What Happens to an SBA EIDL Loan if a Business Closes?

E.J. Simonsen | Oct 24, 2022

Since the COVID-19 pandemic began, the SBA has loans more than $630B to small businesses

Unfortunately, many businesses still couldn't make it through the pandemic. So, what happens if your business used an Economic Injury Disaster Loan but is now closing? 

Here's what you need to know about getting out from under that SBA EIDL loan, in three straightforward steps. 

Step 1: Understand what the EIDL was for

The purpose of an Economic Injury Disaster Loan (EIDL) from the Small Business Administration (SBA) is to meet financial obligations and operating expenses that would have been met had the disaster — in this case, COVID-19 — not occurred. 

The funds your business received through the EIDL program initially offered as much as 6 months of your business's working capital. As the pandemic continued, the SBA offered additional assistance for up to 24 months of working capital. 

Economic Injury Disaster Loans are usually available on a 30-year term, which means they're given with the expectation that the business will pay back the loan and are not designed to be forgivable. This is what creates problems when a business closes. 

So, let's take a closer look at just what happens to an SBA EIDL loan if your business closes.  

Step 2: Identify how much was taken out for the loan

What happens to your business's SBA EIDL depends on the size of the loan that the business received. In general, smaller loans have reduced consequences and may be easier to discharge than a much larger EIDL. Here's how your business EIDL may be resolved, depending on the size of the loan. 

If the SBA EIDL Loan was less than $25,000

If your business took out less than $25,000 in SBA loans, it's good to know that the EIDL can generally be discharged. 

Smaller loans like this don't require collateral or a personal guarantee, which means there's not much for the SBA to collect if a business closes. The government may seize federally held assets like income tax refunds, but they will not be able to seize your personal funds or assets owned by the business. 

If the SBA EIDL Loan was more than $25,000 but less than $200,000

At this amount, the SBA typically requires collateral from the business and may put a blanket lien on company assets if the business defaults on the loan. This means that if the business cannot make payments or closes, the SBA may seize business assets. 

For example, if your business owns a building, heavy machinery, or vehicles, the government may seize those assets to satisfy parts of the outstanding debt. 

If the SBA EIDL Loan was more than $200,000

If your business took an EIDL for more than $200,000, a personal guarantee was required. This means that if the business can't make payments, the business owner is also be financially responsible. 

In addition to the blanket lien on the business and all business assets used as collateral, the SBA can also seize the business owner's personal assets. If your business is closing, and it had an EIDL of greater than $200,000, the business owner's personal assets and finances are at risk. 

Step 3: Determine the Best Way to Handle an SBA EIDL Loan if Your Business is Closing

If your business is closing, then it may be too late to consider a Chapter 11, Subchapter 5 bankruptcy, which would help reorganize the business debt, and potentially help the business owner retain personal assets. (If your business hasn't closed, but is worried about making payments on an SBA EIDL, talk to The Lane Law Firm's attorneys to see how Subchapter 5 reorganization can support your business.)

When a business is ready to close, there are two main options to take care of an SBA EIDL: an offer-in-compromise and bankruptcy. 

Offer-in-Compromise

An EIDL offer-in-compromise (OIC) may be available once the business has officially closed and all assets not encumbered by the SBA have been liquidated. An OIC is an agreement between the borrower (the business) and the lender (the SBA), where the borrower agrees to pay the SBA a lump sum less than the debt owed, in exchange for the SBA to consider the debt settled.

An offer-in-compromise is not guaranteed. You have to apply for an OIC through the SBA, and your business (and you, if personally guaranteed) must meet a range of criteria to be considered eligible for an offer-in-compromise. 

One very uncomfortable and unique criteria is that the amount offered must be at least as much as the SBA could expect to receive through “enforced collection proceedings.” This could include levying liens on assets, bank accounts, wage garnishments, and obtaining a judgment. What's more, an OIC usually requires a lump sum payment within 60 days of approval. 

Unfortunately, the SBA is currently reporting that it is taking 6 to 12 months for an offer-in-compromise decision. This makes it a near-impossible option for most businesses and business owners who need answers fast. 

Bankruptcy

If the business is already at the point where closing is a must, bankruptcy might be the best option to ensure that an SBA EIDL loan does not affect your personal finances any more than it has to. 

Business Bankruptcy

For any business that is closing with an SBA EIDL that cannot pay a lump sum, business bankruptcy might be the right choice. Chapter 7 business bankruptcy, specifically, can work to liquidate and minimize the debt amount that the business must pay. 

This will help take care of the business's responsibility, but if your business took out a larger EIDL, the business owner's finances may still be in trouble. 

Personal Bankruptcy

If the business owner signed a personal guarantee for an SBA EIDL for a business that is closing, personal bankruptcy may also be necessary. While bankruptcy is never an easy choice, and not a decision to be made without the direct support of your trusted attorney, in most cases, personal bankruptcy can eliminate or reduce most of the debt left over from the business's SBA EIDL. There are a few personal bankruptcy types that will work to eliminate or reduce SBA EIDL debt:

  • Chapter 7 Personal Bankruptcy — Will typically eliminate 100% of the debt the business owner is responsible to for the SBA EIDL. 
  • Chapter 11 and Chapter 13 Personal Bankruptcy — Both of these types of personal bankruptcies will help to eliminate most of the debt a business owner is responsible for through the SBA EIDL. 

Worried Your Business Can't Afford SBA EIDL Payments?

The forbearance period is ending on many COVID-19-related SBA Economic Injury Disaster Loans. Businesses across the country are worried they may be unable to make those payments, or worse — they may have to close. If your business isn't sure where to turn, the business debt relief and bankruptcy attorneys at The Lane Law Firm are here to help. 

We can help your business restructure debt, reorganize through a Chapter 11, Subchapter 5 bankruptcy, or if it's needed, file for a Chapter 7 business or personal bankruptcy. No matter your concern, know that we're here to help with a team of experienced legal professionals. 

 


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