Pevita Pearce
Tax professionals nationwide are experiencing an unprecedented surge in client inquiries as the Small Business Administration (SBA) has initiated the largest debt referral in its history, transferring nearly 500,000 delinquent pandemic-era loans, primarily from the Economic Injury Disaster Loan (EIDL) program, to the U.S. Department of the Treasury for collection. This significant move has caught many small business owners off guard, as a substantial number were unaware of their loan delinquency status, let alone that their debts were now under aggressive government collection protocols.
The situation is further complicated by reports of the SBA failing to adhere to its own internal notification procedures, leaving many borrowers in the dark about the impending transfer of their debts. Consequently, these business owners now face a stark reality: the federal government possesses the authority to intercept tax refunds and Social Security benefits, garnish wages, and engage third-party private collection agencies to recover the outstanding balances. Adding to the financial strain, the transfer to Treasury collection incurs substantial processing fees, potentially as high as 32% of the outstanding loan amount. Furthermore, borrowers in the Treasury collection pipeline find their options for debt resolution significantly curtailed compared to when the loans were managed directly by the SBA.
This complex and often distressing scenario is compelling business owners to seek guidance from their trusted tax advisors. For practitioners navigating this unfamiliar and challenging landscape, understanding the intricacies of the EIDL program and the implications of Treasury collection is paramount to effectively assisting their clients.
The Evolving Landscape of the Economic Injury Disaster Loan Program
The SBA’s Economic Injury Disaster Loan (EIDL) program boasts a history dating back to the 1950s, historically serving as a critical resource for businesses affected by localized disasters such as hurricanes, floods, and tornadoes. The program’s primary objective was to provide working capital to businesses that experienced substantial economic injury as a direct result of a declared disaster.
The unprecedented nature of the COVID-19 pandemic necessitated a dramatic expansion of the EIDL program. Under the authority granted by the CARES Act of 2020, the SBA significantly scaled up its operations, transforming the EIDL program into a primary lifeline for businesses grappling with the economic fallout of the national emergency. This expanded COVID-19 EIDL initiative saw nearly 4 million businesses across the United States receive crucial financial assistance to sustain operations during a period of extreme uncertainty.
The terms offered for these COVID-19 EIDL loans were notably generous, designed to provide substantial relief. Borrowers were granted long repayment terms, typically spanning 30 years, with a fixed interest rate of 3.75%. The loan structure varied based on the amount borrowed. For loans under $25,000, the terms were relatively lenient, often requiring no collateral. Loans ranging from $25,000 to $200,000 generally necessitated some form of collateral. However, for loans exceeding $200,000, a personal guarantee was a standard requirement, meaning that business owners were personally liable for the debt, putting both business and personal assets at risk.
Over time, a significant degree of confusion has emerged surrounding the repayment obligations of these EIDL loans. Tax professionals have reported instances where clients have either forgotten about the loans altogether or were under the misapprehension that repayment was not immediately required or was optional, a misunderstanding that has contributed to the current wave of delinquencies.
SBA’s Unprecedented Referral of Loans to Treasury Collection
The situation escalated significantly in the spring of 2023 when the SBA executed its largest debt referral in the agency’s history. Tens of billions of dollars in delinquent COVID-19 EIDL loans were systematically transferred to the Treasury Offset Program (TOP) for collection. This action aligns with federal mandates requiring government agencies to refer delinquent debts to the Treasury Department.
The suddenness of this transfer has profoundly impacted many business owners. A considerable number were unaware that their loan payments were overdue, leading to a state of shock upon discovering their debts were in active collection. Compounding this distress are reports indicating that the SBA did not consistently provide the legally mandated 60-day pre-transfer notice to EIDL borrowers, which is intended to inform them of the impending transfer to Treasury’s Cross-Servicing Program. Many business owners first learned of the transfer not through official communication from the SBA, but rather through a notice from the Treasury Department, often accompanied by a substantial collection fee ranging from 28% to 32% of the outstanding loan balance.
A critical consequence of this transfer is the termination of SBA-specific relief provisions. Programs designed to assist borrowers facing financial hardship, such as the SBA’s hardship accommodation plans, are no longer accessible once a loan is moved to Treasury collection. This leaves borrowers in a more precarious position, with fewer avenues for structured repayment and negotiation.
Unlike delinquent federal student loans, which have garnered considerable media attention and public discussion, the plight of delinquent SBA EIDL loans has received comparatively less coverage. This disparity has led many frustrated borrowers, seeking information and assistance, to increasingly rely on the expertise and guidance of their trusted tax professionals.
Strategies for Tax Professionals Assisting Clients with EIDL Loans
Tax practitioners play a crucial role in guiding their clients through the complexities of delinquent EIDL loans. Here are several key steps and considerations that tax professionals can share with business owners facing this challenging situation:
1. Comprehensive Loan Review and Verification:
- Access Loan Documents: The first step for any client facing EIDL delinquency is to locate and thoroughly review all original loan agreements, promissory notes, and any subsequent correspondence from the SBA. This includes understanding the original loan amount, interest rate, repayment schedule, and any specific covenants or terms.
- Verify Delinquency Status: Clients should directly contact the SBA or the designated loan servicing center to confirm the exact amount owed, the dates of missed payments, and the official status of their loan. It is crucial to have this information directly from the source to ensure accuracy.
- Identify Collection Fees: If the loan has been transferred to Treasury, meticulously examine the collection fee added to the balance. Understand how this fee is calculated and its impact on the total debt.
2. Understanding SBA Communication Gaps:
- Document All Communications: Advise clients to meticulously document every interaction they have with the SBA and the Treasury Department, including dates, names of representatives spoken to, and summaries of conversations. This documentation can be vital if disputes arise.
- Formalize Inquiries: Encourage clients to submit all inquiries and requests in writing (certified mail is recommended) to create a clear paper trail. This includes requests for clarification on payment histories, loan terms, or dispute resolution processes.
3. Exploring Pre-Treasury Collection Options (If Applicable):
- SBA Hardship Programs: If the loan has not yet been transferred to Treasury, vigorously pursue any available SBA hardship programs or deferment options. These programs can provide temporary relief and allow businesses to get back on track with payments.
- Loan Modification Discussions: Engage with the SBA to explore possibilities for loan modification, such as adjusting the repayment schedule or interest rate, if such options are still available.
4. Navigating Treasury Collection Protocols:
- Understand Treasury Offset Program (TOP): Educate clients about the Treasury Offset Program. This program allows the Treasury Department to intercept federal payments owed to an individual or entity to satisfy delinquent debts. This can include federal tax refunds, state tax refunds, and federal benefit payments like Social Security.
- Wage Garnishment and Levy: Inform clients that if other collection methods fail, Treasury can pursue wage garnishment or levy bank accounts and other assets.
- Third-Party Collection Agencies: Explain that Treasury often contracts with private collection agencies. These agencies have their own protocols and may initiate aggressive collection efforts.
5. Developing a Repayment Strategy:
- Assess Financial Capacity: Conduct a thorough assessment of the client’s current financial situation, including cash flow, profitability, and available assets.
- Negotiate with Treasury: If direct negotiation with Treasury or their contracted agencies is necessary, advise clients to be prepared with a realistic repayment proposal based on their financial capacity. Highlight the importance of a structured payment plan over sporadic or insufficient payments.
- Consider Debt Resolution Options: In some cases, clients may need to explore broader debt resolution strategies, potentially including bankruptcy, if the debt burden is overwhelming.
6. Seeking Legal Counsel:
- Consult with an Attorney: For complex cases, especially those involving potential asset seizure or significant disputes, strongly recommend that clients consult with an attorney specializing in debt relief, business law, or bankruptcy. An attorney can provide crucial legal advice and representation.
Limited Options for Loans Transferred to Treasury
Once delinquent EIDL loans have been officially transferred to the Treasury Department for collection, the borrower’s available options become considerably more restricted. However, certain steps can still be considered:
- Direct Communication with Treasury: While SBA programs are no longer accessible, borrowers can and should communicate directly with the Treasury Department or their assigned collection agency. The goal is to understand the exact amount due, including accrued interest and fees, and to explore any potential payment arrangements.
- Inquire About Payment Plans: Treasury may offer installment payment plans, though these are often less flexible than SBA options. It is crucial to negotiate terms that are manageable for the business’s financial reality.
- Dispute Resolution (Limited Scope): If there are demonstrable errors in the debt amount or the collection process, borrowers may have limited grounds to dispute the debt. This typically requires strong evidence and adherence to strict procedural guidelines set by Treasury.
- Explore State and Local Relief (If Available): While federal relief programs may be exhausted, it is worth investigating if any state or local government initiatives or non-profit organizations offer assistance programs for small businesses facing debt challenges.
- Asset Protection Strategies: Advise clients to understand their rights regarding asset protection. Consulting with an attorney is critical to explore legal strategies for safeguarding essential business and personal assets from seizure, within the bounds of the law.
- Bankruptcy Consultation: For businesses facing insurmountable debt, a consultation with a bankruptcy attorney is a necessary step. Chapter 7 (liquidation) or Chapter 11 (reorganization) might offer a path to debt relief, though the implications are significant.
The reality is that once a loan enters the Treasury collection pipeline, the leverage shifts heavily in favor of the government. Proactive engagement and a clear understanding of the limited options are essential for mitigating the most severe consequences.
The Broader Implications and Future Outlook
The SBA’s decision to transfer nearly half a million delinquent EIDL loans to Treasury collection represents a significant shift in how pandemic-era relief debt is being managed. This move underscores the government’s intent to recover taxpayer funds that were disbursed during a national crisis.
For tax professionals, this situation highlights the evolving role they play beyond traditional tax preparation and advisory services. They are increasingly becoming critical navigators of complex financial regulations and government programs, requiring ongoing education and adaptation. The sheer volume of these delinquent loans suggests that millions more borrowers could face similar collection actions in the future. This underscores the urgent need for borrowers to remain vigilant and proactive regarding their EIDL obligations, rather than remaining idle. The consequences of inaction can be severe and far-reaching, impacting not only business finances but also personal credit and future financial opportunities.
The long-term impact of this mass collection effort on the small business landscape remains to be seen. It may lead to increased business failures, reduced economic activity in affected communities, and a heightened sense of caution among businesses considering future government-backed loans. The transparency and fairness of the collection process will likely be under scrutiny, particularly given the reports of procedural shortcomings by the SBA. As this situation unfolds, ongoing communication and advocacy from tax professionals and business groups will be crucial in ensuring that borrowers are treated equitably and that appropriate avenues for resolution remain accessible.
About the Authors:
Daniel Staeven, a partner at Frost Law, specializes in representing businesses and individuals confronting significant financial distress. He is scheduled to discuss the ongoing implications of EIDL loans at a forthcoming webinar on September 29th, hosted by the Accounting, Legal, & Finance Institute (ALFi) in conjunction with Frost Law’s Peter Mancini. The webinar, titled "EIDL Aftermath: Next Steps," offers continuing professional education (CPE) and continuing education (CE) credits and is free to register.
Terry Lemons, Public Relations Director at Frost Law, brings extensive experience to his role. Previously, he dedicated 26 years of his career to the Internal Revenue Service (IRS), culminating in 13 years as the Chief of Communications & Liaison. In this capacity, he was responsible for overseeing the IRS’s communication strategies and outreach efforts to the tax professional community.
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