Using Chapter 7 Bankruptcy to Stop SBA EIDL Collections Effectively
The Small Business Administration (SBA) provides Economic Injury Disaster Loans (EIDL) as a way to help support small businesses affected by disasters. While this loan program has been around for a while, it soared in popularity during the COVID-19 pandemic, when the federal government essentially made it available to all small businesses in the country.
These loans offer small businesses financial relief to help them recover from economic losses suffered as a result of disasters. To be eligible for EIDL loans, small businesses must be located in a declared disaster zone and also prove they suffered economic injury as a result of that disaster.
Small businesses are able to use the funds from the loans to cover operating costs, including utilities, rent and payroll.
Unlike some other popular SBA loan programs, EIDL loans must be repaid in full, though they often come with favorable loan terms. If you can’t repay the loan, you are at risk of professional and even personal liability.
In this article, we’ll discuss what happens in this case, as well as how to use Chapter 7 bankruptcy to stop SBA EIDL collections effectively.
Personal Liability and Guarantees
Whether a borrower is personally liable for EIDL loans depends on how much money they borrowed.
Loans that were less than $25,000 are essentially unsecured loans, as they don’t require collateral or a personal guarantee. Loans that are between $25,000 and $199,999 typically require borrowers to put up collateral to secure the loan.
For EIDL loans that are $200,000 or more, the SBA typically requires collateral as well as a personal guarantee from any person who owns at least 20% of the business. What this personal guarantee does is put your personal assets and finances at risk should you fail to repay the loan, even if the business were to close.
As such, a personal guarantee increases a borrower’s responsibility for the SBA loan repayment, and it can even lead to collection efforts against your personal assets.
Before you can take action to protect yourself from collection, it’s important to understand what your personal liability is. This is an essential first step before filing for bankruptcy so you and your advisors can determine what the best course of action might be.
Secured EIDL Loans and Blanket Liens
As mentioned, any EIDL loan of $25,000 or more typically requires collateral to secure the loan. This can be any physical asset such as property, equipment or some other business asset that has value.
If a borrower is unable to repay an EIDL loan, the SBA has the option of issuing what’s known as a blanket lien. This gives the federal agency a security interest in all of the borrower’s assets, and could allow them to seize assets and sell them to repay the outstanding loan amount.
These blanket liens give lenders maximum protection against the money they lend, but don’t offer much protection at all to borrowers, who could be at risk of losing all of their pledged assets should they default on the loan.
This is why all borrowers need to carefully review the security agreement and fully understand all the terms of the loan, including blanket liens, before signing off on a loan.
Collection Efforts and Bankruptcy
Just like private lenders, the SBA has the power to pursue collection efforts against any borrowers who default on EIDL loans. This includes a potential foreclosure and seizure of business and potentially personal assets.
Borrowers who find themselves in this situation can file for Chapter 7 or Chapter 13 bankruptcy, though. This can stop collection efforts by the SBA, including wage garnishments and lawsuits, through what’s known as the automatic stay.
This procedural move gives borrowers temporary protection so that they can reorganize and/or liquidate their assets without creditors interfering in the process.
Before taking any action, it’s best to consult with an experienced bankruptcy attorney to determine the best path forward for your specific circumstances, as bankruptcy takes more than a one-size-fits-all approach.
Dischargeability of Business Loans
Many SBA loans are dischargeable in bankruptcy, and that includes EIDL loans. That being said, there are exceptions that exist that you need to be aware of.
For instance, embezzlementnegligence, misrepresentation and fraud are all things that could stop an EIDL loan from being discharged. In rare cases, the SBA may also challenge the discharge of a loan.
To determine whether your SBA loan is dischargeable through bankruptcy, you should fully review all loan documents and terms. Since this can be challenging for non-experts, it’s always advisable to consult with a seasoned bankruptcy attorney, which will ensure you get the best outcome possible.
Alternatives to Bankruptcy for EIDL Loans
Of course, bankruptcy isn’t the only option if you are having trouble repaying your SBA loan. Some alternatives do exist, such as negotiating directly with the SBA or considering debt restructuring.
Another possible option is what’s known as an offer in compromise (OIC), which might be available if you’re unable to repay the full amount of the loan, however, this is not yet an option for EIDL loans issued by the SBA.
Before determining what the best option for you is, it’s best to review your full financial picture and weigh all of your options. Consulting with a bankruptcy attorney and possibly even a financial advisor is a good idea, too, so you can get some outside, unbiased, expert advice on the matter.
Conclusion and Next Steps for SBA Loans
If you’re struggling with SBA loan debt, you need to investigate your options and seek professional advice so you can protect your personal assets as much as possible. Bankruptcy could provide a fresh start for you, but you need to carefully consider the consequences of doing so and any possible alternatives.
Consulting with an experienced and reputable bankruptcy attorney can help you navigate the complex bankruptcy process and ensure the best possible outcome for your specific circumstance.
At Babi Legal Group, we have more than 15 yearsa decade of experience in business, bankruptcy, debt collection and debt settlement law. We can review your case and help you get the outcome that is best for you, your family and your business.
To learn more, please contact us today.
