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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.

$391,000 SBA COVID EIDL - CROSS-SERVICING DISPUTE | NEGOTIATED REINSTATEMENT & WORKOUT

$391,000 SBA COVID EIDL - CROSS-SERVICING DISPUTE | NEGOTIATED REINSTATEMENT & WORKOUT

Client's small business obtained an SBA COVID EIDL for $301,000 pledging collateral by executing the Note, Unconditional Guarantee and Security Agreement.  The business defaulted on the loan and the SBA CESC called the Note and Guarantee, accelerated the principal balance due, accrued interest and retracted the 30-year term schedule.  

The loan was transferred to the Treasury's Bureau of Fiscal Service which resulted in the statutory addition of $90,000+ in administrative fees, costs, penalties and interest with the total debt now at $391.000+. Treasury also initiated a Treasury Offset Program (TOP) levy against the client's federal contractor payments for the full amount each month - intercepting all of its revenue and pushing the business to the brink of bankruptcy.

The Firm was hired to investigate and find an alternate solution to the bankruptcy option.  After submitting formal production requests for all government records, it was discovered that the SBA failed to send the required Official 60-Day Pre-Referral Notice to the borrower and guarantor prior to referring the debt to Treasury. This procedural due process violation served as the basis to submit a Cross-Servicing Dispute to recall the debt from Treasury back to the SBA and to negotiate a reinstatement of the original 30-year maturity date, a modified workout, cessation of the TOP levy against the federal contractor payments and removal of the $90,000+ Treasury-based collection fees, interest and penalties.

$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

The client personally guaranteed an SBA 7(a) loan for $150,000. His business revenue decreased significantly causing default and an accelerated balance of $143,000. The client received the SBA's Official 60-day notice with the debt scheduled for referral to the Treasury’s Bureau of Fiscal Service for aggressive collection in less than 26 days. We were hired to represent him, respond to the SBA's Official 60-day notice, and prevent enforced collection by the Treasury and the Department of Justice. We successfully negotiated a structured workout with an extended maturity date that included a reduction of the 14% interest rate and removal of substantial collection fees (30% of the loan balance), effectively saving the client over $242,000.

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