Bankruptcy ✦ SBA & Business Debt
The EIDL Loan Is in Default. Treasury Is Calling. Here Is the Map.
SBA COVID EIDL and 7(a) defaults are the largest source of business-debt cases in our practice, and the collection machine behind them is federal, fast, and mostly automatic. North Star Law Firm helps Colorado business owners decide between an SBA offer in compromise, a workout, Subchapter V, and personal bankruptcy, with an attorney-CPA who has worked on these loan programs since 2020.
Short Answer
What actually happens after an SBA loan defaults?
The SBA sends a demand, and after roughly 120 days of delinquency the loan is referred to the Treasury Department’s Bureau of the Fiscal Service for cross-servicing. Treasury adds a fee of close to 30 percent, hands the account to a private collection agency, and starts using the tools that need no court: offset of federal payments and tax refunds, offset of Social Security, and administrative wage garnishment of 15 percent of your pay. Eventually the file can go to the Department of Justice for a lawsuit. Every one of those steps has a defense, a deadline, or a workaround, and bankruptcy stops all of them at once.
- Treasury offset and administrative wage garnishment defended or stopped
- SBA offer in compromise evaluated against bankruptcy on the actual numbers
- Subchapter V filed in days when a business is being drained
- Personal guarantee exposure analyzed before any filing
- DOJ fraud risk assessed before sworn disclosures go to the government
- Colorado exemptions applied against federal judgment enforcement
Your Options
Four ways out, and how to choose
| Path | Best for | What it does | What it doesn’t do |
|---|---|---|---|
| SBA offer in compromise | An owner whose business has closed or is closing, with modest personal finances and no other major debt | Settles the guarantee for what the SBA finds you can pay; evaluated on ability to pay, not balance | Doesn’t stop Treasury collection while pending; requires full financial disclosure; not available while the business is operating normally |
| Workout or hardship plan | A borrower who can pay something and wants to stay out of court | Keeps the loan out of Treasury referral or gets it recalled; a performing plan is a durable defense to offset | Interest keeps running; a missed payment puts you back at the start |
| Subchapter V | An operating business with SBA, MCA, tax, and vendor debt that needs the stay to survive | Stops every creditor at filing; pays the SBA the collateral value plus a share of disposable income over 3 to 5 years; keeps ownership | Doesn’t discharge the owner’s guarantee unless addressed in the plan or a separate case |
| Chapter 7 or 13 for the owner | A guarantor whose business is done and who has other debt to clear | Discharges the guarantee and everything else that qualifies; Chapter 13 protects nonexempt property | Doesn’t help if the loan was obtained or used fraudulently; liens on collateral survive |
Colorado Rules
What Colorado law adds to a federal collection problem
The collection machinery is federal and identical in every state, but three Colorado rules change the analysis. First, Colorado’s exemptions travel into a federal collection case: under 28 U.S.C. § 3014 a debtor sued by the United States can elect the exemptions of the state where they live, so the $250,000 homestead, the vehicle exemption, and full retirement protection apply against an SBA judgment. Second, Colorado permits private judgment creditors to garnish wages, up to 20 percent of disposable earnings under C.R.S. § 13-54-104, so a business owner with MCA judgments faces garnishment from both directions, which is a reason bankruptcy comes up sooner here than in Texas. Third, Colorado’s Voidable Transactions Act (C.R.S. § 38-8-101 and following) gives creditors, and a bankruptcy trustee, a four-year reach-back on transfers, so moving assets to a spouse or an LLC after the default is not a plan; it is evidence.
The Attorney-CPA Difference
These are accounting cases wearing legal clothes.
An EIDL matter turns on where the money went. The loan documents restricted proceeds to working capital, the application was signed under penalty of perjury, and the DOJ has treated pandemic loan fraud as a priority since 2020. Before any resolution goes to the SBA or Treasury, and certainly before a bankruptcy petition puts sworn schedules in front of the government, someone has to trace the funds and evaluate the exposure. We do that tracing as forensic accountants, and we give the legal advice that follows from it as attorneys, under privilege.
Phillip Zagotti co-authored a guide to the CARES Act relief programs in April 2020 that warned readers then that fraud enforcement would follow the money. Six years later, much of the practice is helping the same generation of borrowers close out those loans.
- Use-of-proceeds tracing before any disclosure is made
- Guarantee and collateral analysis from the actual loan documents
- SBA offer in compromise packages prepared by a CPA
- Treasury offset, fee, and garnishment challenges
- Subchapter V and personal bankruptcy when the numbers call for it
Questions & Answers
SBA and business debt questions, answered
Can the SBA or Treasury take my house in Colorado?
Rarely, and Colorado’s exemptions are part of why. When the government sues on a defaulted loan, the Federal Debt Collection Procedures Act lets you elect the exemptions of your home state (28 U.S.C. § 3014), which in Colorado means the $250,000 homestead ($350,000 if elderly or disabled) under C.R.S. § 38-41-201. A home with equity inside that figure is protected from a judgment lien’s enforcement. Two cautions: the SBA took a real estate lien on EIDL loans over $500,000, and a lien you signed for is not defeated by an exemption; and use of loan proceeds that amounts to fraud can put the home at risk in ways an exemption does not cover.
Can they garnish my wages without suing me?
Yes. Once an SBA loan is referred to the Treasury Department’s cross-servicing program, Treasury can order administrative wage garnishment of up to 15 percent of disposable pay with no court judgment, offset your federal tax refunds and Social Security through the Treasury Offset Program, and add a collection fee that runs close to 30 percent of the balance. A Colorado judgment creditor, by contrast, needs a judgment first and is capped at 20 percent. Bankruptcy’s automatic stay stops all of it at filing.
Is an EIDL loan dischargeable in bankruptcy?
Yes, in most cases. An EIDL or 7(a) loan is an ordinary debt under the Bankruptcy Code. It is discharged in Chapter 7 unless the SBA proves the loan was obtained by fraud under 11 U.S.C. § 523(a)(2), and it is restructured in a Chapter 13 or Subchapter V plan otherwise. Collateral liens survive the discharge, so a business with equipment or receivables under an EIDL UCC lien has a separate negotiation. The one thing we always analyze first is whether the loan application or the use of proceeds creates fraud exposure, because a bankruptcy filing puts sworn disclosures in front of the government.
Should I file bankruptcy or make an offer in compromise to the SBA?
It depends on what else you owe and what you own. An SBA offer in compromise is evaluated on your ability to pay, not the balance, and works well when the SBA loan is your only major problem and your finances are modest. Bankruptcy is better when there is other debt to clear, when Treasury collection has already started, or when a business needs the automatic stay to keep operating. We run both numbers in the consultation.
My business closed. Do I still owe the EIDL personally?
It depends on the loan size and how the business was organized. EIDL loans of $200,000 or less made to an LLC or corporation generally have no personal guarantee, so the debt dies with the entity unless the owner signed something more. Loans above $200,000 required a personal guarantee. A sole proprietor owes the loan personally at any amount. The closed business also has to be wound up correctly so that the tax and lien issues don’t follow you.
What about merchant cash advances stacked on top of the SBA loan?
That is the most common fact pattern we see from Colorado business owners now. MCA daily debits usually have to be stopped fast, and Subchapter V is often the only tool that does it while keeping the business alive. The advances are treated as claims in the case, and their terms can be examined for usury and mischaracterization.
Before Treasury takes the next payment, find out what your options actually are.
A free consultation with an attorney-CPA on your SBA, EIDL, or MCA debt: offer in compromise, workout, or bankruptcy, with the numbers behind each.