We are receiving more and more calls and emails from consumers regarding their default under EIDL Loans and EIDL Grants, from the SBA or related banks and their options with respect to those defaults.In the way of background, EIDL (Economic Injury Disaster Loans) and EIDL Grants were provided to small businesses to help them recover from the COVID-19 pandemic.
EIDL loans were supposed to used for working capital and operating expenses. EIDL loans are not forgivable and must be repaid. EIDL Grants do not need to be repaid.The maximum for EIDL Loans was $2 million. The interest rate on those loans was not to exceed 4%.The term was up to 30 years, with no prepayment penalty or fees.
So if you cannot pay these loans what happens?
Here are the consequences of default:
Any collateral (property) you pledged for the loan is at risk. Depending on applicable state law the lender has the right to take the property and sell those assets to repay the loan.
Any parties or entities that guaranteed the loan can be required or sued to repay the loan balance.
The SBA will send you a demand letter, demanding that the loan be repaid.
The SBA can sue you or the guarantor of the EIDL Loans.
Your business and personal credit reports will show the default and your credit score will decline.
The SBA can lien and levy on federally held assets such as tax refunds
The loan default will be reported to the IRS and you may have to recognize income equal to the amount of the loan default, which is not repaid to the lender.
EIDL loans of $25,000 or less do not require collateral or personal guarantees.
EIDL loans between $25,000 and $200,000, require collateral (UCC-1 and a Security Agreement) but generally do not require personal guarantees. In case of a default with respect to loans of this size, collateral such as accounts receivable, inventory or equipment could be seized and sold to satisfy the debt.
EIDL loans greater than $200,000 require collateral and personal guarantees.
An individual with an EIDL loan can file for chapter 7, 13 or 11 bankruptcy. Chapter 7 is a liquidation (the business closes), chapter 13 is a 3 to 5 year payment plan for individuals (not businesses) and chapter 11 is a reorganization or a liquidation for an individual or a business.
A business that has an EIDL loan can file for chapter 7 or 11 bankruptcy or chapter 11, Subchapter V bankruptcy (a form of chapter 11 bankruptcy for small businesses). EIDL loans can be discharged in a chapter 7 bankruptcy filing. Assets that were collateralized for an EIDL loan, such as equipment or accounts receivable would become the property of the Lender.
Parties who guaranteed EIDL loans can be sued by the EIDL lender and they would need to do a workout (an out of court workout) or a bankruptcy filing.