Can You File Bankruptcy on an SBA or EIDL Loan? 6 Things That Happen to the Debt

In most cases, yes, you can file bankruptcy on an SBA or EIDL loan. What happens after you do though, what your rights and obligations are, and whether bankruptcy is even worth filing on SBA or EIDL loans varies dramatically. For some owners, it’s a simple matter and a positive outcome. For others, it is a complicated and painful situation.

With things like student loans, federal debts in bankruptcy usually mean the debt cannot be discharged. That isn’t the case for SBA and EIDL loans. However, depending on the type of bankruptcy you file and how you handle the loan, the bankruptcy may not have the outcome you want.

The Automatic Stay

If you file bankruptcy, collection on SBA or EIDL loans stops right away. The automatic stay acts as a shield against collection. It tells all creditors who know about the bankruptcy to leave you alone. Even if your SBA or EIDL loan is already at Treasury, Cross Servicing shouldn’t be able to continue their collection efforts. Once you file bankruptcy, new and old garnishments may stop. It can also block tax refund offsets that have not yet happened. The stay only covers whoever filed for bankruptcy and not a co-debtor partner.

Wipe Out Their Personal Liability on SBA and EIDL Debts

Anyone who qualifies for Chapter 7 can use it to wipe out their personal liability on SBA and EIDL debts. This includes debt still with Cross Servicing. To qualify, you’ll have to run a means test to see if you pass the qualifying income threshold. That compares your household income to the median for your state based on family size. After that, you still have to determine if your expenses leave you with enough disposable income to pay certain debts, which could push you to another chapter. And keep in mind that if you are using a business structure, the business itself doesn’t get a discharge, only individual people.

It does not wipe out loans in their entirety though. The loan remains even if your liability on it is wiped out. This is because the collateral you pledged is the lender’s safety net. If your EIDL loan was larger than $25,000, it likely required you to pledge some assets. If there is a UCC lien filed on all the business assets or even specific collateral that serves as security, the collateral is still subject to collection even though the bankruptcy wiped out all or part of the debt. At the end of the case, after the court releases you from liability, the lien survives. That means the government can still take pledged assets.

If the loan was more than $200,000, the SBA required an unconditional personal guarantee from each owner with at least 20% ownership. Under the terms of a personal guarantee, if the company can’t or won’t repay the loan, you are obligated to. A borrower’s personal guarantee on a business loan is essentially like a second debt if the business folds. That means that even if the business declares bankruptcy and wipes out the main debt, the personal guarantee can stick around after. It also means the government can go after anyone else who signed. For instance, a co-owner or partner or your spouse may also be obligated. With Chapter 7 bankruptcy, the personal guarantee from the loan is usually discharged as long as fraud was not committed.

If you can’t file Chapter 7 or don’t want to, Chapter 13 can allow you to manage most debts by paying it back over a period of time. That includes SBA and EIDL loans. You likely won’t pay the full balance owed if the debt is unsecured. You’ll share the small payments for unsecured creditors with other unsecured creditors. So, rather than being stuck with an SBA or EIDL payment that is too much for your means, you may be able to make a much smaller one and wrap it into the plan. Then, after three to five years, the bankruptcy can discharge what you still owe on it, along with other debts.

If you acted as a guarantor on the business loan, any lien on your home creates stress because losing the house is a very real fear. Fortunately, bankruptcy law has a solution for a lot of these problems. As covered above, the automatic stay generally stops any lawsuits or other collections against you when you file. That includes any plans to put a lien on your home. As for homestead exemptions, some states allow a wide range of exemption, and others have limited allowances. Look at state exemption laws, the equity on your home, and review your bankruptcy schedule.

Though businesses can file Chapter 7 to liquidate debts and Chapter 11 to keep operating and repair some of their debts, Congress created a way for small businesses to avoid the high fees and complicated filings needed in Chapter 11 cases and file for bankruptcy more affordably. The idea is a subchapter in Chapter 11, called Subchapter V. But the eligibility requirements for this type of subchapter bankruptcy are specific. The debts have to be under a certain limit: $3,424,000 as of 2026. It’s also true that at least half of the debt has to be from business, not personal sources. A requirement is that the company remains in business when it files for bankruptcy.

In the subchapter V bankruptcy, you could seek to cram down the loan to reduce its secured portion based on the collateral’s market value. Then whatever is left after that likely remains unsecured and may be managed or discharged after you finish the plan.

Your SBA or EIDL loan would not be dischargeable if you committed fraud when you applied for the loan. If the government thinks you fraudulently got your SBA or EIDL loan, they can pursue the debt even after your bankruptcy finishes. But time is limited. They have to file a complaint within 60 days after the date the bankruptcy court sets for the first creditors’ meeting date. Beyond that, they won’t be able to pursue the debt. There is an exception though. A court can allow them to try after the time is up if they ask for an extension first.

Before You Even Consider Filing for Bankruptcy

Knowing you can wipe out SBA and EIDL loans in bankruptcy is one thing. Navigating the rules and details of how to manage your loans during and after bankruptcy is another. If you know you are going to declare bankruptcy, how you run your business in the months before that matters. Before you even consider filing for bankruptcy, reread your EIDL documents carefully. If you pledged collateral or signed a personal guarantee, you need to know. You also want to check your UCC filings for the loan. Then gather your bank statements, your profit and loss statements, and your tax returns. You may also need to prepare the “Means Test” to qualify for a particular type of bankruptcy filing.

Timing is important. If you “give” or move assets or cash to relatives before filing, the court may not protect the asset. See a bankruptcy lawyer before you speak with Treasury collectors, and don’t make verbal promises of repayment.