Covid Loans That Boosted Businesses Now Push Them to Bankruptcy

Small companies unable to pay back pandemic-era emergency loans issued by the federal government are steadily going under or filing for bankruptcy. And, in many cases, the business owners who personally guaranteed repayment are too.

A $380 billion loan program included in the 2020 CARES Act to help small businesses stay afloat has become a source of financial pain as bills mount and hardship accommodations end for many borrowers unable to keep up with the debt service, even at 3.75% fixed interest rates.

Covid-19 Economic Injury Disaster Loans, which were given to nearly 4 million companies to cover a broad range of operating expenses, are increasingly being listed as outstanding debts in bankruptcy petitions for financially distressed firms. More than 1,800 companies have filed for bankruptcy this year listing the Small Business Administration as a major creditor, surpassing figures for each of the last five calendar years, according to data compiled by BankruptcyData.

The surge in filings by corporate debtors with EIDL loans comes in tandem with a growing number of consumer bankruptcies by owners who have become personally liable for those debts when the businesses fail.

“We’re getting multiple calls every single day from people across the country about these EIDLs,” Colorado bankruptcy attorney Mike Wink said. “There’s been a pretty steady crescendo of people dealing with this stuff.”

The program allowed businesses to borrow up to $2 million to be paid back over 30 years, with the option to defer debt payments for 30 months. Any loans above $25,000 had collateral collateral requirements and those exceeding $200,000 required the business owners to sign personal guarantees.

For many individuals now personally responsible for delinquent EIDLs, bankruptcy is the only way to get out from under them. Defaulted loans are referred to the Treasury Department, which has the power to withhold tax refunds or garnish wages.

Orlando-based bankruptcy attorney Robert Branson of Branson Law PLLC said he now receives about two or three inquiries a day from people who are unable to cover their monthly EIDL payments.

If borrowers are over the $200,000 threshold, “the only option I can give them is bankruptcy at this point in time,” he said.

‘Too Much Money’

Along with other federal loan and grant programs introduced at the onset of the pandemic, Covid EIDLs were intended to help struggling small business owners weather temporary shutdowns and other shocks to the global economic system.

The loans complemented the SBA’s roughly $800 billion Paycheck Protection Program, which was intended to help employers cover payrolls. Although EIDLs weren’t forgivable like PPP funds, they were offered on “really good terms,” said tax attorney Rebecca Sheppard of Frost Law.

“For folks that were going through trouble, it was hard to say ‘no’ to,” she said.

But, according to a 2024 Federal Reserve Bank of Cleveland paper, companies with EIDL debt are more likely to have higher amounts of overall debt outstanding and less likely to be profitable than those without it.

Unlike traditional SBA loans intended to help businesses grow, EIDL “proceeds were largely used to survive,” Wink said.

Many of those now filing for bankruptcy with delinquent SBA debt were able to stave off a financial reckoning for a few years “because they had this money in the EIDLs,” he said.

By the end of 2024, the SBA had charged off 370,000 EIDL loans worth about $47 billion and was trying to collect on another $14.7 billion in loans that had been delinquent for at least three months, according to an August report from the agency’s inspector general.

A separate report published by the Congressional Research Service in November 2024—discussing policy options for organizations struggling to make EIDL payments—said the SBA had recognized a loss on loans totaling $78 billion.

The program helped carry people through the worst of the pandemic, but “they gave out too much money,” Wink said.

Government Pressure

Bankruptcy can provide a venue for overburdened companies to restructure with a reduced debt load. But in many cases, businesses with SBA loan debt on their books are either being shuttered without filing for bankruptcy or put into Chapter 7 proceedings to liquidate.

The current stream of bankruptcies for companies and individuals with EIDL debt comes as the SBA in March ended hardship accommodations that had allowed borrowers to cut their typical monthly payments by 90% for up to six months with the option to reapply for relief.

The agency still allows eligible borrowers to obtain six months of relief, but payments are reduced by only 50% and the option is only available once every five years.

The policy change coupled with the potential of default and the penalties that can come with it are driving more filings for bankruptcy, according to attorneys.

“In March there was a huge uptick,” Sheppard said.

And there could be more if the SBA takes a more aggressive approach toward delinquent EIDL borrowers, which it has avoided doing so far, according to the August inspector general report.

“Specifically, the agency did not perfect its security interest on borrower deposit accounts, conduct post-default site visits, report all delinquent obligors to credit bureaus, or refer debts to the U.S. Department of Justice for litigation,” it said.

Filings could increase even more should the SBA—which has drastically cut its staff under the Trump administration—return to its norm of being an aggressive creditor, Wink said.

SBA press officers didn’t respond to questions about the loan program or debt relief.

For the agency, “I have to think this is putting a lot of stress on them,” Wink said. “I think there’s a lot to come.”