If you took out a Small Business Administration EIDL loan of $25,000 or less and your business later closed, you're in one of the lowest risk positions any federal loan borrower can be in, and most people don't realize it.
Nearly 4 million businesses received SBA loans during the pandemic under the Economic Injury Disaster Loan program, known as EIDL. A significant share of those loans was $25,000 or less. For that group, SBA required no collateral and no personal guarantee. That single fact changes almost everything about what happens next if the business doesn't survive.
Frost Law regularly hears from borrowers in this exact position, who fear they're about to lose a house, a car, or a tax refund forever. In most cases, that's not how these SBA loans work. But "most cases" aren’t "every case," and the details matter.
Nearly 500,000 delinquent borrowers that participated in SBA’s EIDL program have been referred to the U.S. Department of Treasury. This major change means businesses can be contacted by third-party private collection agencies pursuing collection of government debt. In this situation, delinquent borrowers will now need to deal with the Treasury Offset Program, which means the government can automatically seize things like tax refunds and Social Security benefits. And for some in borrowers, the government can also garnish paychecks, taking up to 15% without additional legal proceedings.
Moving these loans from the SBA into the Treasury collection program means delinquent borrowers have vastly limited financial options to repay their debts. They could face financial entanglements for years. Complicating the matter: Frost Law continues seeing instances where SBA did not follow the proper protocols for notifying loan borrowers before their debts were transferred to Treasury. Frost Law, a national firm headquartered in metropolitan Washington, D.C., has been working with hundreds of SBA EIDL borrowers. For people who have received an SBA notification, contact from a third-party collection agency or suspect their EIDL loan has been sent to the Treasury Department for collection, Frost Law may be able to help. Have questions? Contact us at Frost Law to see what your options may be or if a limited exception may apply to you.
This is the third in a series of Frost Law articles exploring EIDL issues. Others in the series include EIDL Borrowers At Financial Risk of Growing Bills, Garnishment of Wages, and Social Security Benefits and Frost Law Alert: SBA Loan Holder Rights May Have Been Violated When Debts Sent to Treasury for Collection.
But for many of those smaller borrowers who took out $25,000 or less in SBA EIDL loans, the situation can be much less dire. SBA’s lending tiers made no collateral or personal guaranty a requirement at this loan size. But loans above $25,000 required a blanket lien on business assets, and loans above $200,000 required a personal guaranty as well.
For these smaller borrowers under $25,000, there’s no lien filed and no guaranty signed. That means SBA has no collateral to seize, no site visit to conduct, and no foreclosure to pursue. If your business was an LLC or corporation, the debt generally stays with the business entity, not with you personally.
But that protection has limits.
The clearest one centers on sole proprietors: If you took the loan as a sole proprietor, there’s no legal wall between you and the business, and the debt follows you regardless of the loan amount. This entity “shield” can also go away in cases of fraud or misrepresentation on the loan application. This defense can also fail if a court finds grounds to disregard the entity altogether, for example, if business and personal funds were never kept separate.
These situations are the exception, not the rule. But they illustrate why anyone unsure how their loan or entity was structured should get a quick professional review rather than assume.
Limited collection tools don't mean the government has no collection tools. Federal law still requires SBA to act on delinquent debt, and at 120 days past due, the loan gets referred to the Treasury Offset Program (TOP).
Through TOP, the government can intercept federal payments, tax refunds, Social Security benefits, and other federal payments, from whoever is legally responsible for the debt. This can happen automatically, without a lawsuit or a court judgment.
But the TOP collection program generally can't take these steps on a loan of $25,000 or smaller:
For those borrowers who have closed – or are considering closing – their businesses, how you approach this matters. A clean, documented closure puts you in a stronger position if questions ever come up later involving your SBA loans. Here are some important tips to keep in mind:
The SBA will attempt to contact borrowers by phone, letter, and email. If there's no response, SBA formally writes the loan off as a loss and refers it to Treasury. From there, the government’s primary tool isn’t a lawsuit, it’s intercepting money it would otherwise pay the borrower, and applying it to the debt instead. In practice, that usually means a tax refund or a Social Security payment gets reduced or withheld entirely to cover what’s owed. This can happen automatically, without a court order or a lawsuit, once the debt is on file with Treasury. But lawsuits against borrowers with balances under $25,000 are rare because the cost of litigation isn’t worth it to the government at this loan size.
A closed business with a delinquent EIDL under $25,000 is not a crisis for the borrower. No collateral was pledged, and in most cases, no personal guarantee was signed. The real exposure is the federal government taking action to offset payments like tax refunds and payments against whoever the debt legally belongs to. That’s the usual course of action rather than more serious options like a lawsuit, a lien, or a seized bank account.
But there are some important caveats that borrowers in this situation with a delinquent loan need to understand. Their financial safety can depend on factors like entity structure, how the loan was signed, and how the closure was documented. If you're not sure where you stand on these issues, a quick review is worth more than an assumption – and it could protect valuable assets.
Frost Law has advised businesses nationwide on SBA EIDL loans since March 2020. If you have questions about a loan under $25,000 and a closed business, call Frost Law at (410) 497-5947 or fill out our contact form to find out exactly where you stand.
If you took out a Small Business Administration EIDL loan of $25,000 or less and your business later closed, you're in one of the lowest risk positions any federal loan borrower can be in, and most people don't realize it.
Nearly 4 million businesses received SBA loans during the pandemic under the Economic Injury Disaster Loan program, known as EIDL. A significant share of those loans was $25,000 or less. For that group, SBA required no collateral and no personal guarantee. That single fact changes almost everything about what happens next if the business doesn't survive.
Frost Law regularly hears from borrowers in this exact position, who fear they're about to lose a house, a car, or a tax refund forever. In most cases, that's not how these SBA loans work. But "most cases" aren’t "every case," and the details matter.
Nearly 500,000 delinquent borrowers that participated in SBA’s EIDL program have been referred to the U.S. Department of Treasury. This major change means businesses can be contacted by third-party private collection agencies pursuing collection of government debt. In this situation, delinquent borrowers will now need to deal with the Treasury Offset Program, which means the government can automatically seize things like tax refunds and Social Security benefits. And for some in borrowers, the government can also garnish paychecks, taking up to 15% without additional legal proceedings.
Moving these loans from the SBA into the Treasury collection program means delinquent borrowers have vastly limited financial options to repay their debts. They could face financial entanglements for years. Complicating the matter: Frost Law continues seeing instances where SBA did not follow the proper protocols for notifying loan borrowers before their debts were transferred to Treasury. Frost Law, a national firm headquartered in metropolitan Washington, D.C., has been working with hundreds of SBA EIDL borrowers. For people who have received an SBA notification, contact from a third-party collection agency or suspect their EIDL loan has been sent to the Treasury Department for collection, Frost Law may be able to help. Have questions? Contact us at Frost Law to see what your options may be or if a limited exception may apply to you.
This is the third in a series of Frost Law articles exploring EIDL issues. Others in the series include EIDL Borrowers At Financial Risk of Growing Bills, Garnishment of Wages, and Social Security Benefits and Frost Law Alert: SBA Loan Holder Rights May Have Been Violated When Debts Sent to Treasury for Collection.
But for many of those smaller borrowers who took out $25,000 or less in SBA EIDL loans, the situation can be much less dire. SBA’s lending tiers made no collateral or personal guaranty a requirement at this loan size. But loans above $25,000 required a blanket lien on business assets, and loans above $200,000 required a personal guaranty as well.
For these smaller borrowers under $25,000, there’s no lien filed and no guaranty signed. That means SBA has no collateral to seize, no site visit to conduct, and no foreclosure to pursue. If your business was an LLC or corporation, the debt generally stays with the business entity, not with you personally.
But that protection has limits.
The clearest one centers on sole proprietors: If you took the loan as a sole proprietor, there’s no legal wall between you and the business, and the debt follows you regardless of the loan amount. This entity “shield” can also go away in cases of fraud or misrepresentation on the loan application. This defense can also fail if a court finds grounds to disregard the entity altogether, for example, if business and personal funds were never kept separate.
These situations are the exception, not the rule. But they illustrate why anyone unsure how their loan or entity was structured should get a quick professional review rather than assume.
Limited collection tools don't mean the government has no collection tools. Federal law still requires SBA to act on delinquent debt, and at 120 days past due, the loan gets referred to the Treasury Offset Program (TOP).
Through TOP, the government can intercept federal payments, tax refunds, Social Security benefits, and other federal payments, from whoever is legally responsible for the debt. This can happen automatically, without a lawsuit or a court judgment.
But the TOP collection program generally can't take these steps on a loan of $25,000 or smaller:
For those borrowers who have closed – or are considering closing – their businesses, how you approach this matters. A clean, documented closure puts you in a stronger position if questions ever come up later involving your SBA loans. Here are some important tips to keep in mind:
The SBA will attempt to contact borrowers by phone, letter, and email. If there's no response, SBA formally writes the loan off as a loss and refers it to Treasury. From there, the government’s primary tool isn’t a lawsuit, it’s intercepting money it would otherwise pay the borrower, and applying it to the debt instead. In practice, that usually means a tax refund or a Social Security payment gets reduced or withheld entirely to cover what’s owed. This can happen automatically, without a court order or a lawsuit, once the debt is on file with Treasury. But lawsuits against borrowers with balances under $25,000 are rare because the cost of litigation isn’t worth it to the government at this loan size.
A closed business with a delinquent EIDL under $25,000 is not a crisis for the borrower. No collateral was pledged, and in most cases, no personal guarantee was signed. The real exposure is the federal government taking action to offset payments like tax refunds and payments against whoever the debt legally belongs to. That’s the usual course of action rather than more serious options like a lawsuit, a lien, or a seized bank account.
But there are some important caveats that borrowers in this situation with a delinquent loan need to understand. Their financial safety can depend on factors like entity structure, how the loan was signed, and how the closure was documented. If you're not sure where you stand on these issues, a quick review is worth more than an assumption – and it could protect valuable assets.
Frost Law has advised businesses nationwide on SBA EIDL loans since March 2020. If you have questions about a loan under $25,000 and a closed business, call Frost Law at (410) 497-5947 or fill out our contact form to find out exactly where you stand.
