The payment was manageable when the business was stronger. Now revenue has fallen, the Economic Injury Disaster Loan balance remains, and collection notices are becoming more serious. An EIDL default can lead to federal collection action, but the consequences depend on who owes the debt, whether you signed a personal guarantee, and where the loan is in the collection process.
What Happens When an EIDL Loan Goes Into Default?
A COVID-19 Economic Injury Disaster Loan, commonly called an EIDL, is a federal debt owed to the U.S. Small Business Administration. Missing payments can cause the loan to become delinquent and eventually enter default.
The SBA can demand payment, enforce its rights against pledged collateral, or refer the account to the U.S. Department of the Treasury for collection. Once Treasury becomes involved, additional collection fees can increase the amount owed.
What Is the Treasury Offset Program?
The Treasury Offset Program, or TOP, collects qualifying delinquent debts by reducing certain federal payments otherwise payable to the debtor. Depending on the circumstances, an offset could affect:
- Federal income tax refunds
- Payments for federal contracts
- Certain federal benefit payments
- Other eligible federal payments
Before referring a debt to TOP, the responsible agency must provide notice and an opportunity to dispute or resolve it. Treasury’s due process guidelines identify a 60-day notice period before referral. The notice should explain available rights, including the ability to inspect records, challenge the debt, or seek an acceptable repayment arrangement.
Can the Government Garnish Your Wages?
Administrative wage garnishment allows a federal agency to direct a private employer to withhold part of an individual debtor’s disposable pay without first obtaining an ordinary court judgment. Federal rules generally limit withholding to 15 percent of disposable pay unless the debtor agrees to a higher amount.
This process does not apply merely because someone owns the business that borrowed the money. The individual must be legally responsible for the debt, such as through a sole proprietorship or an enforceable personal guarantee.
Before garnishment begins, the debtor ordinarily receives written notice and an opportunity to inspect records, enter a repayment agreement, or request a hearing. Treasury guidelines provide for notice at least 30 days before administrative wage garnishment. A timely hearing request can affect when withholding begins, so the date printed on the notice matters.
Does a Personal Guarantee Change the Risk?
COVID-19 EIDL loans of more than $200,000 generally required personal guarantees from individuals who owned at least 20 percent of the borrowing business. Loans exceeding $25,000 were commonly secured by business assets. Collateral protects the government’s claim against pledged property, while a personal guarantee permits collection from the guarantor.
When a corporation or LLC is the named borrower and no owner signed a personal guarantee, ownership alone ordinarily does not make the owner responsible for the company’s debt. Personal exposure could still arise under the loan documents or from fraud, misuse of loan proceeds, improper transfers, or another recognized basis for individual liability.
Sole proprietors face a different situation because the owner and business are not separate legal entities.
What Options Remain After Default?
Start by reviewing your loan documents and every collection notice. Acting promptly helps preserve your options. Depending on the account’s status and the business’s finances, possible responses include:
- Disputing an incorrect balance or mistaken identity
- Requesting records or seeking a repayment arrangement
- Evaluating available SBA servicing options
- Considering personal or business bankruptcy
For business owners considering bankruptcy, the automatic stay that takes effect in most cases generally pauses collection activity. However, the effect on an EIDL depends on who filed, who owes the debt, and whether fraud or another exception to discharge is alleged. A corporation or LLC does not receive a Chapter 7 discharge.
Review an EIDL Default With ClearPath Law LLC
An EIDL default can affect the business, its assets, and sometimes the owner personally. Attorney David L. Stevens at ClearPath Law LLC helps New Jersey business owners review federal loan obligations and evaluate debt-relief options.
Contact ClearPath Law to discuss the collection notice, loan documents, and available options before another deadline passes.
