Has a Borrower Personally Guaranteed an SBA COVID EIDL Loan?
During the COVID-19 pandemic, the Small Business Administration (SBA) provided Economic Injury Disaster Loans (EIDL) to support businesses facing financial hardship. While these loans served as a vital source of relief, many borrowers now face uncertainty regarding their personal liability. Specifically, a common question that arises is: Did I personally guarantee my SBA COVID EIDL loan?
Understanding whether you have personally guaranteed an EIDL loan is critical, as it determines whether your personal assets may be at risk in the event of a default. This article will examine the SBA’s personal guarantee requirements for EIDL loans, outline how to determine whether you have signed a personal guarantee, and explain the potential consequences of default—including the role of bankruptcy in resolving SBA loan debt.
What Is a Personal Guarantee?
A personal guarantee is a legally binding commitment by an individual (usually the business owner) to repay a loan if the business itself is unable to meet its repayment obligations. When a personal guarantee is in place, the lender has the right to pursue the guarantor’s personal assets—including bank accounts, real estate, vehicles, and other property—to satisfy the outstanding debt.
For example, if your business defaults on a loan and a personal guarantee exists, the lender may initiate legal action against you personally to recover the unpaid balance. This exposure extends beyond the business entity and directly implicates the guarantor’s personal financial standing.
SBA Personal Guarantee Requirements for COVID EIDL Loans
The SBA established specific guidelines regarding personal guarantees for EIDL loans based on the loan amount:
1. Loans of $25,000 or Less
- No personal guarantee was required.
- No collateral was required.
- The borrower’s liability was limited to the business assets only.
2. Loans Over $25,000 Up to $200,000
- No personal guarantee was required.
- However, the SBA required collateral for loans exceeding $25,000.
- The SBA typically secured the loan by filing a Uniform Commercial Code (UCC) lien on the business’s assets, which may include equipment, inventory, accounts receivable, and other business property.
3. Loans Over $200,000
- A personal guarantee was required.
- At least one business owner with a 20% or greater ownership interest was required to sign a personal guarantee.
- In the event of a default, the SBA would have the right to pursue the guarantor’s personal assets if the business assets were insufficient to cover the outstanding balance.
How to Determine Whether You Signed a Personal Guarantee
If you are uncertain whether you personally guaranteed your SBA EIDL loan, there are several ways to confirm this information:
1. Review the Loan Agreement
The loan agreement you executed when accepting the funds outlines the terms and conditions of the loan. This document will specify whether a personal guarantee was required and the extent of your personal liability. Look for specific language referring to “personal guarantee” or “personal liability.”
2. Examine the Loan Authorization and Agreement (LAA)
The Loan Authorization and Agreement (LAA) is the formal document that governs the loan terms. This document will state explicitly whether a personal guarantee was required and which parties were identified as guarantors.
3. Contact the SBA or Loan Servicer
If you are unable to locate the loan agreement or LAA, you may contact the SBA directly or consult with your loan servicer. The SBA or servicer should be able to provide a copy of the loan documents and clarify whether a personal guarantee was executed.
Consequences of Default on an SBA COVID EIDL Loan
If your business defaults on an EIDL loan, the SBA’s recourse will depend on whether a personal guarantee exists and the terms outlined in the loan agreement:
1. If No Personal Guarantee Exists
- The SBA’s recovery options are limited to the business’s assets.
- If a UCC lien was filed, the SBA may seize or liquidate business property to satisfy the debt.
- If the business assets are insufficient to cover the debt, the SBA cannot pursue the borrower’s personal assets unless a personal guarantee was executed.
2. If a Personal Guarantee Exists
- If the business assets are insufficient to satisfy the debt, the SBA can pursue the guarantor’s personal assets to recover the outstanding balance.
- The SBA may seek to garnish wages, levy bank accounts, place liens on real property, and initiate other legal actions to collect the debt.
- A personal guarantee creates joint and several liability, meaning the SBA may pursue any or all guarantors individually or collectively.
Can Bankruptcy Discharge an SBA EIDL Loan?
In some cases, filing for bankruptcy may provide relief from an SBA EIDL loan—particularly if a personal guarantee was involved. However, the outcome depends on the type of bankruptcy filed and the specific circumstances of the loan and business.
1. Chapter 7 Bankruptcy (Liquidation)
- In a Chapter 7 bankruptcy, a business or individual’s assets are liquidated to repay creditors.
- If the loan was personally guaranteed and the business assets are insufficient to cover the debt, the SBA may attempt to collect the remaining balance from the guarantor.
- A personal guarantee may be discharged in a Chapter 7 bankruptcy if the guarantor qualifies for discharge.
- However, if the loan was secured by collateral (such as through a UCC lien), the SBA retains the right to seize that collateral even after a bankruptcy discharge.
2. Chapter 11 Bankruptcy (Business Reorganization)
- Chapter 11 allows businesses to restructure their debts while continuing to operate.
- If the SBA loan is part of the restructuring plan, the terms may be modified to reduce the payment amount or extend the repayment period.
- If the loan was personally guaranteed, the business owner may still be liable for any unpaid balance that remains after the business assets are liquidated.
3. Chapter 13 Bankruptcy (Individual Debt Reorganization)
- Chapter 13 bankruptcy allows individuals to restructure personal debts under a repayment plan.
- If a business owner personally guaranteed an SBA loan, the debt could be included in the Chapter 13 repayment plan.
- In some cases, a portion of the debt may be discharged at the conclusion of the repayment period (typically three to five years).
Limitations and Considerations
- While bankruptcy can discharge personal liability for an SBA loan, it will not eliminate the SBA’s claim on business assets under a UCC lien.
- Fraud or misrepresentation in the loan application process may prevent the debt from being discharged in bankruptcy.
- A bankruptcy filing will have significant credit and legal consequences, including the potential loss of business licenses and future borrowing capacity.
Options If You Are Unable to Repay an EIDL Loan
If your business is struggling to meet its repayment obligations, there are several potential options available:
- Loan Modification: You may be able to negotiate modified terms with the SBA, such as extending the repayment period or reducing the monthly payment amount.
- Hardship Accommodation: The SBA offers a hardship program that allows for temporary reductions in payment amounts if the business is experiencing financial difficulty.
- Offer in Compromise: If the business has ceased operations and liquidation of business assets will not satisfy the debt, you may be able to negotiate an Offer in Compromise. This process allows you to settle the debt for less than the full amount owed, subject to SBA approval.
Why This Matters
Understanding whether you have personally guaranteed an SBA COVID EIDL loan is essential for managing your financial exposure. If a personal guarantee exists, a business default could lead to personal liability, including the potential loss of personal assets.
If you are considering bankruptcy or need assistance evaluating your liability, it is advisable to consult with an attorney experienced in business lending and SBA loan matters. Legal counsel can help you assess your exposure, explore available options, and develop a strategy to protect your interests.
