Small Businesses Can Seek Help from The Wink Law Firm

During the COVID-19 pandemic in the United States, the federal government offered Small  Business Administration Economic Injury and Disaster Loans (SBA EIDL) to shore up businesses struggling during this time. The loan helped many businesses get back on their feet. However, many small businesses are now unable to repay their EIDL loan, and a significant number are in default.

The Wink Law Firm can not only serve as your business bankruptcy lawyer, but can also help you navigate EIDLs and the Small Business Administration. While EIDLs are not subject to SBA loan forgiveness, there are ways to effectively achieve relief from your EIDL.

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Understanding the Difference Between EIDL Loans and SBA Loans

Historically, the Small Business Administration lent through third-party banks and nearly always required personal guarantees and pledges of collateral as a condition of taking out a loan. In the event the SBA loan is not repaid, the partner bank administering the loan would take the collateral – often the business owner’s home.

If the collateral is insufficient to repay the loan in full, the SBA would then sue the business owner for any remaining balance due on the debt to enforce the personal guarantee. If you owe a SBA loan that is not an EIDL, you almost certainly have guaranteed the loan and will likely need a personal debt relief plan, such as personal bankruptcy or an Offer in Compromise.

  • EIDLs are different from traditional SBA loans. The terms of EIDLs are more favorable than traditional SBA loans. EIDLs are unsecured and not guaranteed if less than $25,000, secured by business assets, but not personally guaranteed if between $25,000 and $200,000, and secured by business assets and personally guaranteed if more than $200,000.
  • The SBA has lent EIDLs directly without third-party banks as administrators and now has a portfolio of loans totalling approximately $387 billion to 4 million different borrowers. With significant default rates occurring on these loans, it’s fair to say that the SBA is overwhelmed in dealing with EIDL loans.

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The Small Business Administration Hardship Program Provides Temporary Relief

If you need temporary relief from your EIDL loan, you can apply for hardship with the SBA. This reduces your payments to 10% of the balance owed for six months. You must be current on your EIDL payments to obtain this relief.

If temporary relief isn’t enough, you can consider other options:

  • For EIDL loans less than $200,000, dissolve your business. EIDLs for less than $200,000 are generally not personally guaranteed, which means the business owner is not personally liable for the debt as long as the business is structured as an LLC or corporation. If the business is a sole proprietorship, the owner is personally liable for EIDL repayment, regardless of loan size. However, SBA agents will tell LLC or corporation business owners that they will be personally liable for the loan. The Wink Law Firm has communicated with the SBA and found these threats to be empty.
  • For LLCs or corporations, dissolving the business can effectively achieve EIDL loan forgiveness. However, when you dissolve the business, EIDLs above $25,000 have a security interest in business assets. Technically, the business assets should be liquidated with proceeds going to the SBA, requiring the SBA to release its lien on the assets and enable a sale of them. The Wink Law Firm can help your business obtain a lien release and communicate with the SBA regarding the dissolution of your business.

It is possible that the SBA could launch an inquiry into your business – even after dissolution – and find that you misapplied funds, which could make you personally liable for 1.5 times the original loan amount. If you committed fraud when obtaining the loan, you may be held criminally liable by the federal government. At The Wink Law Firm, our experience is such that inquiries are extremely rare, although the SBA is focused on rooting out fraud.

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Personal Liability to the SBA: Business Bankruptcy Law and Offers in Compromise

If you…

  • Are a sole proprietor
  • Own a business that owes a traditional SBA loan
  • Or have a balance with an EIDL greater than $200,000

…then you are very likely personally liable for the loan.

This means that simply dissolving the business will not provide EIDL or SBA loan forgiveness. The SBA will seek to collect from you personally if the loan is unpaid, which could mean repossession of your collateral, referring you to the Treasury, and a levy of your assets. For these business owners, you need a personal debt relief plan, which can include filing for bankruptcy.

Liability for SBA loans is dischargeable in bankruptcy. For personally guaranteed loans, it is important to know that discharging that debt in personal bankruptcy does not remove your LLC or corporation’s liability for that debt. If you plan to keep operating your LLC or corporation after personal bankruptcy – which is not advised – you will still face collection from the Small Business Administration. Similarly, putting your LLC or corporation into bankruptcy will not remove your personal liability for your EIDL loan.

While dissolving your LLC or corporation and filing personal bankruptcy can get you out of your EIDL liability, another option for business owners with guaranteed debt is submitting an Offer in Compromise to the Small Business Administration. The formal means of getting SBA loan forgiveness requires a full disclosure of your assets and income and will cost you based on your ability to repay.

The business bankruptcy lawyers at The Wink Law Firm can help you devise the best possible strategy for you and your small business.

Operating Your Business After SBA Loan Forgiveness

It’s possible to continue operating your business in a different form, such as another LLC, corporation, or sole proprietorship, after dissolving your original LLC or corporation, filing bankruptcy, or submitting an Offer in Compromise to the SBA.

However, the more assets your new business will require from your old business, the more difficult and costly this can be. This is because most SBA loans include a security interest in the business assets and any option for relief will likely require a reconciliation of those assets. In some cases, your new company could purchase those assets from the old company, with the proceeds then going to the SBA. The business bankruptcy attorneys at The Wink Law Firm can advise you on your options for keeping your business going while obtaining relief on your SBA loan. Contact us to get started.