EIDL Loans and Personal Liability
EIDL Loans and Personal Liability
During the toughest days of the COVID-19 pandemic, the Small Business Administration (SBA) offered a lifeline to many businesses in the form of Economic Injury Disaster Loans (EIDL loans). These loans allowed many small businesses to continue operating, despite the unprecedented financial challenges. In many cases, though, borrowers were required to sign a personal guarantee. This means that if the business cannot repay the loan, the individual who signed the guarantee is personally liable for the debt, putting their personal assets, such as their home or savings, at risk. This personal guarantee can lead to significant financial strain, especially if the business is unable to recover as expected. Even if the business files for bankruptcy or stops operating, a personal guarantee means that the individual signing it remains liable for the debt. If the business’s assets are insufficient to cover the debt, the SBA can pursue the personal assets of the guarantor.
Bankruptcy: A Way Out
When the individual guarantor is unable to repay their EIDL loan, one possible solution is filing for bankruptcy. Bankruptcy is a legal process that allows businesses or individuals to either eliminate or repay some or all of their debts through the federal bankruptcy court. There are different types of bankruptcy filings, but for individuals, Chapter 7 and Chapter 13 are the most common.
Chapter 7 Bankruptcy
In Chapter 7 bankruptcy, the business owner’s assets are liquidated to repay as much debt as possible. The court appoints a trustee to oversee the sale of the debtor’s non-exempt assets. The proceeds from these sales are then used to pay off creditors, including the SBA. Importantly, any remaining eligible debts, including EIDL loans with personal guarantees, can be discharged, meaning the borrower is no longer obligated to repay them. This discharge of debt can provide significant relief and a fresh start for business owners. However, it is important to note that Chapter 7 bankruptcy may result in the loss of personal assets that were pledged as collateral for the loan. Additionally, not all debts can be discharged, and the impact on the individual’s credit score can be severe, making it more difficult to obtain credit in the future.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy, also known as a reorganization bankruptcy, involves creating a repayment plan to pay back debts over three to five years. While it does not necessarily discharge the debt, it can make repayments more manageable and protect the owner’s personal assets from liquidation. In many cases, it can substantially decrease the monthly payments and ultimately discharge the EIDL loan debt for pennies on the dollar. This can be particularly beneficial for those who have a regular income but are unable to meet the current repayment terms of their EIDL loans.
Conclusion
EIDL loans, while essential for many small businesses during the pandemic, can become significant financial burdens, especially due to the requirement of signing a personal guarantee. The prolonged economic impact of COVID-19 has worsened these challenges, leaving many business owners struggling to manage their debts. Bankruptcy, though a drastic measure, offers a potential solution to discharge or restructure these loans, reducing and alleviating the personal financial risks associated with them. Understanding the complexities of EIDL loans and the bankruptcy process is crucial for small business owners dealing with overwhelming debt, as it offers them a clearer path to financial recovery and stability. This article can help you get an understanding of what options may work for you, but it is always best to consult with a bankruptcy attorney. A bankruptcy attorney can help you make the appropriate choice based on your circumstances.
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