Quote:
Additionally, while the nature of the loans couldn't be specified — in addition to EIDL and 7(a) offerings, pre-pandemic numbers in particular could involve SBA disaster loans or other loan programs — it's clear the number of bankruptcies in which the SBA is the one holding the debt is on the rise.
That doesn't mean the SBA will begin seizing assets and carting off restaurant or retail equipment. But it does mean, as the pandemic continues to recede from the everyday impact it had, a growing number of businesses that managed to stay afloat during Covid will go under and find there is much less leeway associated with holding an SBA loan than they might have thought.
The agency itself is under heavy pressure to collect on every dollar it's owed, which leaves business owners on the hook. That could mean garnished tax refunds and being barred from federal programs.
Matt Coleman, vice president at Mercury Public Affairs and a former spokesperson for the SBA, said there are serious consequences for businesses defaulting on SBA loans.
While the SBA often will attempt to work with a borrower — such as through its hardship program that shrinks and caps EIDL payments for six months — it ultimately will refer that debt to the Treasury Department, which often adds a 30% penalty on debts it collects on.
“Benjamin Franklin said it right: There are only two things certain in life. And U.S. Treasury will collect on one of them, usually through their Treasury Offset Program administered by the Bureau of Fiscal Services,” Coleman said. “Even if a borrower doesn’t pay Treasury, they will get their money by garnishing your tax refunds, your wages, a grant or any income you may receive just to resolve your debt … and Treasury could even go further and garnish part of your Social Security payments.”
He said small-business owners should “think long and hard” before considering bankruptcy, though, as it too has big consequences, such as prohibiting them from obtaining another government loan for 10 years.
SBA outlines its actions
The SBA said in a statement to The Playbook there has been no change in how it handles SBA loans when a borrower files for bankruptcy; the agency acts like a creditor in accordance with the law. What actions it takes depends on factors such as the liability of the debtor, the collateral involved, the assets and the type of bankruptcy, the agency said in its response after being contacted by The Playbook multiple times for this story.
“When SBA is listed as a creditor in a bankruptcy filing, SBA receives notice. Where appropriate, SBA takes action based on the bankruptcy notice to comply with the automatic stay, such as stopping communications and collections,” the agency said. “If appropriate, SBA files a claim in the bankruptcy case and collects in the same manner as other creditors in the same class.”
The SBA said it may coordinate with U.S. attorneys offices and bankruptcy trustees to recoup and protect taxpayer funds.
The SBA has rolled out a number of programs and reprieves for small-business owners overwhelmed by their Covid EIDL loans. At first, business owners only had to begin repaying EIDL loans after 30 months. The agency then instituted several rounds of “hardship” deferments that capped payments. In early 2024, it announced a 60-day “goodwill” exception period for some loans during which the agency would not send delinquent loans to the IRS or Treasury Department for collections — although it did not defer the interest collecting on those loans.
The SBA has drawn heat in the past from lawmakers for saying it would not collect on PPP loans of less than $100,000, and lawmakers have been concerned the agency also would not collect on smaller EIDL program loans. The agency said its PPP collection efforts yielded very little and, ultimately, it costs more to try and collect than to write off the loans.
The SBA inspector general also has pointed out in reports to Congress that up to 17% of all Covid EIDL and PPP funding is potentially fraudulent — specifically, more than $136 billion in EIDL money and $64 billion in PPP loans, representing more than 4 million loans total. The SBA has disputed the watchdog's methodology and conclusions.
The SBA has said in statements to The Playbook all business owners are required to pay back their EIDL program funding. The agency also has said the update to its collections process — in which it would push to recover loans wherever possible — was based off a new analysis using updated and more mature datasets.
Small businesses saddled by debt
Despite a comparatively robust economy with low unemployment and significant growth, many small businesses are straining under the weight of debt taken on during the Covid-19 pandemic.
While about 28% of small businesses report they have no outstanding debt — roughly the same as the 29% that said the same in 2019 — about 39% of small-business owners reported having more than $100,000 in debt last year. That's a notable increase from the 31% that reported more than $100,000 in debt in 2019, according to the 2024 Report on Employer Firms: Findings from the 2023 Small Business Credit Survey, published by the Federal Reserve in March.
A report by online credit-report provider Creditsafe found 58% of U.S. businesses it surveyed have increased their long-term debt in the past 12 months, while 17% said their ability to repay their debt has worsened in the past year. Another report by asset-management group Janus Henderson Investors found companies worldwide took on a record $456 billion of new debt between 2022 and 2023, and S&P Global found corporate debt defaults increased by 80% in 2023 alone.
While bankruptcy filings are on the rise, they still are nowhere near the levels seen before the pandemic, although experts expect they will continue to increase over the coming years.
Bankruptcy filings of all types peaked at around 1.6 million in 2010, during the height of the Great Recession, and plateaued at around 774,000 annually in the years leading up to the pandemic. In the subsequent years, with a host of relief programs for individuals, families and businesses taking effect, the number of annual filings slid to about 388,000, according to data from the Administrative Office of the U.S. Courts on behalf of the Federal Judiciary. That number increased to about 453,000 last year, and experts expect it will continue to rise in the months and years to come.
Larger companies already are seeing a substantial surge in bankruptcy filings, according to data from S&P Global Market Intelligence, which tracked bankruptcies for public companies and for private companies with either public debt of more than $2 million or with assets or liabilities above $10 million. By that metric, bankruptcies hit 642 in 2023, the highest annual mark since 2010 and far above the 372 recorded in 2022.
Jonathan Carson, co-CEO of Stretto, which offers corporate restructuring and bankruptcy services, said businesses can discharge SBA loans in bankruptcy, but if they pledged collateral, that will be taken as part of a broader liquidation. That's not to be confused with other government debts that cannot be discharged, such as taxes, or harder-to-discharge debts, such as student loans.
While cases vary individually, Carson said business owners overwhelmed by their debt should consider bankruptcy rather than letting their EIDL or SBA loans fall into delinquency.
“Bankruptcy is a much cleaner approach to managing liabilities on your balance sheet than ignoring your liabilities and hoping they go away,” Carson said. “The stigma attached to bankruptcy 25 years ago no longer remains.”
For Andelman, he wishes he would have declared bankruptcy sooner.
“I would have declared bankruptcy immediately after the Omicron wave if I had known it worked,” he said. “I think it would have been easier and I would have been in a much better position.”
.
