The U.S. government's fight to collect up to $20 billion in delinquent Covid-era loans exposes a harsh reality for many small businesses and nonprofits. This windfall intended as a lifeline during economic devastation now threatens to drown countless American dreams.
The Small Business Administration (SBA), tasked with administering the loans, has begun referring nearly 1 million Covid disaster loans with balances under $100,000 to the Treasury Department for collection. This follows the earlier referral of 10,000 larger delinquent loans.
These referrals highlight the program's ongoing challenges. The SBA has already written off 20% of its staggering $390 billion Covid disaster loan portfolio, a figure encompassing Treasury referrals, bankruptcies, fraud, and borrower deaths.
**Avoiding the Maelstrom: **Borrowers in default can potentially escape the Treasury's clutches by seeking hardship assistance from the SBA. However, the process is riddled with confusion and inconsistency, according to borrower advocates. Jason Milleisen, who advises struggling borrowers, paints a picture of "superconfused" clients receiving conflicting information from different SBA representatives.
A Broken Lifeline? Mitra Ryndak's story exemplifies the program's pitfalls. Her Winnetka, Illinois restaurant, Cafe Aroma, was evicted after receiving a $136,000 Covid loan in 2020. Despite utilizing the funds for legitimate purposes, Ryndak now faces renewed pressure to repay after the SBA rejected her settlement offer. Her harrowing experience underscores the limited relief options available.
The program's vulnerability to fraud further complicates matters. The SBA's Office of Inspector General estimates that over $136 billion in Covid loans, roughly a third of the total, exhibited signs of potential fraud. While the SBA disputes this figure, it acknowledges the issue's gravity.
Beyond potential fraud, many borrowers were financially fragile pre-pandemic and continue to struggle. Others have shuttered their doors entirely. Poor communication from the SBA, along with ever-shifting policies and limited relief options, have exacerbated these challenges.
Bankruptcy attorney Mike Abelow observes a troubling trend: nearly every small business bankruptcy he handles involves a Covid disaster loan. John Migliore, a Connecticut restaurateur, exemplifies this. Despite availing himself of hardship reductions, he anticipates difficulty fulfilling even the reduced payments. Migliore's story highlights the unrealistic expectations some borrowers harbored, fueled by the hope of a swift rebound and promised grants that never materialized.
Initially, the SBA resisted referring smaller delinquent loans to the Treasury, citing collection costs outweighing potential recoveries. However, pressure from Congress and the agency's inspector general, who warned of a potential delinquency domino effect, forced a policy shift.
Some borrowers report making the requested catch-up payments yet remain entangled in the Treasury's collection process. While the SBA maintains the ability to recall loans at the initial collection stage, this option vanishes once assigned to a collection firm.
The SBA is constantly evaluating its pandemic relief programs, balancing support for struggling businesses with taxpayer protection. With 3.7 million outstanding disaster loans under management, a figure 15 times pre-pandemic levels, the stakes are undeniably high.
Unlike private lenders, the U.S. government wields immense power, including the ability to seize government benefits and tax refunds. However, unlike private lenders, the SBA possesses limited flexibility in debt settlement. Broad loan forgiveness would require congressional action.
Travis Johnson, co-owner of a shuttered Nashville mattress business, exemplifies the program's limitations. Despite repaying a significant portion of their $450,000 Covid loan, Johnson and his partner remain saddled with a sizable remaining debt. Their story underscores the program's potential to cripple businesses struggling to stay afloat.
The ultimate impact of the Covid loan program remains to be seen. While some businesses undoubtedly benefited, many now face an uncertain future, burdened by a debt incurred during a time of unprecedented crisis. The U.S. government must navigate these troubled waters carefully, striking a balance between debt collection and fostering the recovery of America's small business ecosystem.
