Covid Loans Turn Toxic: $75.2 Billion in Restaurant EIDLs Charged Off

Covid-era disaster loans worth $75.2 billion have already been charged off, as defaults on the federal government's economic injury disaster loans climbed past 30% by last June, according to a congressional report released earlier this year.

The numbers behind the program are enormous. Since Congress passed the Cares Act in March 2020, the Small Business Administration (SBA) has issued 3.9 million Covid-related EIDLs totaling $378.4 billion, with up to $2 million available per applicant. The terms looked generous: 30-year maturities, 3.75% interest, 30-month deferments. For thousands of independent restaurant owners, they've become the crisis after the crisis.

"Covid was an extinction event for tens of thousands of restaurants," said Erika Polmar, executive director of the Independent Restaurant Coalition. "The ones that survived, if they didn't receive [restaurant revitalization fund] grants, had to pay off all that debt from small businesses loans or EIDLs."

What happened to the borrowers?

Take Jai Mazumdar. For almost 20 years he has run Spice N Curry, a cafe and grocery near Florida International University in Miami. When the pandemic hit, he took a $370,000 EIDL in early 2021, then another $87,000 the following year as losses mounted because students and faculty stayed remote.

Because his loans exceed $200,000, Mazumdar had to personally guarantee them — meaning the government can seize personal assets if he defaults. Five years on, his business has lost money every year since Covid. He closed the dining room permanently in 2023, a year and a half after reopening.

"My monthly EIDL payment is $1,900, and my home mortgage is $1,600," he said. "I had to rent out a room in my own home so I could have extra income to cover part of the payment." He's working seven days a week, 12 hours a day, and calls it "a completely hand-to-mouth existence."

Randy Barnette, founder of Virginia-based Ornery Beer Company, is nearly two years past due on a $500,000 EIDL from February 2021. The money arrived in 48 hours. "I literally got an email from the SBA on a Monday, and a couple of signatures on DocuSign later, there was a half million dollars in our account," he said. "It was so easy, I was afraid I was falling for a scam."

Expansion plans stalled, real estate deals fell through, and Barnette downsized the brewery and shuttered the original restaurant. When the SBA's hardship accommodation plan — introduced in November 2022 to cut monthly payments — expired last March, he stopped paying. His loan went to the treasury department for collection last summer. With compounded interest, penalties and fees, his bill jumped from $530,000 to more than $750,000.

"Not one nickel that we paid after the grace period went to the principal," Barnette said.

How aggressive is the collection machinery?

Very. Once borrowers exceed 120 days past due, loans transfer to the US treasury department, where fees and penalties typically add about 30% of the principal. On personally guaranteed loans, the IRS can garnish wages, tax refunds or a portion of social security benefits.

Barnette, 56, faces Chapter 7 with thin protection: Virginia's homestead exemption shields only $25,000 of home equity per individual. "My home that I've lived in for 20 years is the only thing I have of value," he said. "If I lose my house, I'll just be living in a trailer park until I die."

Mazumdar, as a Florida resident, keeps his home in bankruptcy — and he intends to keep paying on time, even operating in the red.

Who's to blame — and what's next?

Some observers fault the SBA for relaxing creditworthiness standards too far. "When you're drowning in the ocean and that lifeboat comes by, you don't count to see if it has enough oars, you just hop in," said John Benson, a small business attorney in Doylestown, Pennsylvania, whose firm has seen a significant uptick in restaurant EIDL inquiries. His firm has succeeded in reinstating collected loans or settling debts for lesser amounts.

In Milwaukee, chef Dan Jacobs of DanDan and EsterEv pays nearly $5,000 a month on his 2021 EIDL — a sum he says equals a high-level manager's annual cost and cuts his profit margin by one-third. "We've seen close to a 15% drop in business from last year," he said. "And there's no real reason for it, except the fact that the economy is trash."

Barnette is betting on politics. "I'm just kicking the can down the the road, trying to improve the health of the business, until Congress changes things," he said. "We're all holding our breath in the restaurant industry, hoping the political climate changes and maybe our leaders will do something about this."