Understanding Personal Guarantees and Your Options.
During the COVID-19 pandemic, thousands of small businesses turned to Economic Injury Disaster Loans (EIDL) offered through the U.S. Small Business Administration (SBA) to survive unprecedented economic challenges. While these loans provided much-needed relief, many business owners are now discovering that repayment obligations can create significant financial stress. One of the most important questions is whether the business owner personally guaranteed the debt.
What Is a Personal Guarantee?
A personal guarantee is a legal promise that makes an individual personally responsible for repayment of a business debt if the business cannot pay. In other words, the lender can pursue the owner’s personal assets—not just business assets—to satisfy the loan obligation.
For traditional SBA loans, personal guarantees are common. However, EIDL loans were structured somewhat differently.
Were EIDL Loans Personally Guaranteed?
The answer depends largely on the amount of the loan.
For many COVID-era EIDL loans:
- Loans of $200,000 or less generally did not require a personal guarantee.
- Loans exceeding $200,000 typically required the owners to execute a personal guarantee in favor of the SBA.
This distinction can have major consequences when a business closes or becomes unable to repay the loan.
What Happens If an EIDL Loan Goes Into Default?
When an EIDL loan defaults, the SBA may pursue collection efforts. If no personal guarantee exists, the SBA’s recovery may be limited primarily to business assets and any collateral securing the loan. If the business has ceased operations and has few remaining assets, the owner’s personal exposure may be limited.
However, where a valid personal guarantee exists, the SBA may seek recovery from the guarantor personally. Collection efforts can include administrative actions, referrals to the U.S. Department of the Treasury, and litigation in appropriate cases.
Can Bankruptcy Help?
Bankruptcy may provide relief for some borrowers facing overwhelming EIDL debt. Depending on the circumstances, both business and individual bankruptcy options may be available. For business owners who signed personal guarantees, a personal bankruptcy filing may address liability arising from the guarantee. The specific outcome will depend on the type of bankruptcy filed and the borrower’s overall financial situation.
Seek Advice Before Taking Action
Many business owners assume that because an EIDL loan was obtained for a business, they cannot be personally liable. Others mistakenly believe that every EIDL loan carries a personal guarantee. Neither assumption is always correct.
If your business is struggling with EIDL loan payments, it is important to review the loan documents carefully and understand exactly what obligations were undertaken. An experienced bankruptcy or debt-relief attorney can help evaluate your exposure, discuss available options, and develop a strategy to protect your financial future.
If you are concerned about SBA or EIDL loan liability, contact our office for a consultation to discuss your specific circumstances.