EIDL Loan Sent to Collections: How to Resolve.

Understanding the meaning of an EIDL loan sent to collections requires an understanding of how the SBA manages EIDL loans, the consequences of defaulting on an EIDL loan, and the various stages of the SBA’s EIDL recovery process.

1. Repayable Debt vs. Forgivable Assistance

As mentioned above, EIDLs were structured as repayable debt, not inherently forgivable assistance. As a result, while some PPP loans received forgiveness due to eligible payroll and overhead expenses, EIDLs generally must be paid back in full.

2. Default Status

When the SBA’s EIDL recovery process begins, it is often because the SBA loan has been placed into default status due to missed monthly payments. The specifics of default are further discussed in the sections below.

3. Default Recovery

Default recovery is the first stage of the SBA’s efforts to collect an overdue EIDL loan. During this stage, the SBA may take a range of measures to assess a borrower’s ability to pay in full, such as making a formal demand for payment, conducting a collateral evaluation, or attempting to collect pending government proceeds.

4. Treasury Department Referral

If a borrower’s EIDL loan is not resolved at the SBA’s default recovery stage, the loan is typically referred to the U.S. Treasury Department for further collection efforts. These efforts can have broader consequences than those undertaken by the SBA, such as the Treasury’s ability to offset federal tax refunds to satisfy an outstanding debt.

5. Assignment to Private Collection Agencies

While the Treasury Department has the authority to collect federal debt itself, it can also refer the debt to private collection agencies for collection efforts. In that case, the private collection agency may send demand letters, negotiate payment or compromise within its limited authority, and assist with administrative wage garnishment, while the federal agency retains authority to refer the debt for litigation.

Which EIDL records determine who owes what before you negotiate?

If you are being targeted by a collection agency or the SBA’s default recovery efforts, you will need to examine several different types of records to determine your exposure. Along with reviewing your own records, you will also need to review the records and communications provided to you.

1. Authorization Records

If a private collection agency is contacting you, you must verify that the agency has authorization from the U.S. Department of the Treasury (or the SBA) to seek repayment of your EIDL loan on the government’s behalf. The documents provided in the records above demonstrate that the Department of the Treasury has authority to seek repayment for federal debts that remain unpaid after referral from agencies such as the SBA. With that being said, this does not mean that every entity seeking repayment has the proper authority to collect on your behalf.

2. Debt Verification Records

You will also need to verify the validity of the debt, that the payment terms and amounts being requested are appropriate, and that you are willing to make a payment. The records provided above including “SBA Disaster Loan Program,” “How to Repay Your Loan,” and “COVID-19 Economic Injury Disaster Loan” demonstrate that EIDLs are repayable loans, and they clarify when borrowers may (and may not) need to start making payments on their EIDL loans.

3. Personal Liability Documents

When negotiating with a collection agency or the SBA, another key concern is whether or not you are personally liable for the loan debt. Determining your personal liability for an EIDL loan involves examining the loan documents and any guarantee records you may have signed. The records provided above, which include both the “Frequently Asked Questions (FAQs)” and a “Pay Loan” page, do not appear to establish a universal personal-guarantee requirement for EIDL loans.

4. Loan Usage Records

Finally, you will also need to determine if the funds advanced to you under your EIDL loan were used correctly. According to the “Economic Injury Disaster Loans” record provided above, “working capital” uses (such as payroll and rent) are among the eligible uses of EIDL funds. If the funds were used incorrectly, this could give you a strong basis to dispute the debt.

How does Treasury collection differ from a private agency or lawsuit?

1. Collection Tool Differences

Treasury collection is unique from other forms of debt collection because the Department of the Treasury has a set of federal collection tools that other entities do not. This includes the ability to directly pursue payment through wage garnishment and federal tax-refund offsets, which are powerful collection tools not typically available to private collection agencies.

2. Direct Asset Enforcement Power

Private collection agencies generally do not have the authority to directly seize personal property or financial assets. Instead, they will often attempt to coerce you into making a voluntary payment. With that said, the government can aggressively enforce judgments obtained by the government or authorized private counsel and can pursue its own judgment in appropriate cases.

3. Additional Collection Effort Required

In most cases, the government cannot seize your personal assets or financial assets without first taking additional collection steps. For example, to enforce a judgment, the judgment creditor may need to obtain a writ of execution before lawfully seizing nonexempt personal property.

4. Increased Balance Due to Private Collection Agent Participation

When a private collection agency takes a role in EIDL collection efforts, you should expect your balance to increase in most cases. The cost to hire and manage private collection agencies are often passed through to the borrower, which can lead to increases in balance due and more aggressive collection practices. One of our competitors warn of a 25 to 40 percent increase.

5. Referral Authority

The pages provided discuss the role and function of Treasury collection agencies. This includes discussions of Treasury’s referral authority and a role for private collection agencies to help with collection efforts. This does not appear to include any mention of third-party referrals from lawyers or other entities.

Can bankruptcy, an Offer in Compromise, or a limitations defense end an EIDL collection?

1. Bankruptcy

When negotiating with collection agencies or the SBA, it is important to understand what other options you have available if you cannot come to a voluntary agreement. For example, bankruptcy can be an option. Specifically, Chapter 11, Chapter 11 Subchapter V, and Chapter 13 bankruptcy filings all contain provisions for dealing with the EIDL loan, and it is possible to file a bankruptcy petition to discharge your EIDL obligations. However, discharging an EIDL loan depends on (i) the type of bankruptcy that you file, (ii) whether the loan is personally guaranteed, (iii) whether you seek repayment for business or individual purposes, and (iv) the circumstances under which you seek discharge.

2. Offer in Compromise

The possibility of negotiating an Offer in Compromise (OIC) can also impact the terms that you present in your negotiation. An Offer in Compromise is a settlement negotiation during which a debtor proposes to pay the creditor something less than the full amount owed in order to end the obligation. For COVID-19 EIDLs, an Offer in Compromise may be considered only after liquidation of collateral, and COVID-19 EIDLs are not eligible for forgiveness. However, the pages provided above give conflicting information about the availability of this resolution option. One page says, “An Offer in Compromise will be considered ONLY AFTER LIQUIDATION of all collateral pursuant to Agency guidelines. COVID EIDLs are not able to be forgiven.” On the other hand, the Page entitled “Offer in Compromise Requirement Letter” refers to “SBA Offer in Compromise (OIC)” as a viable path to debt resolution. While the pages provided above are detailed, neither page provides an official citation, a date, or a link to an official source, and so the actual resolution of this conflict remains unclear.

When can EIDL fund-use questions turn collection into criminal exposure?

1. Allegations of Misuse or Other Fraud

If the collection efforts targeting your business or your personal assets are tied to allegations of misused EIDL funds, this can shift your situation from civil to criminal. These allegations can produce not only demands for repayment, but also criminal charges for fraud. If you have received a demand for repayment from a collection agency and believe it may be tied to allegations of fraudulent misrepresentation or other fraud, this may mean that you are at risk of criminal exposure even if you agree to repayment.

2. The Fraud Consequences

The penalties imposed for federal fraud are substantial, and the specific consequences vary based on the type of fraud alleged. For example, the penalties imposed for bankruptcy fraud, mail and wire fraud, and bank fraud all differ. With that said, if the fraud allegations involve a scheme to defraud the government, federal prosecutors may seek consequences such as restitution, forfeiture, fines, or federal imprisonment.

3. False Claims Act

Allegations that have gone too far to warrant civil action in the form of a lawsuit under the False Claims Act can also produce criminal exposure. Codified at 31 U.S.C. § 3729, the False Claims Act is a federal statute that imposes civil liability on individuals and businesses that fraudulently obtain or claim payment from the federal government. Some allegations of fraudulent EIDL use fall squarely within the statutory language of the False Claims Act, and this means that individuals and businesses under investigation for misuse of their EIDL funds may face civil litigation under the statute seeking treble government damages, civil penalties, but not criminal charges under the False Claims Act itself.

4. Bank Fraud, Wire Fraud, Mail Fraud, and Other Federal Offenses

In addition to the False Claims Act, the federal government has numerous other tools at its disposal for pursuing criminal charges. For example, if a borrower obtained an EIDL through or committed EIDL fraud over electronic means, federal authorities may pursue charges under the federal wire fraud statute (codified at 18 U.S.C. § 1343). Like other federal fraud statutes, a conviction under this statute may be punishable by imprisonment.

Talk It Through With a Lawyer

Every case turns on its own facts. Todd Spodek is the managing partner of Spodek Law Group, a second generation firm his father opened in 1976, and the firm takes federal criminal and white collar matters nationwide. Call 888 348 8028 to talk it through.