During the COVID pandemic, the Small Business Administration extended EIDIL loans to millions of small to medium-sized businesses. Unlike the forgivable Paycheck Protection Program loans, Economic Injury Disaster Loans typically require repayment beginning a year after the loan was received. The majority of these EIDL loans are now coming due, but many businesses are facing difficulty in making payments. Even with the pandemic largely in the rearview mirror, business realities have significantly changed, and many business owners are still trying to return to normal revenue levels. If your business can’t repay your EIDL loan, here is the information you need to know.
When Your Business Can’t Repay the Loan
Several factors specific to your EIDL loan will determine your options as payment comes due.
- Who is the borrower? The name of the borrower – the entity liable for the debt – appears in the first paragraph of the loan agreement. You’ll first need to identify if the borrower is a real person, a corporation, or an LLC. If the borrower is a legal entity, you’ll next need to determine if a personal guarantee of an owner or manager exists. Although collection notices are addressed to YOU, YOUR BUSINESS NAME, ADDRESS, the SBA may not hold you personally liable. The loan agreement specifies who owes the debt.
- Is the EIDL loan secured or unsecured? Unsecured loans are those for which there is no collateral. A secured loan involves collateral granted to the lender and described in the legal agreement. A lien gives the lender the right to claim any collateral in its rights against the borrower. The provisions of the loan agreement limit the borrower’s rights as to the collateral. The collateral specified in the agreement cannot be sold or further encumbered without the lender’s consent. The lender does have the right to sell any named collateral in the event of a default. This sale dissolves the borrower’s liability only if the proceeds are sufficient to pay the loan and associated costs.
If You Don’t Repay the EIDIL Loan
Any legal entity can shut down the business, with or without bankruptcy. The SBA has the right to assume possession of any collateral, sell it, and apply the proceeds to the loan balance. If the SBA loan is unsecured – without collateral – its rights are identical to any other unpaid creditor. In most cases, the shareholders and managers of a legal entity will not be held personally liable for the entity’s debts.
The scenario becomes more complicated if an individual is the borrower or guarantor and is deemed legally liable. The SBA may garnish wages or seize tax refunds without a lawsuit until the loan is satisfied. The SBA does not have the power to file a lien on a personal residence or other assets without filing a lawsuit.
Will Bankruptcy Discharge the EIDIL Loan?
Entities can only discharge debts via Chapter 11, a reorganization bankruptcy. Reorganization is appropriate when the business is viable going forward and reasonably expects to have the ability to make payments to creditors.
Fortunately, the situation is different for a real person. An individual’s personal liability on an EIDIL loan is dischargeable through bankruptcy unless the loan was obtained because of deliberate misrepresentations.
Don’t Face the Situation Alone
Like any other debt, the looming repayment of the EIDIL loans requires organizations to investigate their business’s viability and options in the future. An experienced bankruptcy lawyer can help you determine the options available to you and your business.
If you are a Sarasota business owner facing EIDIL loan repayment, call the offices of Richard V. Ellis today. We can help you to make the right decisions for your financial future.