Day of Reckoning Coming for COVID-era SBA Loan Programs

02.06.2025

During the COVID pandemic, the U.S. Small Business Administration (SBA) provided two types of loans to small businesses:  (1) the Paycheck Protection Program (PPP); and (2) the COVID Economic Injury Disaster Loans (EIDL).  The total amount funded under these programs was a whopping $1.2 trillion.

The PPP loans were distributed by third party lenders.  Small businesses secured approximately $800 billion in PPP funds which were designed to keep employees paid during the pandemic.  Borrowers have up to five years from origination of the “loan” to request forgiveness.  The primary criterion for loan forgiveness is that the borrower used at least 60% of the proceeds on payroll costs within 8 to 24 weeks after receiving the loan.  In January 2024, the SBA announced that it had forgiven $761 million, or 96% of the PPP loan portfolio.

The EIDL provided small business loans of up to $2 million to help pay operating expenses (including payroll) and provide working capital.  The SBA disbursed more than 4.1 million EIDL loans totaling approximately $400 billion.  The SBA has reported that 1.3 million EIDL loans are in default, in liquidation, or have been charged off.  This is actually not much different from the federal government’s originally projected default rate of 37%.

Initially, the SBA focused most of its efforts on collecting loans perceived to be fraudulent.  How much fraud actually occurred is open to question.  The SBA’s inspector general estimated that $200 billion, or one-sixth, of all PPP and EIDL funds went to fraudulent borrowers; but the SBA itself estimated “only” $36 billion of fraudulently obtained loans, of which $30 billion has been recovered.

As to non-fraudulent EIDL loans, the SBA was reluctant at first to pursue defaults aggressively.  Small business owners only had to start paying back the loans after 30 months to avoid default status although interest continued to accrue during this deferment.  Then, the SBA initiated a Hardship Accommodation Plan, which allowed EIDL borrowers in default to pay only a certain percentage of their monthly payment amount for up to five 6-month periods (ranging from 10% of the monthly payment in the first enrollment period to 75% in the fifth period).  Currently, approximately 300,000 loans, totaling $36 billion, are still enrolled in the Hardship Accommodation Plan.

There was even a period of time, starting in February 2023, when the SBA announced that it would not attempt to collect loans of $100,000 or less, because the cost to collect would be higher than the amount likely to be collected.  This automatic write off policy was dropped in December 2023 under pressure from Congress.  Now, with COVID in the rearview mirror, and with a new presidential administration that may take a tougher approach to loan enforcement, many borrowers may soon face serious financial pressure to handle debt.  The SBA decided against selling the EIDL loan portfolio to a third party servicer and has opened a standalone COVID-19 EIDL servicing center in Fort Worth, Texas with more than 1,500 employees. 

Subchapter V of the Bankruptcy Code, which became effective early in the pandemic, offers a significantly simplified and less expensive process for companies to reorganize their financial affairs, and has helped numerous small businesses (including many PPP and EIDL loan recipients) to achieve success in chapter 11 cases [prior alert on Subchapter V].  Nonetheless, Congress recently allowed the debt limit for eligibility to file a Subchapter V case to drop from $7.5 million to approximately $3 million, reducing the number of companies eligible for the streamlined Subchapter V process.  The pressure of having more SBA loans in default and collection, might encourage Congress to restore the Subchapter V debt limit to $7.5 million (or higher) in the future.  In any event, the number of small business bankruptcy filings may accelerate in the near future due to the significant number of loans in default, and more aggressive SBA loan enforcement activity.

The Bankruptcy Practice Group at Hirschler is experienced in representing debtors and creditors in small (and larger) business bankruptcy cases, as well handling out of court workouts.  Please feel free to call one of our attorneys to assist you whether as a prospective debtor or creditor.