Tax professionals across the country find themselves facing a wave of client questions as the Small Business Administration sent nearly 500,000 delinquent pandemic loans to the Treasury Department’s collection apparatus.
Moving these loans over to Treasury for collection has been a shock for many small businesses that didn’t realize they were behind on payments, let alone that they were sitting in collection status.
Complicating the matter: There are instances where SBA did not follow internal protocols to notify loan borrowers their debts were being transferred. Now, the business owners find themselves in a situation where the government can seize tax refunds or Social Security benefits, wages can be garnished, and third-party private collection agencies can come calling.
On top of that, the transfer to Treasury collection means there’s a hefty processing fee added onto the loan amount—up to 32%. And delinquent borrowers in the Treasury queue have fewer options to help repay their debt.
Naturally, confused owners are turning to their tax professionals to help sort this out. For tax practitioners trying to navigate this unfamiliar terrain, here’s some advice to help clients with SBA loans.
The EIDL program’s winding path
The SBA loan program has been around all the way back to the 1950s. The Economic Injury Disaster Loan program—referred to as EIDL, which rhymes with “IDLE”—focused on helping businesses recover from localized events like hurricanes, floods, and tornadoes.
But the government super-sized the program when COVID-19 hit. With a national emergency underway, the CARES Act allowed the SBA to expand the program to help businesses across the country. Nearly 4 million businesses received the COVID-19 EIDL loans to support and help their businesses during the crisis.
The terms were generous. Business owners signed 30-year loans at 3.75% interest with terms varying by the size of the loan. For loans under $25,000, there were few strings attached; the loans were unsecured. For loans between $25,000 and $200,000, collateral was generally required. But for loans over $200,000, a personal guarantee was required—meaning that it wasn’t just business assets at risk.
As time has passed, there’s been confusion about the loan program. Tax pros say some clients simply forgot they had the loans or didn’t realize they required repayment.
SBA sends loans to Treasury collection
The situation changed this spring when SBA made the largest debt-referral in the agency’s history, sending delinquent COVID loans worth tens of billions over to the Treasury Offset Program for collection. Federal law requires agencies to refer delinquent debts to Treasury.
The move stunned some business owners. Some were unaware that their loans were delinquent. In many cases, the SBA did not provide the 60-day notice, required by law, to the EIDL borrower alerting them that the loan would be transferred to the Treasury’s Cross-Servicing Program. Instead, many business owners discovered the transfer after it occurred when they received a Treasury bill noting the loan balance had a new, whopping collection fee of between 28% and 32% tacked on.
Compounding the problem: When these loans transfer to Treasury, the SBA provisions—like the hardship program—are no longer available to the people who need it the most.
Unlike delinquent federal student loans, the SBA EIDL loans have not received much media attention. So frustrated borrowers seeking information increasingly turn to trusted tax professionals with questions and to seek help.
Ways tax pros can help clients
There are several steps that tax pros can share with business owners facing an EIDL loan:
- Check the SBA account: Many borrowers don’t realize they have a loan account at the SBA. They should visit the SBA Loan Portal to set up the account and check balances.
- Stay current: Borrowers staying current on their SBA loan is the easiest step. The options drop dramatically when a loan becomes delinquent and goes into collection status.
- Review loan documents: Many borrowers may not realize—or have forgotten—the terms of the loan. This includes whether they personally guaranteed the terms or pledged any collateral. The larger the loan, the larger the risk—not just to the business but to the individual.
- Keep good records: Borrowers should hold onto loan correspondence in case they need to appeal a decision in the future.
- Seek payment assistance: While the loan is still with the SBA, those having hardships should look into payment assistance before missing payments. Borrowers who are current, or less than 90 days past due, can ask to reduce payments by 50% for six months.
- Offer in compromise: There are limited situations where SBA will accept offers in compromise to settle for less than the full amount of debt. This typically involves businesses that have closed and assets have been liquidated.
Options for loans transferred to Treasury
If the delinquent loans have already been sent to Treasury for collection, a borrower’s options become much more limited. In this scenario, borrowers can consider these steps:
- File a dispute: If the borrower thinks there’s a mistake, filing a dispute promptly with proper documentation can be critical. This can cover disputes over the debt itself, the amount of the debt, or—in a more common situation—whether SBA transferred the loan with proper 60-day notification. The dispute should be sent to the collection entity identified in the collection notice, and a copy can be sent to the SBA as well as Treasury.
- Wage garnishment hearings: For owners with loans transferred to Treasury facing wage garnishment, hearings must be requested within 15 business days of the notice mailing to pause collection activity.
- Private collection agencies: Be careful with private debt collectors reaching out about SBA debt. Make sure they are legitimate, and get any payment arrangement in writing. And be wary of scams.
- Consider professional help: These are complex collection programs. For clients with difficult situations, additional professional help may be needed.
With millions of more EIDL loans still outstanding, more borrowers could face these scenarios in the future. It underscores that borrowers should not stay idle when it comes to taking action on EIDL loans.
ABOUT THE AUTHORS:
Daniel Staeven, is a partner at Frost Law who represents businesses and individuals in financial distress. He will discuss EIDL loans at a Sept. 29 webinar with the Accounting, Legal, & Finance Institute (ALFi) and Frost’s Peter Mancini. “EIDL Aftermath: Next Steps” has CPE and CE credit available. Registration is free.
Terry Lemons is the public relations director at Frost Law, a firm headquartered in metropolitan Washington, D.C. Previously, he spent 26 years at the IRS, spending the last 13 as Communications & Liaison chief where he oversaw the agency’s communications operations and outreach to the tax professional community.
Photo credit: rawpixel.com/Freepik
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