What Happens If You Default on an EIDL Loan?

That letter from the SBA sitting on your kitchen counter. The one you opened, read halfway through, and then set face-down because finishing it felt like admitting something you werent ready to admit. If your searching this at 11pm, you already know something went wrong. The business didnt recover like you thought it would. The payments you swore youd catch up on never got caught up. And now your wondering what happens next.

At Spodek Law Group, we work with business owners facing federal debt situations every day. Were not here to judge what happened with your EIDL loan. Were here to explain what your actually facing and what your options are before those options disappear. Because heres what most people dont understand about EIDL default - theres a window right now that wont stay open forever.

You took that loan because the government told you to. They said it would save your business. Maybe it did, temporarily. Maybe it didnt. Either way, your now one of 1.3 million Americans in some stage of EIDL default. Thats not a small number. Thats a crisis the government is still figuring out how to handle. And the way there handling it right now is actualy more favorable to borrowers then most people realize.

The 120-Day Countdown Nobody Told You About

That first missed payment started a clock you probly didnt know existed. The SBA doesnt knock on your door the next day demanding repayment. The system is actualy designed to give you time - but that time has structure, and understanding that structure changes everthing about how you should respond.

Heres the timeline nobody explains clearly. Day 1 through 30 - your delinquent but nobodys panicking. You get a reminder letter. Maybe a phone call. The SBA treats this like a normal missed payment, nothing more. Day 31 through 60 - the account gets flagged internaly. More letters. More urgency in the tone. Your file starts moving through the system. Day 61 through 90 - this is where it gets serious. The SBA can accelerate your entire loan balance. That means everything you owe becomes due immediatly, not just the missed payments. The full princapal. All the accrued interest. Everything.

Look, 37% of all EIDL borrowers are in some stage of default, liquidation, or charge-off right now. Thats the offical number from late 2024. Your not alone in this situation. Your in a situation the goverment created and is now struggling to manage. The SBA charged off $47 billion in EIDL loans by December 2024. Less then 1% of that was recovered through liquidation. Think about that for a second. They wrote off $47 billion and recovered almost nothing. The system isnt working the way anyone expected.

Day 91 through 120 - default notice goes out. Your whole balance is due. And heres were the real countdown begins. At 120 days delinquent, federal law technicaly requires referral to the Treasury Department for collection. Thats were everything changes. Thats were your options start dissapearing. Thats were a bad situation becomes significently worse.

The 120-day mark matters becuase it triggers the Debt Collection Improvement Act requirements. This isnt a policy the SBA chose. Its a law. Once your 120 days past due, the goverment is technicaly supposed to send your debt to Treasury for enforced collection. But - and this is important - theres an exception happening right now that most people dont know about.

What Treasury Does That SBA Cant

Heres were it gets worse. The SBA is basicly a lending agency. There nice about it, relativly speaking. They send letters. They make phone calls. They offer payment plans. They want you to succeed becuase a performing loan is better then a defaulted one. Treasury is completly diffrent. Treasury is a collection agency with federal powers that bypass normal protections.

When your loan moves from SBA to Treasury, several things happen simultaniously and you have almost no ability to stop them:

Your tax refunds can be seized without warning. Any federal payment you were expecting - tax refund, Social Security benifits, other federal payments - gets intercepted and applied to your debt automaticaly. They dont need to sue you first. They dont need a court order. They dont need to notify you before they take it. This happens automaticaly through something called the Treasury Offset Program. You file your taxes expecting a $5,000 refund and it just never arrives. Gone. Applied to your EIDL debt.

Wage garnishment starts without litigation. For W-2 employees, Treasury can garnish up to 15% of your disposible income. They dont need to take you to court first. They dont need to get a judgement. They just start taking it from your paycheck. Thats diffrent from private debt collection were creditors have to sue you and win before touching your paycheck. The federal goverment dosent need to prove anything to anyone.

And heres the part that realy hurts - they add 30% to your balance just for taking your file. Thats not a penalty for doing anything wrong. Thats not punishment for defaulting. Thats Treasurys fee for handeling what SBA couldnt resolve. On a $100,000 loan, thats $30,000 added to what you owe just becuase your file changed hands. On a $500,000 loan, thats $150,000. The debt grows significently bigger the moment it transfers.

They dont need a court order. Read that sentance again.

With private debt, creditors have to go through the legal system. They file lawsuits. They get judgements. They wait for appeals. Then maybe they can garnish wages or seize assets. The federal goverment skips all of that. There already the goverment. They dont need there own permission. They have powers regular creditors dont have. And once Treasury has your file, negotation becomes much harder. Your not dealing with a lending agency trying to help you anymore. Your dealing with a collection agency trying to get the goverments money back.

The SBA will work with you. Treasury will collect from you. Thats the diffrence.

The Window Thats Closing in 2026

OK so heres were things get intresting. And honestly, this isnt widely reported. Most borrowers dont know this hapened. Most lawyers who dont specialize in this area dont know it hapened.

Something changed in April 2024. The Treasury Department granted the SBA a 2-year exemption from the mandatory referral requirement. That sounds buracratic and boring. Heres what it actualy means in plain english:

Every single EIDL loan that had been sent to Treasury was pulled back. All of them. Every one. The loans that were already in Treasury collection got returned to SBA. The clock reset. The 30% fees that were added? There still there, but collection is back with SBA. The garnishment powers? Back to SBA's softer approach. The automatic seizure of tax refunds? Paused while SBA has the file.

If you thought your loan was already with Treasury and you were already facing there collection powers, you might be wrong. Check your account at lending.sba.gov. As of May 2024, all COVID EIDL debts are being serviced through SBA directly. The loans came back. Your loan might have come back.

This happend becuase the SBA convinced Treasury that they needed more time to work with borrowers. The scale of the problem - 1.3 million defaults on $400 billion in loans - was to big to dump into Treasurys collection system all at once. It would overwhelm there infrastructure. It would cost more to collect then they'd recover. So they got an exemption. They got time. They got a window.

But heres the thing that should make you pay attention. That exemption expires March 2026. Thats not a maybe. Thats not a goal. Thats not something that will probly get extended again. Thats a deadline. When that exemption ends, Treasury referrals resume. The loans that came back will go back. And then the 30% fees, the automatic garnishments, the seized tax refunds - all of that becomes your reality again.

The window is open right now. It wont stay open forever. Every month you wait is a month closer to when the options you have today dissapear completly.

When Your LLC Shield Disappears: The $200K Line

Now heres were we need to talk about your specific situation becuase not all EIDL defaults are created equal. The personal liability question depends almost completly on one number - how much you borrowed. And most people dont understand were the lines are.

For loans under $200,000 taken by LLCs, S-Corps, or C-Corps: no personal guarentee was required. The CARES Act specificaly waived personal guarentees for these smaller loans taken during the pandemic. What does that mean in practicle terms? It means your personal assets - your house, your savings, your retirement accounts, your car, your kids college fund - there not on the table. The SBA can pursue the business assets. They can ruin the business credit. They can make it impossible for your company to get another loan ever. But they cant come after you personaly. Your personal credit might take a hit becuase of the UCC filing, but your personal assets are protected.

Under $200,000 with a business entity? Your personal assets arent at risk. Thats the law. Thats the CARES Act. Thats real.

But theres exceptions. And the exceptions matter enormously.

Sole proprietors dont get this protection. If you operate as a sole proprieter, the business is you. Theres no legal seperation between your personal finances and the business finances. So even if you borrowed less then $200K, your personaly liable for every dollar becuase the structure of your business doesnt create any shield. The SBA can absolutly pursue your house, your savings, your personal accounts. You and the business are the same legal entity.

Loans over $200,000 required personal guarentees from anyone with 20% or more ownership. If you own a significant stake in the business and borrowed more then $200K, you signed a guarentee. You might not remember signing it. It was probably buried in the loan documents. But its there. The SBA can absolutly pursue your personal assets if the business assets dont cover the debt. Your personaly on the hook.

And heres something that catches people by suprise - if you misused the EIDL funds, personal liabilty can attach regardless of loan amount. Using the money for purposes outside what SBA allowed creates addtional exposure. Even if you had the $200K protection, misuse can pierce that protection.

Sole proprietor? The business IS you. Theres no sheild. None.

So before you panic about loosing everthing, figure out which catagory you fall into. Check your loan amount. Check your business structure. Check wheather you signed a guarentee. The answer changes your entire risk profile and determines which options make sense for you.

The Fraud Investigation Fear Most Borrowers Have

That fear your not saying out loud. The one where you lie awake at 3am wondering if someone from the FBI is going to show up at your door. Wondering if using EIDL money for something the goverment didnt specificaly approve counts as federal fraud. Wondering if your going to prison. Wondering if you should have hired a lawyer already.

Heres what the headllines dont tell you.

The DOJ COVID-19 Fraud Enforcement Task Force has charged over 3,500 defendants since 2021. They've recovered $1.4 billion in fraudulent proceeds. Those are real prosecutions. Real people going to federal prison. Real sentances of 10 or 20 years. But look at who there actualy prosecuting. Look at the cases. Look at what those defendants actualy did.

Diana Valteri and Edmond Haxhillari in New Jersey - pleaded guilty in August 2024 to wire fraud and money laundering. They obtained $790,000 through shell companies with zero employees and zero business operations. They invented fake busineses out of thin air and submitted completly fraudulant applications. The businesses didnt exist. The employees didnt exist. The revenue they claimed didnt exist. They fabricated everthing.

Joshua and Magdalena Lybolt in Colorado - indicted in July 2024 for $5 million in fraud. They used the money for a Porsche Taycan, a Range Rover, country club memberships, and real estate properties for themselves. Clear personal enrichment with zero buisness purpose whatsoever. No attempt to even pretend the money went to business expenses.

Shell companies with zero employees. Thats who they prosecute. Fabricated applications with invented businesses. Thats who they prosecute.

These arnt business owners who took loans for legitimate businesses and then struggled when things didnt work out. These are people who fabricated applications, invented employees that never existed, created fake busineses that never operated. The fraud is in the application, not in the usage. The crime is lying to get money you werent entitled to, not using money diffrently then you planned.

Yes, Congress extended the statute of limitations to 10 years for EIDL fraud under the COVID-19 EIDL Fraud Statute of Limitations Act of 2022. But that 10-year window is specificaly for fraud - meaning deliberate misrepresentation to obtain money you werent entitled to. Using funds diffrently then you planned becuase your business was failing? Thats a civil matter. Thats default. Thats what were talking about in this artical. Its not the same thing. Its not even close to the same thing.

If you had a real business, applied honestly about your situation, received money, and then couldnt repay becuase things didnt work out the way you hoped - your not the DOJ's target. You have a debt problem, not a criminal problem. The DOJ has limited resources. There focused on the big fraudsters who stole millions through fake applications. There not going after legitamate business owners who struggled.

Settlement Options They Dont Advertise

The SBA has programs they dont activly promote or advertize. Partly becuase they dont want everyone defaulting just to get a deal. Partly becuase the programs are complicated and require documentation. But they exist, and while your loan is still with SBA - meaning before March 2026 - you can access them. After Treasury referral, most of these options dissapear.

The Hardship Accommodation Plan lets you pay as little as 10% of your normal monthly payment for six months. If your current payment is $2,000 a month and you qualify for HAP, you could pay $200. Thats it. $200 instead of $2,000. This buys you time. It keeps your loan with SBA. It prevents the slide toward Treasury referral. And as of February 2024, SBA expanded eligabilty significently - even borrowers already in default can apply as long as the loan hasnt been sent to Treasury. You dont have to be current to apply. You just have to still be with SBA.

Theres also the 50% payment reduction program. Eligible borrowers can cut there monthly payment in half for six months. You can use this once every five years. Its administered through the MySBA Loan Portal at lending.sba.gov. Not as dramatic as HAP, but easier to qualify for.

And then theres the big one - the Offer in Compromise.

An OIC lets you settle your debt for less then you owe. Significently less. Historicaly, this was only avialable for closed businesses. The logic was that if your business was dead and had no assets, there was nothing to collect, so they'd take what they could get and move on. But recent changes now allow operating busineses to file OIC's too. If you can demonstrate that you cant pay the full amount in a reasonable time, if you can show your financial situation makes full payment impossible, the SBA has authority under 31 CFR 902.2 to compromise the debt.

20 to 50 cents on the dollar. Thats what settlements typicaly look like. A $200,000 debt settled for $40,000 to $100,000.

Why would the SBA take less then they're owed? Becuase there internal metrics count Treasury referral as a failure on there scorecard. A settled loan is a resolved loan. A Treasury referral is an admission that SBA couldnt fix the problem. They have institutional incentive to work with you. Todd Spodek at Spodek Law Group has worked with borrowers navigating these exact negotiations and understands how the SBA evaluates these proposals.

But heres the catch - these options dissapear after Treasury referral. HAP is gone. OIC becomes exponentialy harder becuase now your dealing with Treasury instead of SBA. Your negotiating with a collection agency instead of a lending agency that wants to close files. The window matters. The timing matters. March 2026 matters.

Why Acting Now Matters More Than Youve Been Told

The window wont stay open. March 2026 isnt a flexible deadline. Its not like the payment deferrals that kept getting extended through the pandemic. Treasury gave SBA a specific 2-year exemption starting April 2024 and when that exemption expires, the loans go back to Treasury. Thats the deal that was made.

And theres something else you need to consider. Look, governments change. Priorites change. Adminstrations change. The soft approach to EIDL collection has been policy under one adminstration. A new adminstration might take a completly diffrent view. $400 billion in loans with 37% default rate is a political issue. Someone looking for an easy win could decide to crack down. The favorable treatment borrowers are getting right now is not guarenteed to continue indefinatley.

Call before they call you. Proactive borrowers get better deals. Thats true in almost every debt situation.

If you wait for the SBA to chase you, your negotiating from weakness. They have the leverage. They set the terms. If you reach out first, document your hardship thoroughaly, and propose a reasonable resolution, your negotiating from a position of strengh. The SBA wants to close files. Give them a reason to close yours on favorable terms.

Heres what you should do right now:

Check your loan status at lending.sba.gov. Confirm your loan is still with SBA and not already with Treasury. If it came back from Treasury in 2024, it will show SBA as the servicer. Know were you stand before you do anything else.

Document your hardship completly. Financial statements, tax returns, bank statements, evidence that you cant pay the full amount. The OIC process requires proving inability to pay - prepare that documentation now while you have time.

Consider your options carefully. HAP if you need short-term relief to stabilize. 50% payment reduction if you can manage half payments. OIC if you need to settle for less then you owe. Bankruptcy if the debt is overwhelming everything else in your financial life. Each option has pros and cons depending on your specific situation.

Dont wait for March 2026 to approach. The closer we get to that deadline, the less flexibility the SBA will have. There going to be processing thousands of files trying to resolve them before the exemption expires. Act while theres time and attention to give your case.

At Spodek Law Group, we represent business owners dealing with exactly this situation. The EIDL crisis created problems nobody planned for when those loans went out in 2020 and 2021. But there are paths through it. There are options most people dont know exist. And theres a window right now thats better then any window thats coming after March 2026.

If your facing EIDL default and you dont know what to do next, call us at 212-300-5196. We can look at your specific situation - your loan amount, your business structure, your financial situation - and tell you what options you actually have. No judgment about what happened or how you got here. Just clear guidance about what happens next and how to make the best of a difficult situation.

The countdown is running. Make it count.