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Impact of EIDL Loan Defaults on Credit and Treasury Actions

Defaulting on a COVID EIDL loan can seriously affect your credit and trigger federal collection actions like the Treasury Offset Program. Learn what happens and how to protect yourself.

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Impact of EIDL Loan Defaults on Credit and Treasury Actions

The Economic Injury Disaster Loan (EIDL) program offered essential support to businesses during the COVID-19 pandemic. However, as repayment obligations set in, many borrowers now face the harsh consequences of defaulting on these federal loans. Understanding how EIDL loan defaults impact credit and trigger federal collection efforts is essential for protecting your financial and legal well-being.

What Happens When You Default on an EIDL Loan?

An EIDL loan default occurs when a borrower fails to meet their repayment obligations under the loan agreement. This may happen due to business closure, cash flow shortages, or misunderstandings about repayment timelines.

Once in default, the SBA initiates a multi-step collection process that can have long-lasting financial consequences.

Step-by-Step Overview of the Collection Process:

  1. Initial Delinquency Notifications: Missed payments prompt warning letters from the SBA or a servicing agent.
  2. Transfer to Treasury for Collection: If unresolved, the loan may be transferred to the U.S. Department of the Treasury for enforced recovery.
  3. Treasury Offset Program (TOP): The Treasury can withhold tax refunds, Social Security payments, and other federal benefits to repay the debt.
  4. Administrative Wage Garnishment (AWG): In some cases, up to 15% of your disposable wages may be garnished without court approval.

How EIDL Loan Defaults Affect Your Credit

While EIDL loans are federal debts, they can still indirectly affect your credit in the following ways:

  • Reporting to Credit Bureaus: The SBA may report defaults to commercial credit reporting agencies, especially for larger loans or personally guaranteed debts.
  • Impact on Business Credit: If the loan was issued to an entity, the business’s credit profile may be downgraded, affecting future access to financing.
  • Personal Credit Damage: If a personal guarantee was required, the default can negatively affect the individual’s credit score and borrowing capacity.

Treasury Department Collection Tools

The Department of the Treasury possesses robust enforcement tools under the Debt Collection Improvement Act of 1996. These include:

  • TOP Offsets: Intercepting federal payments (tax refunds, benefits).
  • Cross-Servicing: Assigning debt to private collection agencies.
  • Referral to DOJ: In extreme cases, legal action may be pursued through the U.S. Department of Justice.

These tools can be applied aggressively and often without a traditional court process, making it vital for borrowers to understand their rights and respond promptly.

What Borrowers Can Do

If you're facing EIDL loan collection actions, here are key steps to take:

  1. Respond to SBA or Treasury Notices Immediately. Ignoring them will escalate the situation.
  2. Request Documentation. Verify the debt and your payment history.
  3. Explore Repayment Plans or Settlement Options. In some cases, an Offer in Compromise may reduce your liability.
  4. Consult with a Legal Professional. Experienced attorneys can help navigate negotiations and defend against improper enforcement.

Conclusion and Call to Action

An EIDL loan default can lead to serious financial and legal consequences, from damaged credit to enforced federal collection actions. Understanding how the Treasury Offset Program works and taking timely legal action can make a critical difference in protecting your business and personal finances.

If you've received a notice related to your defaulted EIDL loan or are facing wage garnishment or tax refund interception, contact Protect Law Group today. Our experienced SBA loan attorneys can help assess your case, negotiate with federal agencies, and guide you toward the best possible outcome.

Bullet Point Summary

  • EIDL loan defaults can result in SBA transferring the debt to the Treasury for aggressive collections.
  • Credit scores may be negatively affected, especially if the loan was personally guaranteed.
  • Treasury Offset Program and wage garnishment are common enforcement tools.
  • Borrowers have rights and legal options to contest or settle the debt.
  • Legal representation can help protect against severe financial consequences.

Why Hire Us to Help You with Your Treasury or SBA Debt Problems?

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Millions of Dollars in SBA Debts Resolved via Offer in Compromise and Negotiated Repayment Agreements without our Clients filing for Bankruptcy or Facing Home Foreclosure

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Millions of Dollars in Treasury Debts Defended Against via AWG Hearings, Treasury Offset Program Resolution, Cross-servicing Disputes, Private Collection Agency Representation, Compromise Offers and Negotiated Repayment Agreements

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Our Attorneys are Authorized by the Agency Practice Act to Represent Federal Debtors Nationwide before the SBA, The SBA Office of Hearings and Appeals, the Treasury Department, and the Bureau of Fiscal Service.

$1,200,000 SBA 7A LOAN - SBA OHA LITIGATION

$1,200,000 SBA 7A LOAN - SBA OHA LITIGATION

Client personally guaranteed an SBA 7(a) loan to help with a relative’s new business venture.  After the business failed, Treasury was able to secure a recurring Treasury Offset Program (TOP) levy against his monthly Social Security Benefits based on the claim that he owed over $1.2 million dollars. We initially submitted a Cross-Servicing Dispute, but then, prepared and filed an Appeals Petition with the SBA Office of Hearings and Appeals (SBA OHA).  As a result of our efforts, we were able to convince the SBA to not only terminate the claimed debt of $1.2 million dollars against our client (without him having to file bankruptcy) but also refund the past recurring amounts that were offset from his Social Security Benefits in connection with the TOP levy.

$150,000 SBA 7A LOAN – NEGOTIATED WORKOUT AGREEMENT

$150,000 SBA 7A LOAN – NEGOTIATED WORKOUT AGREEMENT

Client’s small business obtained an SBA 7(a) loan for $150,000.  He and his wife signed personal guarantees and pledged their home as collateral. The SBA loan went into default, the term or maturity date was accelerated and demand for payment of the entire amount claimed was made.  The SBA lender’s note gave it the right to adjust the default interest rate from 7.25% to 18% per annum. The business filed for Chapter 11 bankruptcy but was dismissed after 3 years due to its inability to continue with payments under the plan. Clients wanted to file for Chapter 7 bankruptcy, which would have been a mistake as their home had significant equity to repay the SBA loan balance in full as the Trustee would likely seize and sell the home to repay the secured and unsecured creditors. However, the SBA lender opted to pursue the SBA 7(a) Guaranty and subsequently assigned the loan and the right to enforce collection to the SBA. Clients then received the SBA Official 60-Day Notice and hired the Firm to respond to it and negotiate on their behalf. Clients disputed the SBA’s alleged balance of $148,000, as several payments made to the SBA lender during the Chapter 11 reorganization were not accounted for. To challenge the SBA’s claimed debt balance, the Firm Attorneys initiated expedited discovery to obtain government records. SBA records disclosed the true amount owed was about $97,000. Moreover, because the Clients’ home had significant equity, they were not eligible for an Offer in Compromise or an immediate Release of Lien for Consideration, despite being incorrectly advised by non-attorney consulting companies that they were. Instead, our Firm Attorneys recommended a Workout of $97,000 spread over a lengthy term and a waiver of the applicable interest rate making the monthly payment affordable. After back and forth negotiations, SBA approved the Workout proposal, thereby saving the home from imminent foreclosure and reducing the Clients' liability by nearly $81,000 in incorrect principal balance, accrued interest, and statutory collection fees.

$350,000 SBA 7A LOAN - NEGOTIATED STRUCTURED WORKOUT AGREEMENT

$350,000 SBA 7A LOAN - NEGOTIATED STRUCTURED WORKOUT AGREEMENT

Client personally guaranteed SBA 7(a) loan for $350,000. The small business failed but because of the personal guarantee liability, the client continued to pay the monthly principal & interest out-of-pocket draining his savings. The client hired a local attorney but quickly realized that he was not familiar with SBA-backed loans or their standard operating procedures. Our firm was subsequently hired after the client received the SBA's official 60-day notice. After back-and-forth negotiations, we were able to convince the SBA to reinstate the loan, retract the acceleration of the outstanding balance, modify the original terms, and approve a structured workout reducing the interest rate from 7.75% to 0% and extending the maturity date for a longer period to make the monthly payments affordable. In conclusion, not only we were able to help the client avoid litigation and bankruptcy, but our SBA lawyers also saved him approximately $227,945 over the term of the workout.

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