How to File Bankruptcy on Loans: 6 Loan Types and How a Filing Treats Each

Every loan enters a bankruptcy case carrying the paperwork that created it, and the paperwork, far more than the balance, decides what the filing does to the debt. Two loans of the same size can meet opposite fates in the same case. One is secured and one is not; one names the owner as guarantor and one does not; one calls itself a purchase of receivables.

How to file bankruptcy on loans is therefore a question with six answers, one for each kind of paper a business owner is likely to hold.

1. A Secured Loan Loses Its Grip on the Borrower but Keeps Its Collateral

The filing stops enforcement at once. Section 362(a) stays acts to create, perfect, or enforce a lien against property of the estate, so an equipment lender that had scheduled a repossession for Thursday must stop and ask the court for relief from the stay.

The filing does not dissolve the lien. In Johnson v. Home State Bank, the Supreme Court described a discharge as extinguishing one mode of enforcing a claim, the personal action, while leaving the action against the property intact. A discharged owner can stop owing the note and still lose the truck.

Section 506(a) then splits the claim in two. A lender is secured to the extent of the collateral's value and unsecured for the rest, so a hypothetical $120,000 loan against equipment worth $70,000 becomes a $70,000 secured claim and a $50,000 unsecured one. In Chapter 11, a plan can keep the equipment in the business if the lender retains its lien and receives deferred cash payments with a present value at least equal to that $70,000. In Chapter 7, the equipment is sold or the lender recovers it once the stay is lifted.

2. An Unsecured Term Loan Waits in the Longest Line

A term loan or line of credit without collateral is a general unsecured claim. In a Chapter 7 case it is paid, if at all, after secured creditors take their collateral and after priority claims such as certain wages and taxes, sharing pro rata with every other unsecured creditor in its class.

What happens to the unpaid balance depends on who filed. An individual, including a sole proprietor, can receive a discharge that ends personal liability. An LLC or corporation in Chapter 7 cannot, because Section 727(a)(1) grants no discharge to an entity, and the balance remains owed by a company with nothing left to pay it. In Chapter 11, a confirmed plan fixes what the lender receives, and confirmation discharges the reorganized business from the rest except as the plan or the statute provides.

3. A Merchant Cash Advance Arrives Arguing About What It Is

A merchant cash advance brings into bankruptcy a question no other loan brings: whether it is a loan at all. Funders draft these agreements as purchases of future receivables. If a court accepts that description, the funder may contend that some receipts belong to it rather than to the estate. If the court treats the agreement as a loan, the funder holds a claim like any lender's, secured or unsecured according to its UCC filing and what the filing reaches.

In July 2025, the Fourth Department held in Bridge Funding Cap LLC v. SimonExpress Pizza, LLC that a funder had established as a matter of law that its agreement was a revenue purchase rather than a loan, because the reconciliation provisions required an adjustment on the merchant's request and were not illusory. In February 2026, in an Attorney General proceeding, the First Department held in People v. Richmond Capital Group LLC that agreements "although styled as MCAs, are properly characterized as loans subject to restrictions on usury," where no reconciliation had been performed in practice and the daily payments were fixed. Both courts sit in New York. The contracts, and what the funders did with them, differed.

The characterization then touches everything downstream. Payments made in the 90 days preceding the petition can be attacked as preferences only if they were paid on an antecedent debt, which assumes there was a debt. Daily receipts are cash collateral only if the funder holds an interest in them. And a funder that believes the application overstated revenue may ask the court to except the owner's guaranty liability from discharge under Section 523(a)(2), though the statute requires a materially false written statement about financial condition on which the funder reasonably relied, and nothing is excepted without the funder's request and a hearing.

An advance enters the case as a contract and leaves it as whatever the court decides it was.

Most of what a bankruptcy will do to a loan was settled on the day the loan was signed.

4. An SBA Loan Is Treated as the Loan It Is

The federal guaranty behind a 7(a) loan protects the lender, and it does not place the loan in a special category. The lender files a proof of claim, the claim is secured or unsecured under the same rules as any other, and SBA's servicing procedures direct the lender to object to discharge where there is reason to believe the loan was obtained by fraud. A balance that survives against a guarantor who never filed can later be referred to Treasury for collection.

5. A Personal Guaranty Waits for Its Own Filing

When a company files, its owners' guaranties stay outside the case. In Queenie, Ltd. v. Nygard International, the Second Circuit repeated that stays under Section 362(a) "are limited to debtors" and do not reach co-defendants who have not filed; extending protection to a non-debtor is the exception, available on a showing someone must make by motion. Section 524(e) finishes the thought: a discharge of the company's debt leaves every co-obligor where it stood.

The company files, and the funder calls the owner the following week. The guaranty is resolved when the guarantor files personally, or when the guarantor settles, and the Chapter 13 codebtor stay does not change that, since it reaches only consumer debts.

6. A Student Loan Needs Its Own Lawsuit

Educational loans are the one category on this list that a discharge does not reach by default. Section 523(a)(8) excepts from an individual's discharge loans made, insured, or guaranteed by a governmental unit, and qualified education loans, unless excepting the debt "would impose an undue hardship on the debtor and the debtor's dependents." The debtor must ask the court to determine dischargeability, which the rules treat as an adversary proceeding.

The undue hardship standard comes from case law and differs by circuit, in ways better examined with counsel than summarized in a paragraph.

The Loans a Negotiation Can Reach

Several of these loans can also be addressed outside court, and for a business whose trouble is concentrated in merchant cash advances and the guaranties behind them, that route may deserve a look before a petition is drafted. Delancey Street negotiates those balances. It is not a law firm, it does not file bankruptcy petitions or give legal advice, and it brings in attorneys licensed independently of the company when a file needs one. A business facing a secured lender ready to repossess, or creditors too numerous to settle one at a time, needs bankruptcy counsel instead, and the free, confidential review Delancey offers is one place to learn which description fits.

A bankruptcy court reads the paperwork as it was written. The balance is often the least informative number in the file.