Big corporations make the news, but small businesses are the backbone of this country. Consider that 99.9% of businesses in the U.S. are small businesses and 45% of the country’s economic activity has connections to those businesses. Despite these high percentages, 45% of small businesses fail within their first five years, and only 25% last beyond 15 years.
The reason most businesses fail is cash flow and problems with financial management. Having working capital and the ability to cover day-to-day expenses can come to a halt during or after any type of disaster.
Economic Injury Disaster Loans (EIDL) are often made to private nonprofit organizations, small businesses, and agricultural cooperatives conducting business in declared disaster areas. Many businesses submitted Covid 19 economic injury disaster loan applications due to the economic impact of the pandemic.
Now your business EIDL loan is due and you do not have the funds to meet your obligation. What happens now? Can you submit an offer in compromise on an EIDL loan?
We are going to answer these and other questions so you know how to reduce your risk of default.
What Is an EIDL Loan?
The SBA economic injury disaster loan is federal assistance. The funds provide the financial assistance necessary for a business to repair and rebuild following a declared disaster. For Covid related EIDL loans, the business does not have to have physical damage to qualify, they must have an economic injury.
Loans amounts go up to a maximum of $2 million. To qualify for a loan the business must be in either a county where there is a declaration of disaster r in a contiguous county.
What Happens With a Default?
If you repeatedly miss payments and are not able to negotiate a restructuring of your loan, the loan will be considered in default. This has a significant impact on your business.
- Any collateral used in securing the SBA loan is at risk of seizure
- Loan guarantors may have assets at risk of seizure
- SBA will issue a demand letter for payment
- The SBA can take legal action
- Business and personal credit reports will show the SBA loan default
You do have options when you are in default. By offering to make any type of payment against the loan is an act of goodwill. It may help alleviate further action against you.
You need to prepare for potential legal action. Once you know you are in default, consult with an SBA attorney with a reputation for success in this area of law.
Your attorney will work to prevent a lawsuit from being filed. One of the steps they will take is to assist you in filing an offer in compromise for your personal liability.
What Is an Offer in Compromise (OIC)?
Covid related EIDL loans under $200,000 did not require a personal guarantee. As such, only the business assets are at risk. However, if you did sign a personal guarantee because the amount was over $200,000, an offer in compromise is worth exploring. When the pandemic hit in 2020, one out of six businesses ended up with an SBA loan default of more than $30,000. The first step to reaching a resolution is understanding an offer in compromise.
An offer in compromise must be submitted using SBA Form 1150. For the SBA to process the request it must include specific information:
- Letter from the guarantor explaining your financial hardship and its reason, such as unemployment, disability, medical emergency
- Documentation to support your hardship reason
- Completed and signed SBA Form 1150
- A statement that clearly establishes the source of the funds being used in the offer
- A Borrower’s Consent to Verify Information and 3rd Party Authorization signed by every SBA borrower and guarantor
- A Financial Statement of Debtor, SBA Form 770, completed and signed
- Two months of the most recent bank statements
- Two months of the investment account statements
- Two most recent pay stubs of borrower and guarantor
- Copy of current SSA/SSI award letter and most recent SSA/SSI check stub (if applicable)
- Last two years of federal income tax returns, including all schedules
- Verification of income from the borrower and guarantor not previously identified
- Interim financial statement—balance sheet and profit and loss statement within 90 days
- Copy of dissolution of business, if applicable
- UCC Lien searches of business assets held as security on loan, if applicable
If the OIC includes the release of collateral on the loan, you will need to provide a valuation of the collateral. You will also need to provide a current title report/ownership encumbrance report of the security and a current payoff statement from the lien holder.
Approval of Offer in Compromise
If the SBA approves your OIC the classification of your loan will be changed to compromise/closed. The SBA will not make any further attempts to collect against that loan and will remove your name and social security number from the Treasury offset program. This means you will no longer be subject to tax refund offset, administrative wage garnishment, etc.
Be aware that because you did not repay your loan in full, you may be denied the ability to borrow from any federal agency in the future.
Denial of Offer in Compromise
There are times when the SBA denies an offer in compromise. They sometimes only agree on certain points and will submit a counteroffer to you. When this happens, discuss the offer with your attorney and give the settlement offer serious consideration.
If your SBA loan is referred to the Treasury Department, you may be assessed an additional collection surcharge. Your SBA loan attorney will be able to advise you regarding the risks of countering the SBA counteroffer.
SBA Loan Default Statute of Limitations
The federal government must bring any default lawsuit against you within six years following the date the right of action accrues. A right of action is the ability to initiate a lawsuit to enforce a right or correct a wrong. In this case, it would be to address the business defaulting on their loan payment obligation.
Even though they are unable to file a lawsuit after that date, the SBA may still collect using offset. There is no statute of limitations for offset collections.
This means they can collect against the loan using an administrative wage garnishment or tax refund offset. They may also collect against your Social Security, military pension, or government benefits.
An administrative wage garnishment is a process that allows a federal agency to withhold up to 15% of your wages to repay a federal loan. Authorization allows them to take this action without obtaining a court order pursuant to 32 U.S.C. §3720D and 31 CFR§ 285.11.
SBA Loan Deferment Extended
The SBA extension for EIDL loans defers the first payment due date. The extension and first payment due depend on the loan date.
- Loans made in 2020 have a first payment due date of 24 months, which is a 12-month extension from the date on the note
- Loans made in 2021 have a first payment due date of 18 months, which is a 12-month extension from the date on the note
- Loans made prior to 2020 have a third 12-month deferment of principal and interest, they now need to resume regular payments with the payment immediately proceeding March 31, 2022.
Interest on the loans continues to accrue during the deferment. You may want to make voluntary payments if feasible.
Resolving Delinquent or Default Economic Injury Disaster Loans
Every business that receives economic injury disaster loans anticipates their business to improve. When this doesn’t happen, the risk of losing collateral, wage garnishments, and tax offsets can leave you feeling helpless.
That is when you need the experience of the Protect Law Group. Our SBA attorneys specialize in SBA Offer of Compromise cases. We provide nationwide representation for cases involving $30,000 or more in debt before the Treasury Department’s Bureau of Fiscal Service and the SBA.
Contact our office today by chat, use our online contact form, or by calling (833) 428-0937 to schedule a case evaluation.