What Happens If You Default on an EIDL Loan?
So your EIDL loan payments have stopped, and your officially in default. Maybe you missed one payment, then another, and now your several months behind with no realistic way to catch up. Or maybe you made a conscious decision to stop paying because your business failed and you don’t have the money. Whatever led to the default, your probably wondering what happens next. Will the SBA come after your personal assets? Will they garnish your wages? Will your credit be ruined? Could you face criminal charges? The uncertainty is stressful, especially when you don’t know what collection actions to expect or how aggressive the SBA will be in pursuing the debt.
Defaulting on an EIDL loan triggers a series of consequences that escalate over time. Initially, you’ll receive demand letters and notices giving you opportunities to cure the default. If you don’t respond or can’t make payments, the debt gets referred to the Treasury Department’s collection system, which has extensive powers to collect federal debts—tax refund seizure, wage garnishment, benefit offset, and more. Your credit score takes a massive hit that lasts for years. If you personally guaranteed the loan (loans over $200,000), the SBA can pursue your personal assets. And if the SBA or Justice Department believes you obtained the loan fraudulently or misused the funds, you might face civil lawsuits or even criminal investigation. The consequences are serious and long-lasting.
This article explains exactly what happens when you default on an EIDL loan, from the initial missed payments through the various stages of collection. We’ll cover the timeline of collection actions, what powers the SBA and Treasury have to collect from you, whether your personal assets are at risk, how default affects your credit, what happens if you default on loans with and without personal guarantees, whether you could face fraud allegations, your tax liability for cancelled debt, and what options you have even after defaulting to resolve or reduce the debt. We’ll also explain the critical 180-day mark when EIDL debts get transferred to Treasury for aggressive collection. If your already in default or heading toward it, read this entire article to understand what your facing and what you can do about it.
What’s the Timeline for Collection Actions After I Miss Payments?
When you default on an EIDL loan, collection actions follow a predictable escalation path. Understanding this timeline helps you know what to expect and when:
Days 1-30: First missed payment. After you miss your first payment, you’ll start receiving notices from the SBA or the COVID EIDL Servicing Center. These initial notices are typically reminders that your payment is past due and requests that you contact them to bring the loan current or discuss hardship options. At this stage, the tone is relatively soft—there trying to work with you to resolve the delinquency before it becomes more serious. If you respond at this stage and work out a payment arrangement or hardship accommodation, you can often avoid more serious consequences.
Days 30-90: Multiple missed payments. As you continue to miss payments, the notices become more frequent and more urgent. You’ll receive demand letters stating that your loan is seriously delinquent and giving you deadlines to pay or contact them. The SBA might report the delinquency to credit bureaus at this point, though credit reporting policies vary. You’re still within a window where contacting the SBA and proposing a resolution (payment plan, hardship accommodation, or offer in compromise) can prevent escalation to more aggressive collection. But the window is closing.
Days 90-180: Referral preparation. As your default approaches six months, the SBA begins preparing to refer your debt to the Treasury Department for collection. You’ll receive increasingly serious notices warning that the debt will be transferred to Treasury if you don’t resolve the delinquency. These notices typically give you final opportunities to contact the SBA before the transfer happens. This is your last chance to deal with the SBA directly before you’re dealing with the federal government’s centralized collection apparatus.
Day 180+: Transfer to Treasury. At approximately 180 days past due (six months of non-payment), delinquent EIDL loans are transferred to the Department of the Treasury’s Bureau of the Fiscal Service for collection. Once your debt is at Treasury, you’re no longer dealing with the SBA’s servicing center—you’re dealing with the federal government’s collection system, which has extensive legal powers to collect debts. Treasury will send you notices informing you that they’ve taken over collection and explaining your rights and obligations. At this point, aggressive collection actions can begin—tax refund offset, wage garnishment, and other enforcement measures.
This timeline can vary somewhat based on specific circumstances and SBA policies, but the 180-day mark for Treasury referral is the critical turning point. Once you’re at Treasury, the nature of collection efforts changes from letters and phone calls to actual enforcement actions that directly take money from you.
What Collection Powers Does the Treasury Department Have?
Once your defaulted EIDL loan is transferred to the Treasury Department for collection, you’re facing the full array of federal debt collection powers:
Tax refund offset (TOP). This is typically the first enforcement action you’ll experience. Through the Treasury Offset Program (TOP), the government intercepts your federal tax refunds and applies them to your EIDL debt. If you normally get a $5,000 refund, you’ll get nothing—it goes straight to paying down your loan. This happens automatically without any court proceeding or additional notice beyond the initial notification that your debt is in the TOP system. The refund offset continues every year until the debt is paid or resolved.
Administrative wage garnishment. The Treasury can garnish up to 15% of your disposable income from your paycheck without going to court first. They notify your employer, and your employer is legally required to withhold the specified amount and send it to Treasury. “Disposable income” is your pay after legally required deductions (like taxes and Social Security), but before voluntary deductions (like health insurance or retirement contributions). This garnishment continues every pay period until the debt is satisfied. And it’s an administrative action, not a judicial one—they don’t need to sue you or get a court order first.
Federal payment offset. If you receive any federal payments—federal employee salary, Social Security benefits (in some situations), federal contractor payments, federal grants, or other federal money—those payments can be offset to pay your EIDL debt. Retirement benefits from the Social Security Administration are generally protected from offset for most debts, but other federal payments are fair game.
Credit bureau reporting. Your default is reported to all three major credit bureaus (Equifax, Experian, TransUnion), where it remains for seven years from the date of default. This destroys your credit score—defaults on federal loans are viewed extremely negatively by credit scoring algorithms. The damaged credit affects your ability to get car loans, mortgages, credit cards, or even rent apartments. Many landlords run credit checks, and a defaulted federal loan is a massive red flag.
Litigation. The Department of Justice can file a lawsuit against you in federal court to obtain a judgment for the debt. Once they have a judgment, they can use state law collection remedies available to judgment creditors—levy bank accounts, place liens on your real property, seize and sell assets, and garnish wages beyond the 15% administrative limit. Judgments also extend the time frame for collection—judgments can be renewed and can last for decades, effectively making the debt collection timeline almost unlimited.
Will the SBA Seize My Personal Assets?
Whether your personal assets are at risk depends critically on whether you signed a personal guarantee for your EIDL loan:
EIDL loans of $200,000 or less (typically no personal guarantee): For EIDL loans of $200,000 or less, personal guarantees were not required. This means the loan obligation belongs to your business entity, not to you personally. If your business has no assets and your properly structured as a corporation or LLC (not a sole proprietorship), your personal assets—your house, your personal bank accounts, your car, your personal investments—are generally protected from SBA collection efforts. The SBA’s remedies are limited to whatever business assets exist.
However, there are important caveats: If you operated as a sole proprietorship, there’s no legal separation between you and the business, so business debts are your personal debts regardless of whether there’s a formal personal guarantee. If you took actions that “pierce the corporate veil”—commingling personal and business funds, using business accounts for personal expenses, failing to maintain corporate formalities—the SBA might argue in court that the corporate form should be disregarded and you should be held personally liable. And even if your not legally liable, the SBA might still attempt collection from you personally, and you’d need to assert your lack of personal liability as a defense.
EIDL loans over $200,000 (personal guarantee required): If your EIDL loan exceeded $200,000, you (and any other owner with 20% or more ownership) had to sign a personal guarantee making you personally liable for the full debt. With a personal guarantee, all your personal assets are at risk. The SBA can:
- Place liens on your personal real estate, making it impossible to sell or refinance without paying off the EIDL debt
- Levy your personal bank accounts, taking whatever funds are there to pay the debt
- Garnish your personal wages from any employment
- Seize other personal assets like vehicles, investment accounts, or valuable personal property
Your home is generally protected by homestead exemptions up to certain dollar amounts (varies by state), but if you have significant equity beyond the exemption amount, the SBA could force sale of your home to collect from that equity. Your retirement accounts have some protections under federal law, but those protections aren’t absolute and can be overcome in certain circumstances.
The practical reality: whether or not you have a personal guarantee, the SBA’s primary collection tools are wage garnishment and tax refund offset, which don’t require seizing physical assets. Asset seizure typically happens when there are significant assets (expensive real estate, valuable business equipment, investment accounts) that make the effort worthwhile. For most borrowers, you’re more likely to experience garnishment and offset than actual asset seizure.
How Will Default Affect My Credit?
Defaulting on an EIDL loan has devastating effects on your credit that last for years:
Immediate credit score drop. Once the default is reported to credit bureaus (which can happen after you’re 90-180 days delinquent), your credit score will drop significantly—often 100-200 points or more depending on what your score was before. Defaults on federal loans are treated very seriously by credit scoring algorithms because they indicate you failed to repay a government obligation, which signals high credit risk.
Seven years on your credit report. The default remains on your credit report for seven years from the date of the first missed payment that led to the default. During those seven years, the default appears every time someone pulls your credit report—lenders, landlords, employers conducting background checks, anyone authorized to check your credit sees the default. As the default ages, its impact on your score diminishes somewhat, but it still hurts throughout the seven-year period.
Difficulty obtaining credit. With a defaulted federal loan on your credit report, getting approved for new credit becomes extremely difficult. Most mainstream lenders won’t approve you for mortgages, car loans, or credit cards. You might only qualify for subprime lenders with very high interest rates, or you might be denied entirely. Even credit cards marketed to people with poor credit might reject you because of the federal loan default.
Higher costs when you can get credit. If you are approved for credit, you’ll pay much higher interest rates because you’re seen as high risk. A person with good credit might get a car loan at 4% interest; with a defaulted federal loan on your record, you might pay 15-20% if you’re approved at all. Over the life of the loan, this costs thousands of extra dollars.
Non-credit consequences. The credit damage affects more than just borrowing. Many landlords won’t rent to people with serious delinquencies or defaults. Some employers check credit as part of background checks, particularly for positions involving financial responsibility. Insurance companies in some states use credit-based insurance scores, so your auto or home insurance premiums might increase. The default creates obstacles in many areas of life beyond just credit access.
The only way to remove a default from your credit report before the seven-year period expires is if it was reported in error and you successfully dispute it. Otherwise, it stays there for the full seven years, though you can add explanatory statements to your credit file explaining the circumstances if you want to provide context for future credit reviewers.
What If My Business Has Closed—Am I Still Liable?
Business closure doesn’t automatically eliminate your EIDL debt. Whether you remain liable after closing depends on the same personal guarantee factors discussed above:
Loans under $200,000 with no personal guarantee: If you properly close and dissolve your business entity (LLC or corporation), and there’s no personal guarantee on the loan, the SBA’s collection options are limited to whatever business assets existed when you closed. If there are no business assets, the SBA has little recourse. You can move on with your life, and while the SBA might send collection letters or even file suit against the defunct business entity, they can’t reach your personal assets.
However, “properly closing” means actually dissolving the entity with your state, filing final tax returns, and following formal dissolution procedures. Just abandoning the business doesn’t achieve the same legal effect. And if you transfer business assets to yourself or others before closing to avoid creditors, that could be challenged as a fraudulent transfer, creating personal liability.
Loans over $200,000 with personal guarantee: If you signed a personal guarantee, closing your business doesn’t eliminate your personal liability at all. The guarantee means you’re responsible for the debt even if the business ceases to exist. The SBA can pursue you personally through all the collection mechanisms discussed—garnishment, offset, liens, asset seizure—regardless of whether the business is still operating. Closing the business just eliminates the business as a source of repayment, leaving you as the only source.
Some borrowers mistakenly believe that business bankruptcy discharges the EIDL debt and protects them personally. Business bankruptcy DOES discharge the business’s obligation, but if you personally guaranteed the loan, you’re still liable under the guarantee even after the business’s liability is discharged. You’d need to file personal bankruptcy to discharge your personal liability, and even that might not succeed if the debt is deemed non-dischargeable or if you don’t meet the requirements for discharge.
Could I Face Fraud Charges for Defaulting on My EIDL Loan?
Simply defaulting on an EIDL loan—being unable to repay it—is not fraud and doesn’t create criminal liability. Financial inability to repay a loan is a civil matter, not a criminal one. However, there are circumstances where default might trigger fraud investigations:
Fraud in obtaining the loan. If you provided false information on your EIDL application to obtain the loan—inflated revenue figures, misrepresented your business’s existence or operations, fabricated employee counts—that’s potentially criminal fraud regardless of whether you later default. The default might trigger closer scrutiny that uncovers the false application, but the fraud is in obtaining the loan, not in failing to repay it. If investigators believe you never intended to use the funds for business purposes or never had a legitimate business, they might bring charges for wire fraud, false statements, or other federal crimes.
Misuse of loan proceeds. If you used EIDL funds for unauthorized purposes—personal expenses, luxury purchases, gambling, paying off personal debts—that’s a violation of the loan terms and potentially fraud. Again, this is separate from default—the issue is misuse, not inability to repay. But default might prompt the SBA to investigate how you used the funds, which could uncover misuse and lead to civil penalties or criminal charges.
Asset concealment. If you’re defaulting on an EIDL loan and you transfer assets to family members, create shell companies to hide assets, or otherwise try to conceal assets from collection, that could be civil fraud (fraudulent transfers) or even criminal fraud (bankruptcy fraud if you later file bankruptcy, or obstruction if you’re concealing assets in response to legal proceedings).
The key distinction: Honest inability to repay = civil debt problem. False statements to get the loan or fraudulent conduct related to the loan = potential criminal problem. If you took the EIDL loan in good faith, used it for business purposes, and simply couldn’t repay due to business failure or financial hardship, you’re not going to face criminal charges just for defaulting. But if there are indicators of fraud in how you obtained or used the loan, default might trigger investigations that lead to more serious consequences.
Will I Owe Taxes on Cancelled EIDL Debt?
Yes, potentially. Under Section 108 of the Internal Revenue Code, when debt is forgiven, cancelled, or discharged for less than the amount you owe, the cancelled amount is generally treated as taxable income (called “cancellation of debt income” or COD income). This means if your EIDL debt is settled, forgiven, or discharged, you might owe federal income tax on the cancelled amount.
For example, if you owed $100,000 on an EIDL loan and the SBA accepts an offer in compromise settling the debt for $30,000, you’ve had $70,000 of debt cancelled. That $70,000 is potentially taxable income that you have to report on your tax return for the year the debt was cancelled. Depending on your tax bracket, this could create a tax liability of $10,000-$20,000 or more.
However, there are important exceptions that might protect you from this tax:
Insolvency exception. If you were insolvent at the time the debt was cancelled—meaning your total debts exceeded your total assets—you can exclude the cancelled debt from income to the extent of your insolvency. For example, if you had $200,000 in debts and only $120,000 in assets (making you $80,000 insolvent), and $70,000 of EIDL debt was cancelled, you could exclude the full $70,000 from income because it’s less than your $80,000 insolvency. This exception protects people who are genuinely broke from owing taxes on cancelled debt when they have no ability to pay.
Bankruptcy exception. If debt is discharged in bankruptcy, the cancelled amount is excluded from income. You don’t owe taxes on debt discharged through bankruptcy proceedings.
Qualified business debt exception. If the cancelled debt was business debt and you’re insolvent or in bankruptcy, special rules apply that might allow exclusion. However, this exception is complex and depends on your specific situation.
If you settle your EIDL debt or if the SBA eventually stops trying to collect and reports the debt as uncollectible (which is treated as cancellation), the SBA will issue you IRS Form 1099-C showing the amount of cancelled debt. You must report this on your tax return, and you should claim any applicable exceptions. Consult with a tax attorney or CPA who can evaluate whether you qualify for the insolvency or other exceptions, because incorrectly handling COD income can result in unexpected tax bills or IRS problems.
Can I Still Resolve the Debt After I’ve Already Defaulted?
Yes. Defaulting doesn’t mean all your options are gone—you can still work toward resolving the debt even after you’re seriously delinquent or after it’s been transferred to Treasury:
Offer in compromise. You can submit an offer in compromise even after defaulting, proposing to settle the debt for less than you owe. In fact, borrowers who’ve already defaulted often have stronger OIC cases because the default demonstrates financial hardship. The SBA (or Treasury) will evaluate your reasonable collection potential and might accept a settlement that represents what they could realistically collect given your financial situation. The fact that you’re already in default and they haven’t been able to collect doesn’t necessarily hurt your OIC prospects—it might actually help by showing that aggressive collection hasn’t been successful.
Payment plans. Even in default, you can propose a repayment plan to bring the loan current over time. If you’ve experienced financial hardship but your situation has improved, you might be able to work out a plan where you make monthly payments (possibly reduced payments) to gradually pay down the delinquency. Treasury has authority to accept repayment arrangements even after referral.
Hardship accommodations. If you’re still experiencing financial hardship, you can request accommodations like reduced payments, extended repayment terms, or temporary deferment. The fact that you’re already in default doesn’t disqualify you from these programs, though you’ll need to demonstrate current financial hardship and inability to pay the standard amount.
Challenging collection actions. If you believe you’re not personally liable (no personal guarantee, business closed, etc.) or if collection actions violate your rights, you can challenge specific collection measures even though you’re in default. For example, if Treasury is garnishing your wages but you believe you’re not personally liable, you can assert that defense and potentially stop the garnishment.
The key is proactive engagement. Contact the SBA (if your debt hasn’t been transferred yet) or Treasury (if it has been transferred) and explain that you want to resolve the debt but need accommodations based on your financial situation. Provide financial documentation and propose a specific solution. Many borrowers who’ve defaulted assume there’s nothing they can do and just accept whatever collection actions happen, but proactive negotiation can often result in better outcomes.
Talk to an SBA Debt Resolution Attorney Today
Defaulting on an EIDL loan creates serious consequences—credit damage, aggressive collection actions, potential personal liability, and long-term financial stress. However, default doesn’t have to be the end of the story. Even after defaulting, you have options for resolving or reducing the debt, stopping collection actions, and moving forward.
Our firm has extensive experience helping borrowers deal with EIDL defaults. We’ve negotiated offers in compromise that settled defaulted debts for fractions of what was owed, challenged wrongful personal liability claims, stopped garnishments and levies, worked out repayment plans for clients who want to bring loans current, and protected clients from overreaching collection tactics. We understand federal debt collection law, the SBA’s policies and procedures, and how to present your case most effectively to get the possible outcome.
If you’ve defaulted on your EIDL loan or you’re heading toward default, don’t just accept whatever happens—contact us today for a free consultation. We’ll review your situation, explain what collection actions you’re facing, assess whether you have defenses to personal liability, and advise on the strategy for resolving the debt. The consultation is free and confidential, but it could save you tens of thousands of dollars and years of financial stress.
Default is serious, but it’s not hopeless. Call us now to explore your options.