The Small Business Administration (SBA) began referring as much as $20 billion in delinquent COVID-19 disaster loans with balances of $100,000 or less to the U.S. Treasury Department for collection, The Wall Street Journal reported.

The $390 billion COVID loan program provided financing to nearly 4 million small businesses and nonprofits. The SBA said that it charged off roughly 20 percent of this loan portfolio, an accounting figure that includes Treasury referrals and other circumstances such as bankruptcy, fraud or the death of the borrower. 

Borrowers in default whose loans haven’t been sent to the Treasury Department can avoid the collection process by immediately requesting hardship assistance, according to the SBA.

More than $136 billion of COVID disaster loans, or about one-third of the total, showed signs of potential fraud, the SBA’s Office of Inspector General found in June 2023. The SBA believes the amount of fraud is lower, according to the Journal.

The SBA ceased its efforts to collect $62 billion in COVID-19 loans in October 2023, figuring that those efforts would cost more than simply writing them off. But it resumed collection of some past-due COVID-related loans in late December after the Office of the Inspector General issued a report finding that "the SBA’s decision to cease collections risks violating the Debt Collection Improvement Act of 1996, which prohibits ending collections on fraudulent, false, or misrepresented claims, because SBA OIG and other oversight agencies are continuing to work on identifying COVID-19 EIDL [Economic Injury Disaster Loans] fraud that may not have been identified by the agency."

Borrowers have not repaid their loans for a variety of reasons, including weak financial conditions, ongoing difficulties in recovering from the pandemic, the closing of their businesses, and poor communication and changes in policy from the government.

“I’m talking to dozens of people every week who are dealing with the SBA’s struggle to service these things,” said Jason Milleisen, who advises distressed SBA borrowers and previously handled loan workouts for an SBA lender, in an interview with the Journal. “People are superconfused.” Borrowers often receive conflicting information from different SBA employees, he said.

The SBA at first allowed borrowers to defer loan payments for up to 12 months. It then extended the deferral period twice, to a maximum of 30 months, although interest on the loans continued to pile up during that time, the Journal reported. The agency has also introduced a series of hardship accommodations for borrowers experiencing short-term financial challenges. 

Borrowers who qualify can arrange payment plans but, unlike the forgivable loans issued through the federal Paycheck Protection Program, the disaster loans were designed to be repaid. 

“You can lower your payments through a hardship plan, but it doesn’t change the fact that you owe the money,” said Mike Abelow, a bankruptcy attorney and trustee in Nashville, Tenn., in an interview with the Journal. Nearly every small-business bankruptcy that he is involved in includes a COVID disaster loan, he said.

Some borrowers told the Journal that they made required catch-up payments, following the SBA’s instructions but have been unable to get their loans out of the Treasury collection process. 

The SBA said that it generally can recall troubled loans from the Treasury if payment arrangements are made in the first part of the process; borrowers in that stage can still apply for hardship assistance, the SBA said, according to the Journal.

The agency said it is continuously assessing its pandemic-relief programs and looking for ways to support small businesses while safeguarding taxpayer dollars, the Journal reported.

Unlike private firms, the federal government doesn’t need permission from a court to start collecting on unpaid debts. In some cases, it can seize government benefits and tax refunds. But the SBA has less flexibility than private lenders when it comes to settling unpaid debts. SBA officials say they would consider special arrangements on a case-by-case basis, the Journal reported. A broader forgiveness program would require congressional action.