Quick Answer
Once your EIDL is referred to Treasury’s Cross-Servicing program, a substantial collection fee is added to your balance and the government can garnish up to 15 percent of your disposable pay, intercept your tax refunds, and offset Social Security benefits without ever going to court. Treasury generally cannot send the debt back to the SBA. Bankruptcy stops all of it on the day you file.
Why This Is Happening Now
If your loan has been quiet for years and suddenly is not, there is a specific reason.
Federal agencies are ordinarily required to refer debts that are delinquent for 180 days or more to Treasury for cross-servicing. In April 2024, Treasury granted the SBA a temporary exemption from that requirement for COVID EIDLs, which allowed the SBA to keep servicing defaulted loans in-house rather than handing them to federal collectors. That exemption expired on March 31, 2026.
After it expired, the SBA reported transferring roughly 562,000 pandemic-era loans worth about $22 billion to Treasury and to the Department of Justice. This followed the March 2025 end of the Hardship Accommodation Plan, which had been the last widely available forbearance option.
So the sequence of events borrowers are experiencing is not a system error and not a targeted action against them individually. It is a collection regime that was deliberately held back for several years and is now running.
What Treasury Can Do Without a Court Order
This is the part that catches people off guard. A private lender that wants your wages has to sue you, win, and obtain a judgment. The federal government does not.
Administrative wage garnishment. Under 31 U.S.C. § 3720D and 31 C.F.R. § 285.11, Treasury can order your employer to withhold up to 15 percent of your disposable pay. No court order is required, and state law protections do not apply. State laws that limit or prohibit wage garnishment are simply preempted.
Tax refund interception. Under 31 U.S.C. § 3720A, your federal income tax refund can be applied to the debt before it ever reaches you.
Federal payment offsets. Through the Treasury Offset Program under 31 U.S.C. § 3716, other federal payments owed to you can be reduced, including Social Security retirement and disability benefits. A monthly protected floor applies to Social Security offsets, but benefits above that floor are reachable.
A collection fee added to your balance. Under 31 U.S.C. § 3717(e), the costs of collection are added to what you owe. For cross-serviced debts this fee is substantial and is commonly reported at close to 30 percent of the balance.
Referral for litigation. Treasury and the SBA can refer accounts to the Department of Justice, which can sue, obtain a judgment, and record a lien against real property including your home.
There is also no meaningful time limit. The ten-year statutory limit on administrative offset was repealed in 2008, so offsets can continue indefinitely. Waiting this out is not a strategy.
Two Deadlines Worth Knowing
Most of the cross-servicing process runs on Treasury’s schedule rather than yours. There are a few points where you have rights that expire.
The 15-business-day garnishment hearing window. Before a wage garnishment order issues, you receive a notice of proposed garnishment. If you request a hearing within 15 business days of the date on that notice, the order generally will not go to your employer while the hearing is pending. Request it later and you still get a hearing, but the garnishment may start in the meantime. That difference is a paycheck.
The 12-month employment rule. A federal agency generally cannot garnish the wages of someone who has been in their current job for less than 12 months and who was involuntarily separated from their previous job. If you lost a job and recently started a new one, this may apply to you.
What Does Not Work
Two things borrowers commonly attempt are worth ruling out early so you do not lose months on them.
Asking Treasury to send the debt back to the SBA. Treasury has published an explicit notice on this point, warning borrowers about online misinformation suggesting these debts can be returned. Treasury cannot return COVID EIDL or COVID PPP debts to the SBA. Once the transfer happens, it is one directional.
Applying for an Offer in Compromise and waiting. The SBA continues to accept the paperwork, and Form 1150 with Form 770 can be submitted. But eligibility requires that the business be permanently closed with all collateral liquidated, and the SBA’s own form states that COVID EIDLs cannot be forgiven. Reporting through 2026 indicates no confirmed OIC approvals for COVID EIDL borrowers. Filing one may buy time and demonstrate good faith. It is not a reliable path to resolution, and it is not a reason to defer a decision while garnishment proceeds.
What Actually Stops It
Filing a bankruptcy petition triggers the automatic stay under 11 U.S.C. § 362(a). The effect is immediate and it is not discretionary. Wage garnishment stops. Offsets stop going forward. Collection calls stop. A pending Department of Justice collection suit stops.
The stay is not the end goal, though. The goal is the discharge, which eliminates your personal liability on the debt permanently. Nothing in 11 U.S.C. § 523(a) exempts SBA debt from discharge, and referral to Treasury does not change that. A loan sitting in cross-servicing with a 30 percent fee bolted onto it is just as dischargeable as one still at the SBA.
One timing point deserves emphasis. Money already taken is generally not recoverable. A tax refund intercepted in March is gone. A refund not yet intercepted can often be protected. If you are carrying a defaulted EIDL into a filing season, that is a reason to have the conversation now rather than in April.
Frequently Asked Questions
Can Treasury garnish my wages if my state prohibits wage garnishment?
Yes. Administrative wage garnishment is authorized by federal statute and expressly operates notwithstanding state law.
I never signed a personal guaranty. Can Treasury still garnish my pay?
It should not be able to, because you are not personally liable. This happens anyway, usually because the SBA’s records list an owner as a guarantor incorrectly. Pull your loan documents and confirm. If you did not guarantee the loan and the loan was under $200,000, that is a defense worth raising immediately.
Will they take my Social Security?
Benefits above a monthly protected floor can be offset, generally up to 15 percent. The floor protects a base amount each month.
Can I negotiate a payment plan with Treasury instead?
Treasury can set up payment arrangements based on ability to pay, and for some borrowers that is the right answer. It resolves cash flow. It does not reduce a balance that has just grown by a collection fee.
Does filing bankruptcy stop a Department of Justice lawsuit?
Yes. The automatic stay reaches pending litigation.
This article is general information about bankruptcy and federal debt collection law and is not legal advice. If your EIDL has been referred to Treasury, the options available to you depend on your loan documents, your liability, and your assets.