Treasury Department Contacted Me About EIDL Debt: Is This Fraud??

Again, no. Being contacted by the Treasury Department about your EIDL debt does not necessarily mean you are being accused of fraud. While the SBA has a duty to pursue the repayment of EIDL funds, this does not automatically translate to a fraud accusation. Here are some key reasons why:

1. EIDL Loans are Generally Repayable

Unlike the PPP, which was structured as a combination of forgiveness and repayable loan, most EIDL funds are not ordinarily forgivable. The PPP forgiveness rules do not automatically apply to EIDL loans, and businesses that receive EIDL funds are generally expected to repay the full amount.

2. Business Failure is Not Proof of Fraud

The mere fact that a business received EIDL funds but subsequently closed or failed does not, in itself, establish that the business owner committed fraud. The SBA and DOJ are aware that many businesses, even those that operated in good faith, may have struggled to weather the unique challenges posed by the pandemic.

3. Inability to Repay vs. Knowingly Obtaining Funds Through Deception

Under the law, there is a critical distinction between an inability to repay a loan and the intentional act of obtaining funds through deception. While the SBA and Treasury Department are entitled to seek repayment of EIDL loans, an inability to repay the full loan amount does not necessarily warrant a fraud accusation, especially if the loan was obtained and used in compliance with the applicable rules.

4. SBA Debt Referrals to the Treasury Department

Finally, the SBA has a clear process for referring delinquent EIDL debt to the Treasury Department for collection. The Treasury Department is also authorized to pursue debts on behalf of other federal agencies, including the SBA. As a result, it is quite common for business owners to receive letters from the Treasury Department regarding delinquent federal debt, and this does not necessarily reflect a criminal investigation.

What Does an EIDL Loan Referral to the Treasury Department Actually Change?

When the SBA refers an EIDL loan to the Treasury Department for collection, this can have several significant consequences for the business owner. These consequences are administrative and civil in nature, but they can have real-world repercussions.

Federal Payment Offsets and Wage Garnishments

The Treasury Department has broad authority to collect delinquent debts owed to the federal government. This includes the ability to implement federal payment offsets (whereby any federal payments owed to the business owner, such as tax refunds, are applied toward the debt) and, in some cases, to initiate wage garnishments if the borrower has personal liability under the loan agreement.

More Procedurally Constrained Collection Negotiations

While it is still possible to negotiate with the Treasury Department for a settlement or a payment plan, these negotiations are generally more procedurally constrained than negotiations with the SBA. Once the SBA has referred a delinquent debt to the Treasury Department, the Treasury Department assumes responsibility for the collection process, and its procedures are governed by the Debt Collection Improvement Act of 1996.

Civil Collection While Facing a Criminal Investigation

It is important to remember that a borrower can face civil collection efforts while separately facing a criminal investigation. Conversely, a borrower can be indicted in federal court on fraud charges while still being subject to civil collection efforts by the Treasury Department. The two processes are independent, although they may involve similar factual allegations.

Personal Liability Under Personal Guarantees

If the EIDL loan included a personal guarantee, then the Treasury Department can seek collection from the borrower’s personal assets, not just those of the business. Personal guarantees for EIDL loans were common, especially for loans above a certain amount, and they have exposed individuals to substantial personal financial liability.

Civil Recovery of Improperly Disbursed EIDL Funds

In some cases, federal agencies may pursue civil recovery for EIDL funds that were improperly disbursed, even if no fraud occurred. If the borrower did not meet the eligibility requirements or failed to use the funds for an authorized purpose, the federal government may seek to recover the amount of the improper payment.

Importance of Document Preservation

Finally, regardless of whether a borrower is facing collection efforts, a criminal investigation, or both, it is crucial to preserve all documentation related to the loan. This includes loan applications, financial records, bank statements, and all communications with the SBA and other federal agencies. These documents will be essential for mount an effective defense.

The first consultation is free and confidential, and it runs as long as your questions do.

When Can EIDL Facts Point Beyond Civil Collection Toward a Criminal Investigation?

At what point would an individual or a company have legitimate concerns about being the target of a criminal investigation? Early indicators of the government’s intent to pursue criminal charges could include receiving federal subpoenas, hearing from a federal agent for a voluntary interview, or facing inquiries from the Small Business Administration’s Office of Inspector General. In criminal fraud cases, the focus is typically on the borrower’s conduct during the loan application process, their efforts to obtain the funds, and their expenditures.

The federal government’s investigators have a recurring focus on several key areas of interest. These include attempts to obtain EIDL funds through:

• Providing false information on a loan application (e.g., business revenue, employee numbers, ownership, business entity existence, and other eligibility details)
• Multiple applications filed by a single individual (including under the names of related family members)
• Filing in a third party’s name (identity theft)
• Obtaining funds for shell entities or other fictitious companies

Within these cases, individuals can face criminal charges if they knowingly provided false information and intentionally obtained funds through fraud. However, good-faith mistakes and honest errors in the loan process are legally distinct from intentionally fraud. In most cases, the government will need to prove its allegations beyond a reasonable doubt in order to secure a criminal conviction. This means that the fact that questions exist does not automatically mean that a business owner can be held criminally liable.

Broadly speaking, there are two primary areas of criminal exposure in EIDL fraud cases. The first area is the fraudulent loan application. This includes any material misrepresentations made during the process. The second area is the allegation that borrowed funds were used for unauthorized personal spending. While fraud allegations in the criminal context are taken very seriously, there are also some unique aspects to EIDL prosecutions, both in terms of the issues involved and the government’s burden of proof. In EIDL cases, the distinction between a civil investigation and a criminal investigation may be subtle, so it will be crucial to work with experienced federal defense lawyers to defend your business.

Can Bankruptcy or a Filing Deadline Eliminate an EIDL Fraud Debt?

If a borrower is charged and convicted of EIDL fraud in federal court, the consequences can be significant. Along with potentially facing prison time, fraud convictions can involve restitution, forfeiture, fines, and other penalties. Therefore, it is important to understand how these penalties can impact a borrower’s ability to discharge his or her debt in bankruptcy or whether a filing deadline can be used to avoid civil or criminal liability.

Regarding limitations periods, the sources provided by the federal government do not establish a single limitations period for EIDL fraud. In these cases, the government can initiate criminal charges based on several different federal fraud statutes, and each of these statutes can impose its own unique limitations period and filing deadlines.

Similarly, the applicable limitations period for alleged PPP fraud depends on the specific federal offense charged. If the federal government is pursuing allegations of fraudulent activity in relation to a PPP loan, the applicable limitations period may vary based on the specific facts at hand, and the specific type of fraud alleged.

While bankruptcy is generally available for both business and individual borrowers who receive EIDL funds, the treatment of the borrower’s debt in bankruptcy will depend on the specific circumstances of the borrower’s case. Some of the factors that will be most important when the court determines how to treat an EIDL loan in bankruptcy include:

• The loan documents;
• The borrower’s personal guarantees;
• Any collateral provided under the loan; and
• Any allegations of fraud made by the government.

Notably, allegations of fraud can have a significant impact on how the court handles EIDL-related debt. The treatment of ordinary loan debt is often different from the treatment of debt resulting from fraud, so the nature of the debt will play a key role in the bankruptcy process. In each case, it will be important to work with an experienced bankruptcy attorney to ensure the best possible outcome.

Where to Go From Here

If any of this describes your situation, the next step is a conversation rather than more reading. Spodek Law Group runs a fully online client portal and represents clients coast to coast, with offices in New York, Brooklyn, Queens and Los Angeles. The number is 888 348 8028.