Filing Bankruptcy For EIDL Loans
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Filing Bankruptcy For EIDL Loans and Pandemic Related Debt
In the aftermath of the COVID-19 pandemic, business bankruptcy is on the rise. In 2023 Business Bankruptcy filings will have increased by 10 percent. Part of the reason for such an increase is the business’s inability to repay loans such as Economic Injury Disaster Loans, more commonly known as “EIDL” loans.
Sadek Bankruptcy Law Offices continues to assist business with the prospect of Business liquidation Bankruptcy and the treatment of EIDL loans in a Bankruptcy filing. In this guide, we provide an introduction of the nuances of handling EIDL loans in bankruptcy.
Understanding the EIDL Program
The EIDL program, administered by the U.S. Small Business Administration (SBA), was designed to provide financial assistance to small businesses facing economic hardship due to disasters or other adverse events.
The program became particularly prominent during the COVID-19 pandemic, as businesses sought funds to weather the storm of reduced revenue and operational challenges. Although the last of the EIDL loans were funded in or about May, 2022 the financial devastation of the loans and the economic impact felt by small business owners can still be felt today.
EIDL loans offered a lifeline in the form of low-interest loans, intended to cover various business expenses, including operating costs, marketing and payroll. The flexible nature of these loans made them an attractive choice for struggling businesses seeking to stay afloat.
When Bankruptcy is an Option?
Bankruptcy, a legal process through which individuals and businesses can seek relief from overwhelming debts, can be a reality for even the most well-intentioned entrepreneurs. Bankruptcy allows businesses to either restructure their debts and continue operating (Chapter 11) or liquidate assets to repay creditors (Chapter 7).
EIDL Loans and Bankruptcy: The Intersection
When a business considers bankruptcy, the treatment of its EIDL loans depends on the chapter under which they file. Here’s a breakdown of what to expect:
Chapter 11 Bankruptcy: This route involves reorganization to keep the business running and reorganize its debts. EIDL loans can often be included in the overall debt restructuring plan, allowing the business to continue repaying the loan as per the terms agreed upon with the SBA.
Chapter 11 Bankruptcy is a large endeavor that is usually not an affordable venture for small businesses.
Chapter 7 Bankruptcy
In cases where a business cannot recover, Chapter 7 bankruptcy results in liquidation of business assets, if any. EIDL loans, like other debts, are subject to discharge, meaning that the business may not be held liable to repay the remaining balance.
However, any assets acquired using EIDL funds could be subject to liquidation. In most Chapter 7 Business Bankruptcy cases handled by Sadek Bankruptcy Law Offices, the business assets have dwindled to the point where there would be nothing to liquidate through the bankruptcy process.
The reason being that most businesses try for at least a year to avoid bankruptcy and one way of buying time is to sell assets, if any, to stay financially afloat in hopes that the business trajectory changes.
Personal Guarantee: EIDL loans have limits up to $2 million, however any loan in excess of $200,000 is personally guaranteed, meaning that a business owner’s personal assets are pledged as collateral for the loan.
Meaning if the loan in excess of $200,000 is defaulted on a business owner’s assets such as savings, a home, or a vehicle may be in jeopardy of being collected against as repayment.
Oftentimes when discussing a Business Chapter 7 liquidation, personal guarantees are and have to be part of the conversation to best determine a debt relief strategy for a business owner.
Navigating the Complex Terrain
Businesses that have utilized EIDL funds for specific assets may find those assets under scrutiny during bankruptcy proceedings. Properly documenting how the funds were used can be pivotal in this context.
Consult a Professional: Navigating bankruptcy and its implications on EIDL loans demands expertise.
Consultation with a bankruptcy attorney well-versed in both federal loan programs and bankruptcy laws is highly recommended.
The intersection of EIDL loans and bankruptcy is a complex landscape that requires careful consideration and professional guidance.
As small businesses seek to overcome economic adversity, understanding the nuances of these financial tools and their interaction within the realm of bankruptcy becomes paramount.
By treading carefully and seeking informed advice, entrepreneurs can make well-informed decisions that pave the way for a more secure financial future.