Are you considering bankruptcy while holding a SBA EILD loan?
Here we will look into how bankruptcy relates to the loan and whether the loan is dischargeable in bankruptcy.
SBA has sent more than 9 million collection letters in addition to 1.4 million due process letters and other borrower communication. [1]
What is a SBA EILD Loan?
The Small Business Administration (SBA) Economic Injury Disaster Loan (EIDL) program is a federal loan program that provides financial assistance to small businesses that have suffered substantial economic injury as a result of a declared disaster, such as a pandemic, hurricane, or wildfire. Established to help businesses overcome the financial challenges posed by unforeseen disasters, the SBA EIDL program offers low-interest loans with long-term repayment options. [2]
The SBA EIDL loan is different from traditional SBA loans in that it primarily focuses on providing financial relief to businesses affected by a disaster, rather than promoting their growth and expansion. The loan proceeds can be used for various business purposes, including working capital, payroll expenses, accounts payable, and other operational expenses that the business would have been able to cover had the disaster not occurred.
Chapter 7 Bankruptcy and SBA EILD Loans
Most government-issued loans, including those from the SBA, are not usually dischargeable in bankruptcy. This means that even if a debtor successfully files for Chapter 7 bankruptcy, most of the time they will still be obligated to repay the SBA EIDL loan after their bankruptcy case concludes.
This rule exists to protect the government’s financial interests and to ensure that funds intended for economic recovery are repaid to support future disaster-stricken businesses.
In rare cases, if the debtor can demonstrate undue hardship due to the loan’s repayment, they might have a chance to discharge it through bankruptcy. Proving undue hardship is an uphill battle, requiring the debtor to present substantial evidence that repaying the loan would cause significant and ongoing financial distress.
Debtors must fulfill other eligibility requirements to file for Chapter 7 bankruptcy. These requirements include passing the means test, which assesses the debtor’s income and determines their ability to repay their debts. If the debtor’s income exceeds the state median income, it would hinder their chances of discharging the SBA EIDL loan.
If a debtor successfully files for Chapter 7 bankruptcy and is unable to discharge the SBA EIDL loan, they may still benefit from the bankruptcy process. Chapter 7 bankruptcy allows individuals or businesses to liquidate non-exempt assets to repay their creditors, including the SBA loan. This can provide some relief by eliminating other debts and facilitating a more manageable repayment plan for the debtor’s financial recovery.
Chapter 11 or 13 Bankruptcy and SBA EILD Loans
Chapter 11 bankruptcy, also known as business reorganization bankruptcy, focuses on the restructuring and continuation of a business, rather than liquidation. This type of bankruptcy allows businesses to create a repayment plan over an extended period, typically three to five years. The hope is to make ongoing payments possible for the business while still satisfying creditor obligations.
When it comes to SBA EIDL loans, Chapter 11 bankruptcy can potentially provide businesses with the opportunity to renegotiate the terms and conditions of their loan. This could include extending the repayment period, reducing the interest rate, or modifying other loan terms to alleviate financial burdens. While SBA EIDL loans are generally not dischargeable in bankruptcy, their terms can be adjusted to better align with the business’s cash flow and future prospects.
Chapter 13 bankruptcy is often a viable option for sole proprietors and individuals with significant debt obligations. This type of bankruptcy allows for a repayment plan, usually lasting three to five years, aimed at satisfying creditors while allowing the debtor to maintain control of their assets and continue their business operations.
When it comes to SBA EIDL loans, a Chapter 13 bankruptcy may allow for similar modifications to the loan terms as with Chapter 11. The debtor can propose a repayment plan that takes into account their current financial situation and seeks to make the loan repayments more manageable. Successful modification of an SBA EIDL loan in bankruptcy is subject to court approval.
Both Chapter 11 and 13 bankruptcies offer an “automatic stay” provision. This provision halts all collections activities, including those related to SBA EIDL loans, providing temporary relief to businesses struggling with debt obligations.
Fraud or Misconduct with SBA EILD Loans and Bankruptcy
Fraud or misconduct in the context of SBA EIDL loans can take various forms. Some common examples include:
- False Information:
Applicants may provide false details regarding their business’s financial state, revenue, or the impact of the disaster on their operations to secure a larger loan amount.
- Multiple Loan Applications:
Individuals or businesses may attempt to exploit the system by submitting multiple loan applications under different identities, hoping to secure funds unlawfully.
- Unauthorized Use:
Loan recipients may misuse the funds for purposes outside the program’s intended scope or divert the money for personal use.
Bankruptcy implications may include:
- Denial of Discharge:
If the court determines that fraud or misconduct has occurred, it may deny the discharge of debts related to the SBA EIDL loan, exposing the borrower to significant financial liability.
- Criminal Charges and Penalties:
In cases of significant fraud or egregious misconduct, the SBA may pursue legal action, potentially leading to criminal charges, fines, or imprisonment.
- Civil Recovery and Asset Seizure:
The SBA can initiate civil proceedings to recover fraudulent disbursements or loans. In severe cases, the court may authorize the seizure of the borrower’s assets to satisfy the debt owed.
Secured Vs. Unsecured SBA Loans and Bankruptcy
Secured SBA loans are backed by collateral, typically the borrower’s assets such as real estate, equipment, or inventory. In the event of default or bankruptcy, the lender has the right to seize and sell the collateral to recoup their losses.
These loans provide lenders with added security, thereby enabling them to offer more favorable terms to borrowers. If a business that has obtained a secured SBA loan files for bankruptcy, the lender has the right to seek repayment through the liquidation of the collateral.
Unsecured SBA loans do not require collateral and are primarily based on the borrower’s creditworthiness. These loans generally have higher interest rates and stricter qualification requirements compared to secured loans.
Unsecured loan lenders do not have the same leverage as secured loan lenders since there is no collateral to seize. The borrower may have more options for restructuring or discharging the debt in bankruptcy.
Contact Richard West today to schedule a consultation and take the first step towards resolving your SBA EIDL loan situation through bankruptcy.
FAQs
Filing for bankruptcy does not automatically discharge any debt, including an SBA Economic Injury Disaster Loan (EIDL). While bankruptcy can provide debt relief, it doesn’t guarantee the immediate discharge of your SBA EIDL loan. The impact of bankruptcy on your loan depends on various factors, such as the type of bankruptcy filed, the specific terms of the loan, and whether the loan is considered dischargeable or not.
Each SBA loan program has its own eligibility requirements, and a bankruptcy filing is taken into consideration during the application process. Generally, having a bankruptcy on your record may make it more challenging to secure future SBA loans as it indicates a higher level of financial risk. It is not impossible to obtain an SBA loan after bankruptcy. Factors such as the type of bankruptcy, the reasons behind the bankruptcy, and your overall financial health will be assessed when determining your eligibility.
There is no specific bankruptcy chapter that applies exclusively to SBA EIDL loans. SBA EIDL loans are generally categorized as unsecured debts, and they are treated similarly to other unsecured loans in bankruptcy proceedings. Depending on your financial circumstances and goals, you may choose to file for Chapter 7 or Chapter 13 bankruptcy. In both chapters, SBA EIDL loans can be included, and the terms of repayment can potentially be modified or adjusted.
Sources:
[1] Miller, J., & Miller, J. (2024, January 12). Better data, analysis gives SBA new optimism to recoup smaller COVID loans. Federal News Network – Helping Feds Meet Their Mission. https://federalnewsnetwork.com/big-data/2024/01/better-data-analysis-gives-sba-new-optimism-to-recoup-smaller-covid-loans/
[2] Economic Injury Disaster Loans. (n.d.). U.S. Small Business Administration. https://www.sba.gov/funding-programs/disaster-assistance/economic-injury-disaster-loans
