At the peak of the coronavirus pandemic, one of the generous stimulus programs that Congress created to help struggling businesses stay open was the Covid-19 Economic Injury Disaster Loan (EIDL) program through the Small Business Administration (SBA). Over the life span of the EIDL program, the lending initiative provided more than $390 billion in assistance to various businesses and helped to lessen one of the worst economic crises since the Great Depression. The loans were made directly by the SBA, and provided low-interest, fixed-rate long-term financing at 3.75% for businesses and 2.75% for nonprofit organizations.
The purpose of SBA EIDL loans was to provide funding to help small businesses recover from the economic impacts of the COVID-19 pandemic. This included not just incorporated businesses but also unincorporated, sole proprietorships and the self-employed. As a result, this loan program was available not just to the owner of the small restaurant whose business dropped because people remained home during COVID, but also to the Uber driver who suffered financial losses during the pandemic as well. The funds were intended to be used for working capital for businesses to make regular payments for operating expenses, including payroll, rent or mortgage, utilities, and any additional ordinary business expenses. Since the loan terms allowed it to be put towards payroll, many borrowers used the funds as replacement for their lost income.
Many small business owners affected by the COVID-19 pandemic took part in the EIDL program from the SBA to help keep their businesses afloat. A wide variety of businesses took part in the program. From Uber drivers, restaurants of all sorts, trucking companies, auto shops, barbershops, and even dentists, many businesses that saw a significant decrease in revenue took part. These funds from the SBA were a lifeline for many Americans and business owners at the height of the Pandemic.
In January 2022, the SBA stopped accepting applications for new EIDL loans after a couple rounds of funding. The loan terms were for 30 years at an interest rate of 3.75% and the first two years of payments were deferred. It was a great offer, and many businesses took advantage of the program. Unfortunately, it also attracted a significant amount of fraud. For example, the Justice Department is prosecuting three individuals for fraudulently obtaining approximately $5 million of federal Paycheck Protection Program (PPP) loans and EIDL loans and for laundering the loan proceeds. They prepared fraudulent PPP and EIDL applications for businesses with little or no operations who then shared the proceeds with the perpetrators of the scheme. While that is a blatant example of fraud, other borrowers may have improperly used the loan proceeds as authorized, but on a much lesser scale.
As of May 6, 2022, the SBA ceased the processing of EIDL loan increase requests or requests for reconsideration due to a previously declined loan application. Initially, the SBA decided not to pursue collection of defaulted EIDL loans, but in December 2023, the Biden administration reversed this policy and sought to collect an estimated $30 billion in delinquent debt. The SBA, through the Treasury Department, now plans to more aggressively pursue thousands of small businesses and self-employed individuals that have past-due loans. The default rate for SBA EIDL loans is very high and is now estimated at 37%.
The amount of the SBA loan a business obtained through the program affects the actions that the Treasury Department can take when collecting:
SBA loans up to $25,000 were unsecured, so the SBA did not require any collateral to obtain these loans. This means that the SBA is not able to go after the business’ assets to collect the loan. Additionally, these loans did not require a personal guarantee from incorporated businesses. A personal guarantee would allow the SBA to collect directly from the business owner. However, unincorporated businesses, sole proprietorships and the self-employed obtained their loans in their individual capacity. Accordingly, these borrowers may be pursued directly upon default for any balance.
For loans in excess of $25,00 but less than $200,000, the consequences for business owners are slightly more severe. Again, since the owner of an unincorporated business or sole proprietorships obtained the loan directly in an individual capacity instead of through an incorporated business, they may be sued by the Treasury Department and collected from directly. Additionally, these loans are secured by a businesses’ assets as collateral. This might not affect some small businesses and gig workers such as Uber drivers but could affect businesses that have assets with value. In pursuit of a defaulted loan, the Treasury department could seek to collect the debt and liquidate any assets in an attempt to recoup the loan balance. If there is still a further remaining loan balance, the business owner could then be sued for the deficiency.
SBA loans for $200,000 and above required that business owners sign personal guarantees for the debt. If such an SBA loan goes into default, any guarantor will be personally liable for the balance. Even if the business shuts down, the guarantor will still owe any loan remaining loan balance. Additionally, these SBA loans placed a lien against the business’ assets and accounts receivable as collateral, but for many small businesses, their assets might not have significant value. Realistically, if a business is struggling, they may not have any sizable account receivables, and they may already have other liens asserted against their business. If a business does have assets with value or meaningful account receivables, then it can be a substantial issue for the business if they default on the loan.
If a business or borrower with SBA debt is struggling financially, bankruptcy can be an effective way to discharge the debt from an SBA loan or series of loans. Chapter 7 bankruptcy can enable a debtor to quickly eliminate their debt and get a fresh start while chapter 13 and chapter 11 bankruptcy provides can provide a debtor with the ability to resolve all their debt through a court ordered re-payment plan. Regardless of the type of bankruptcy, once a petition is filed, a debtor receives the benefits of the Automatic Stay, which typically prohibits all debt collection activity.
If a business is seeking to remain open and can financially afford to do so, Chapter 11 or Subchapter V may be the best option. Subchapter V is for small businesses and business owners who are engaged in commercial or business activities (other than primarily owning or operating a single piece of real property) with total secured and unsecured debts of $3,024,725 or less. Additionally, a majority of the debt must be connected to the commercial or business activities of the debtor. Chapter 11 is for businesses seeking to reorganize and continue operation or for individuals who do not qualify for Chapter 13 or Subchapter V.
In a Chapter 11 or Subchapter V case, the debtor reorganizes their business with a plan that creditors accept through a voting process, and the Court then confirms it. If the business is not financially viable and has assets that may be liquidated to pay off the business’ debts, then the business may file for Chapter 7 bankruptcy. If the business has little to no assets, they may just want to close the business and pursue an individual bankruptcy filing on the debt owed by a business owner either personally guaranteed or individually.
No matter which chapter of bankruptcy a debtor files for, at the end of their case, they are provided with a discharge of their debt and receive a fresh financial start. Furthermore, any debt cancelled by the bankruptcy does not create any tax liability, in contrast to receiving an offer and compromise that may result in such a liability.
Our firm has represented many business owners who personally guaranteed SBA loans, from Uber to restaurant owners. Not even taking into account that ridesharing has been an increasingly competitive and saturated business, many Uber drivers have found that Uber’s algorithm has been reducing the money they make over time, which has made it increasingly difficult to pay their SBA loans. Restaurants have traditionally been a business where it is very difficult to consistently make a profit. This is even harder when burdened with SBA loan obligations, especially for businesses that did not fully recover financially from the Covid pandemic.
If a business owner files for bankruptcy, how they utilized the SBA funds may potentially receive scrutiny. Improper use of SBA funds can be a basis for an adversary proceeding challenging the dischargeability of the debt or possibly a criminal referral to the Department of Justice, if warranted. There are surprisingly few bankruptcy cases in which the SBA sued a debtor in an adversary proceeding. See United States v. Klein, BK 22-40804 USBC, Dist. of NE (2022) (in a Chapter 12 case, debtor filed after their farm had been foreclosed. They intended to use SBA funds to start farming again. However, the Bankruptcy Court enjoined them from using the funds since they were not engaged in a farming business before filing the case. Furthermore, they had only used the SBA funds for legal fees, and not for their business.) and United States Small Bus. Admin. v. Vereen (In re Vereen) No. 20-80517 (Bankr. M.D.N.C. Apr. 4, 2022) (The Debtor used $71,000.00 from an SBA loan to purchase a 2012 Bentley Mulsanne and used $36,000.00 to purchase two trucks but was unable to explain what happened to the trucks. As a result, the Court denied his discharge). One reason why we may have seen just a handful of such cases is that the payments on SBA loans allowed for a two-year deferment period and for many only recently became due. Now that required payments have become due, many loans are already in default as business owners struggle to pay. Accordingly, we may see more SBA-related litigation in the Bankruptcy Courts in the near future.
Depending on the circumstances, bankruptcy may be the best option for a borrower with personally guaranteed SBA debt. It is available to all borrowers and all creditors are bound by the filing. Furthermore, it does not have all the stringent requirements of an offer in compromise or Hardship Accommodation Plans, both of which are difficult to obtain. Many debtors simply do not have the funds available to resolve the loan through an offer in compromise, whereas the HAP program is really intended for borrowers with short term financial difficulties. Furthermore, the HAP program is not ideal since interest will continue to accrue on the loan while the borrower is in the plan. If you are struggling with SBA debt, you should speak with an experienced bankruptcy attorney to review your options.
4.9 
Based On 540+ Reviews 
