Understanding Defaulting on an EIDL Loan: Consequences and Next Steps

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The U.S. Small Business Administration plays a vital role in supporting small businesses throughout the country. The government agency does this in a number of ways, including providing guidance and resources to business owners, as well as offering special loan programs.

One of those loan programs is called the Economic Injury Disaster Loan, or EIDL. These loans became well-known during the COVID-19 pandemic, when many businesses in the U.S. became eligible for them all at once.

EIDLs have been around for a while and are available for many different situations. Unlike some other loan programs the SBA sponsors, EIDLs must be repaid, though their terms are often very favorable compared to other available loans.

Below, we’ll discuss what EIDLs are, the impact of not paying them back on time and what options are available to business owners who are struggling to pay.

Introduction to EIDL Loans

Small business owners who have “suffered substantial economic injury” and are located in an area that’s been declared a disaster area are often eligible to get an IEDL from the SBA. Entities that are eligible for these loans include small businesses, most non-profit organizations and small agricultural cooperatives.

This loan program is meant to offer eligible entities the working capital that they might need to recover from the economic injury that they have suffered. 

According to the SBA, the proceeds from these loans can be used to fund debt payments, operating expenses and other types of business-related financial needs. 

At the start of 2022, SBA stopped accepting new applications for EIDLs in relation to the COVID-19 pandemic. While the program is still around, these loans are only available in very limited scenarios where disaster areas have been declared.

The many business owners who took out an EIDL during the pandemic can still manage their loans, including repaying and refinancing, if necessary.

Economic Injury Disaster

The SBA created the EIDL program to support small businesses that have suffered a substantial economic injury. The main eligibility criteria is that the business has to be located in a declared disaster area.

While these loans have to be repaid, they offer much more favorable terms than many other loan programs available from private lenders, including lower interest rates and longer repayment periods. The SBA also provides small business owners with a lot of guidance and resources for how they can recover from such an economic disaster, in addition to the actual loans that they provide.

COVID-19 EIDL

In the early stages of the COVID-19 pandemic, the SBA significantly expanded its EIDL program. One of the major changes was that the entire country was declared a disaster area for qualification purposes, as there was no part of the U.S. that wasn’t affected in a major way by the pandemic.

As such, millions of more businesses than normal were instantly eligible to apply for the EIDL program. That could be seen in the sheer number of businesses who obtained these loans.

In total, the SBA distributed 4.1 million loans under the EIDL program, for a total amount distributed of about $400 billion. The program was so popular because of its relatively easy access to funds with favorable terms at a time when many businesses needed the help.

The main COVID-19 EIDL loan program allowed small business owners to apply for up to $2 million in funds that could be used for normal operating expenses such as payroll. There were different requirements that varied depending on the size of the loan, and applicants could obtain loan increases until all the funds were exhausted.

As mentioned, these EIDLs were not forgivable, like those offered through the Paycheck Protection Program (PPP), and had to be repaid.

The other program was called the EIDL Advance program, and these funds were given to existing applications to the EIDL program who met certain criteria. These Advances operated more like grants, since they didn’t have to be repaid, but they weren’t available to nearly as many businesses as the main EIDL program.

Default Status and Consequences

While COVID-19 EIDL loans were part of a special program, there are still serious consequences for borrowers who default on them. Some examples of what could happen with a default include triggering collection actions by the SBA and negatively affecting the borrower’s credit score.

The SBA has the ability to consider the loan in default status if the borrower fails to make loan payments. Unfortunately, a sizable portion of EIDL borrowers did default on their loans. 

The SBA has reported that about 1.3 million borrowers were in default of their EIDL loan, were in liquidation status or had their loans completely charged off.

If the borrower is sent to collections, they might be personally liable for the debt. The SBA also has the right to garnish a borrower’s wages and also seize some of the business assets to cover the outstanding amount of the loan.

Those who default on an EIDL loan may also find it challenging to obtain future funding from other federal loans or programs. 

Business Debt and Financial Hardship

Anticipating that some borrowers may continue to experience financial hardship and have trouble repaying EIDL loans, the SBA set up the Hardship Accommodation Plan (HAP). This special program was created to help borrowers modify loans if they were having trouble making repayments.

However, that program ended on March 19, 2025. That means that borrowers who are having trouble making payments can no longer automatically qualify for reduced monthly payments for a specified period of time. 

Today, EIDL borrowers who are still facing financial challenges might be best considering other debt relief options such as bankruptcy filing.

Federal Programs and Payments

When a borrower defaults on an EIDL loan, they may see that other federal payments are affected. This could include any tax refunds that they were supposed to get.

The U.S. Treasury Department has the ability to withhold any federal payments to satisfy outstanding EIDL debt if it is not repaid according to terms of the loan. This is why it’s so important to seek out assistance if you are having trouble repaying your loan.

While the SBA no longer offers the HAP program, the agency does still offer support and resources to help borrowers manage debt so they can avoid default.

Avoiding Default

Aside from making regular on-time payments, EIDL borrowers should communicate directly with the SBA if they are having trouble repaying their loan. The agency may be able to help with options such as modifying the loan or loan deferment, if those programs are available, to help them make the payments more manageable.

Even if the SBA isn’t offering direct aid in this way, the agency can still provide guidance, support and resources for other options that borrowers might have to avoid defaulting on their loan.

Next Steps for Borrowers

Aside from contacting the SBA directly, borrowers who are having trouble repaying their EIDL loan payments may consider seeking the advice of an experienced financial advisor or attorney.

These professionals will have the wherewithal and expertise to guide borrowers through all the options they may have to avoid defaulting on an EIDL loan. Borrowers should leave no stone unturned when searching for options, including other debt relief programs and bankruptcy filing.

At Babi Legal Group, we have more than 10 years of experience in business law, bankruptcy, debt collection and debt settlement, and can help small business owners who may be struggling repaying their EIDL loan debt.

For more information, and for a free consultation, please contact us today.

Can You Still Get Your SBA Loan Forgiven in 2025?

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During the COVID-19 pandemic, the federal government created many economic assistance programs for individuals and businesses that were facing significant financial challenges.

For individuals, this included multiple direct stimulus payments as well as enhanced unemployment benefits for those who lost their jobs either permanently or temporarily.

The federal government also created new loan programs such as the Paycheck Protection Program (PPP) through the Small Business Administration (SBA), which could be converted to grants if the money were used to fund certain expenses. 

With the pandemic a few years in the rear view mirror now, business owners may be wondering whether they can still get their loans from the SBA forgiven. We’ll discuss that topic in more depth below.

Introduction to Loan Forgiveness

During the COVID-19 pandemic, the SBA offered loan forgiveness options through programs such as the PPP. Loans equal to 2.5 times a business’ average monthly payroll cost for 2019 were available to small businesses, with a $10 million maximum amount.

To qualify to have the full amount of the loan forgiven, all borrowers had to meet specific requirements. This included using at least 60% of the total amount of the loan to cover payrolls costs. 

The remaining 40% could be used for things such as mortgage interest, as long as your mortgage was signed before February 15, 2020; rent, as long as your lease began before February 15, 2020; or utilities, as long as those services began before February 15, 2020.

The process for having your PPP loan forgiven was often complex, though, which meant that businesses needed to fully review the terms of their loan to determine whether they were eligible and what they had to do.

In most cases, they needed to submit an application to either the SBA directly or to their specific lender requesting forgiveness. 

At the start of 2025, nearly all PPP loans have been forgiven. In fact, the SBA says that 98% of all PPP loans had been forgiven. The remaining loans were either repaid for various reasons, or businesses simply haven’t applied for it yet.

Economic Injury Disaster Considerations

Another popular loan program created during the pandemic was called Economic Injury Disaster Loans (EIDL), which all small businesses that suffered substantial economic injury could apply for. This program gave businesses working capital so they could help recover from any economic losses they suffered, up to a maximum of $2 million. 

To be eligible for these loans, a business had to be located in a declared disaster area and prove they suffered economic injury. There are several factors that the SBA takes into consideration when determining eligibility, including the financial condition of the business and its ability to repay the loan.

These funds could be used to pay for operating expenses such as payroll, utilities and rent.

EIDL loans were not forgivable and had to be repaid, though the requirements varied depending on how big the loan was.

Managing Loan Repayment Challenges

Some small businesses might face continued challenges in repaying their SBA loans, whether they took out an EIDL loan or whether they didn’t qualify for full forgiveness of a PPP loan.

This could include difficulties with cash flow or debt accrual.

Until recently, the SBA offered what it called a Hardship Accommodation Plan (HAP) that was meant to help borrowers who were still experiencing financial difficulties. 

The program allowed businesses that received an EIDL loan to pay only 10% of their normal monthly payment so they could get short-term financial relief. This allowed businesses extra time to recover from economic hardship.

However, this program ended on March 19, 2025. 

As a result, any borrower who still wanted to qualify for a one-time option had to provide the SBA’s COVID EIDL Customer Service Center with a written explanation for why they needed this temporary financial hardship. 

Borrowers also could consider option options, such as refinancing or loan consolidation to help them manage debt.

Luckily, the SBA provides many resources and support so small businesses can navigate the loan repayment process so they can avoid liquidation.

Disaster Loan Forgiveness Options

While EIDL loans given out during the pandemic are no longer eligible for automatic temporary relief, you can still apply for loan forgiveness if you received a PPP loan. No new loans can be awarded under the program, but you can apply for forgiveness still if you haven’t already.

Businesses that received a loan of $50,000 or less can receive full forgiveness of their PPP loan, even if they reduced their number of full-time equivalent employees, or reduced their salaries or wages.

If you meet all of the other criteria for loan forgiveness, you don’t have to go through the complicated calculations around payroll expenses and FTE employees to qualify.

Not only that, but there is still a simplified process for applying for PPP loan forgiveness if your loan was $150,000 or less. This provides a great option for small businesses, as it reduces the amount of paperwork of applying.

To apply for PPP loan forgiveness, you have to fill out an official form that is available on sba.gov. That form also provides instructions on what other documents you have to provide as proof that you used the proceeds of the loan in a way that qualifies you for forgiveness. 

Either the lender or the SBA will review your application and must give you a written determination within 60 days of them receiving the application form. Any loan payments that you are required to repay would start at that point.

Again, if you don’t qualify for loan forgiveness under the PPP, or if you took out an EIDL loan, you still may have options for financial relief. Contact the SBA directly to find out your options, and also consider consolidating or refinancing the loan with a different lender to avoid potential disastrous consequences.

Work with an Experienced Bankruptcy Attorney if You’re Struggling to Repay

Many small businesses were hurt significantly during the COVID-19 pandemic, forcing them to turn to the federal government for economic relief. A lot of businesses took out EIDL or PPP loans because of the quick access to funds, favorable terms and ability to have at least a portion of the loans forgiven.

Even though the pandemic is over now, some businesses still face economic challenges. If their loans didn’t qualify to be forgiven, they might have trouble repaying them.

If your business finds itself in this position, it’s important to consult with an experienced bankruptcy attorney to evaluate your options.

Babi Legal Group has more than 10 years of experience in business law, debt collection, debt settlement and bankruptcy. We can help you explore your legal options if you find yourself having trouble repaying your pandemic-era loans.

For more information, please contact us today.