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Can’t Repay Your SBA Covid Loan? Bankruptcy Might Help

April 7, 2023

At the start of the Covid-19 pandemic, many businesses struggled due to shutdowns, supply chain challenges, labor shortages, and other challenges. In 2020, the Small Business Administration (SBA) created two new programs to help keep small businesses solvent during the pandemic. One program was the Payroll Protection Program (PPP), designed primarily to help small businesses keep employees on the payroll. The other was the Economic Injury Disaster Loan (EIDL) program. The purpose of the EIDL program was to help small businesses recover from the economic impacts of the pandemic by providing low-interest, long-term loans to help businesses meet financial obligations and operating expenses that they could have met had the disaster not occurred.

Not Every Business Has Bounced Back From The Pandemic

The terms of the EIDL program are favorable to borrowers (30-year loans with a 3.75% interest rate), and many business owners who took advantage of the EIDL program reasonably assumed that their business would return to pre-pandemic levels by the time they needed to repay the loan.

The economy has improved, but some industries have not returned to pre-pandemic revenue levels. Recognizing the continuing challenges, the SBA initially allowed repayment to be deferred. However, that is changing.

The Clock Is Ticking Again On Repayment

After multiple deferrals, SBA loan payments are starting up again. This has put many small business owners in a difficult position. Some are still dealing with the economic after-effects of the pandemic and are struggling to stay afloat—often because of the same issues that led business owners to take advantage of EIDL loans in the first place, plus inflation. Additionally, interest continued to accrue on the loan balance for borrowers who took advantage of the deferrals.

If You Can’t Repay Your Loan, Could Bankruptcy Help?

That depends on the loan terms and whether it was a secured loan or an unsecured loan. There are substantial differences among regular SBA Loans, EIDLs, and PPP loans. Consulting with an experienced bankruptcy attorney can help you determine whether bankruptcy can benefit you. At BransonLaw, we have helped many small businesses to either have their SBA debt forgiven or to restructure the debt through a Chapter 11 Subchapter V bankruptcy plan.

Secured vs. Unsecured SBA Loans

Some SBA loans are mortgages or similar to mortgages in that people have pledged property or business assets, such as equipment, and account receivables to secure the loan. The SBA files a Uniform Commercial Code (“UCC”) instrument with the State of Florida to secure the assets that are not real property. Loans that aren’t secured can often be discharged in bankruptcy and secured loans can be restructured.

EIDL loans up to $25,000 are unsecured. Loans greater than $25,000 are usually secured by business assets or property. EIDL loans that are more than $200,000 generally require a personal guarantee by the business owner. EIDL Loans, along with all other debts, are part of a bankruptcy proceeding.

PPP loans are unsecured debts that are generally forgiven if they were used for the purposes of the loans, primarily for payroll costs. If the loan wasn’t forgiven by the SBA, these loans can be included in a bankruptcy filing. PPP loans are typically treated as unsecured creditors and receive a portion or pro rata distribution of the total debt.

How SBA Loans Work

SBA loans help small businesses get funding by setting loan guidelines and reducing lender risk. The SBA works with approved lenders (financial institutions) to provide capital to small businesses. Loans are issued by the financial institution and backed by the U.S. government, which means the SBA reimburses the lender for part of your debt if you default. That does NOT mean you don’t have to pay back the debt. You are still required to pay back the federal government, and the government has many tools at its discretion to get the money you owe.

What Happens If You Guaranteed An SBA Loan And Defaulted On Payments?

Aside from ruining your credit and making it more difficult or costly to get loans in the future, additional consequences include:

  • The SBA can seize and sell any business assets, for example, equipment, furniture, computers, and vehicles, then apply the proceeds to the debt.

  • Your account can be turned over to the U.S. Treasury Department for collection. The Treasury Department can then garnish your wages and seize any federally held assets, such as income tax refunds or other federal monies owed to the business if you have a secured loan.

  • If you have defaulted on an EIDL loan of more than $200,000, your personal assets can be seized. That includes real property you pledged for security, the money in your personal bank account, investments, cars, and other personal assets.

  • The lender could sue you even if your loan was unsecured.

BransonLaw Can Help

If you are behind on your SBA loan payments, contact BransonLaw immediately. You only have a short window of time to avoid the severe consequences of defaulting on your SBA loan. We can often help borrowers restructure the debt through a Chapter 11 Subchapter V payment plan. For example, if your business pledged its assets to secure the SBA loan, a Chapter 11 Subchapter V bankruptcy can “value” the SBA claim to the current value of the business assets, and the difference is treated as unsecured. For example, a business with assets valued at $20,000.00 that owes $200,0000.00, would pay back $20,000.00 secured claim at a reasonable rate of interest and the difference of $180,000.00 would be an unsecured claim and might only receive a percentage of that amount and any balance would be discharged. We have had cases where the SBA only received pennies on the dollar for the unsecured portion. This can make an incredible difference to a business’s cash flow. We can help you determine whether bankruptcy is the best option for your business and for you.

Keep in mind that even if your business closes, you may still be responsible for repaying your loan unless you have had the debt discharged through bankruptcy. If you have pledged business or personal assets to obtain the loan, those assets may still be subject to foreclosure or repossession. At BransonLaw, we can assess your situation and determine the best options for you or your company.

We are here to help. Call BransonLaw today.