for Pre-Bankruptcy Planning
Legitimate pre-bankruptcy planning exists and is well-established. Paying down a mortgage, contributing to a 401(k), or purchasing exempt personal property can be entirely appropriate — provided it is done in good faith, without actual intent to defraud, and as far in advance of filing as possible. Timing matters enormously.
What is not permitted:

• Gifting property to a family member or friend

• Selling an asset to an insider at a steep discount

• Restructuring asset ownership to put it beyond creditor reach on the eve of bankruptcy, without providing reasonably equivalent value to the estate in return

Albrecht is particularly instructive because it involved a legally recognized ownership form — tenancy by the entirety — that would have been entirely valid had it predated the financial distress. The problem was timing and purpose: the conversion occurred the day after the wedding, weeks before filing, while Albrecht was already insolvent, and the sole purpose was to remove the asset from creditor reach.

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The Trustee's Avoidance Powers Are Broad
Chapter 7 Trustees use their avoidance powers routinely. The federal look-back window is two years under § 548. State fraudulent transfer statutes — available to Trustees through § 544(b) — reach back up to six years. Trustees scrutinize real property transfers, deed changes, and asset dispositions made in the period leading up to a filing.

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Bottom Line
Pre-bankruptcy planning is a legitimate part of bankruptcy practice. But it must be done carefully and timed properly, with full understanding of the avoidance rules. Any transfer of significant value — to a family member, a friend, or a third party at below-market price — made while the debtor is insolvent and on the eve of bankruptcy is a target. A legal structure (a deed, a sale, even a marriage) does not insulate the transaction.

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James (Jim) Shenwick is a bankruptcy attorney in New York representing individuals and businesses in Chapter 7 and Chapter 11 proceedings, creditor/debtor disputes, and bankruptcy litigation.
Jim Shenwick, Esq. | 917-363-3391 | jshenwick@gmail.com
Schedule a call
Please click the link to schedule a telephone call with me.
https://calendly.com/james-shenwick/15min
 
We help individuals and businesses with too much debt — and creditors in bankruptcy cases.