When the COVID-19 pandemic disrupted your business, a COVID-19 Economic Injury Disaster Loan, commonly called an EIDL, may have helped you cover payroll, rent, operating expenses, or other immediate needs. At the time, the loan may have felt like the only way to keep your business open.
Years later, your circumstances may look very different. Your business may have closed, its revenue may never have recovered, or the monthly payment may now be coming from income you need for your mortgage, utilities, groceries, and other household expenses. You may also have received an SBA default notice, a Treasury collection letter, or a warning that an eligible federal payment could be reduced to collect the debt.
If you cannot repay the balance, you probably want a direct answer: Can an SBA EIDL loan be discharged in bankruptcy?
Yes, an SBA EIDL loan can be discharged under the right circumstances. The debt is not automatically excluded from discharge simply because the SBA is a federal agency. The answer depends on who legally borrowed the money, whether you personally guaranteed repayment, whether business property secures the loan, and whether an exception to discharge applies.
Who Is Personally Responsible for the EIDL Loan?
The first question is not how much is owed. It is who legally owes it.
If you operated as a sole proprietor, the business was not a separate legal entity from you. An EIDL loan made to you as a sole proprietor is ordinarily your personal obligation and must be disclosed with your other debts in an individual bankruptcy case.
The situation is different when an LLC or corporation borrowed the money. A separate business entity can owe an EIDL loan without automatically making its owner personally responsible. Signing documents as the company’s authorized representative does not necessarily mean that you agreed to repay the debt yourself.
Personal liability can still arise if you signed a guarantee. COVID EIDL loans above $200,000 generally required personal guarantees, but the signed documents identify who guaranteed a particular loan. Closing or dissolving the company does not eliminate a guarantee that you signed.
If the borrower was an LLC or corporation and you did not personally guarantee the debt, you may not owe the balance individually. The SBA can still pursue its rights against the company and property securing the loan, but filing personal bankruptcy solely because the business owes an EIDL balance might not be necessary.
The promissory note, loan authorization, guarantee, security agreement, and signature pages should be reviewed before deciding who is liable. At the Law Office of Joel R. Spivack, I review those documents alongside your broader financial circumstances before discussing whether Chapter 7 or Chapter 13 is appropriate.
Even when you are personally liable, the next question is whether the SBA holds a security interest in business property.
A Bankruptcy Discharge Does Not Automatically Remove an SBA Lien
Personal liability and collateral rights are separate issues.
Many EIDL loans were secured by business assets, including equipment, inventory, accounts receivable, furniture, or other company property. If the business still owns secured property, you should not assume that you are free to sell or transfer it because operations have ended.
Selling machinery, trading in a business vehicle, transferring assets to a new company, or disposing of inventory could involve property covered by the SBA’s security interest. The SBA has servicing procedures for actions involving collateral releases, ownership changes, and business closures or liquidations. Depending on the documents and proposed transaction, supporting records or SBA approval could be required.
A bankruptcy discharge eliminates an individual’s personal liability for a debt that is discharged. It does not automatically erase a valid lien. If the SBA holds an enforceable security interest, it can retain rights against the collateral even after the borrower’s personal liability is discharged.
Before disposing of remaining business property, determine what the SBA claims as collateral and how its lien should be addressed.
What if Your Business Has Already Closed?
Many South Jersey business owners are no longer operating the businesses that received their EIDL loans. They may have shut down years ago, but still receive statements, collection notices, or demands for payment.
Closing a business does not automatically discharge its debts. It also does not make an owner personally responsible for every obligation incurred by an LLC or corporation.
If your business has closed, the important questions include:
- Was it a sole proprietorship, LLC, or corporation?
- Did you sign a personal guarantee?
- Does the business still own equipment, inventory, or other property?
- Are payments now coming from income needed for household expenses?
- Have you received SBA or Treasury collection notices?
- Are credit cards, taxes, medical bills, or other debts also creating financial pressure?
These facts help determine whether personal bankruptcy offers meaningful relief or whether the company’s debt, collateral, or collection status requires separate attention.
Can the SBA Challenge the Discharge?
An inability to repay an EIDL loan after a genuine business failure does not, by itself, amount to fraud.
However, the Bankruptcy Code excludes certain debts obtained through false pretenses, false representations, or actual fraud. It also excludes debts obtained through materially false written financial statements when the creditor reasonably relied on the statement, and the debtor made it with intent to deceive.
Questions can arise if an application contained inaccurate information about revenue, employees, business operations, or eligibility. Concerns can also arise if loan proceeds were transferred or used in ways that appear inconsistent with the borrower’s certifications.
A mistake, missing record, or expense later questioned by the SBA does not automatically make the entire loan nondischargeable. The borrower’s intent, the surrounding facts, and the legal elements of the creditor’s objection all matter. A creditor asserting a fraud-based exception generally must raise the issue in bankruptcy court and prove that the exception applies.
If you have concerns about the application or use of the funds, address them candidly with a bankruptcy attorney before filing.
How Do Chapter 7 and Chapter 13 Treat an EIDL Loan?
For an individual who is personally responsible for an EIDL loan, Chapter 7 can discharge the obligation if the debt qualifies and no statutory exception applies. Chapter 7 can address qualifying business-related debts as well as consumer obligations. Valid liens, nonexempt property, eligibility rules, and dischargeability exceptions still require careful review.
Chapter 13 provides a court-supervised repayment plan for qualifying individuals with regular income. It generally allows a debtor to retain property while making court-approved payments over three to five years. Eligibility requirements and statutory debt limits apply.
The right chapter depends on more than the EIDL balance. A bankruptcy attorney also needs to consider your income, household expenses, home equity, vehicles, taxes, other debts, and remaining business assets. The analysis should account for whether you are trying to protect property, continue operating as a sole proprietor, or resolve several debts that are straining your budget.
What Documents Should You Gather Before Discussing Bankruptcy?
Before meeting with a bankruptcy attorney, gather as many of these documents as possible:
- The EIDL promissory note and loan authorization
- Any personal guarantee or security agreement
- SBA account statements and payment history
- Default, acceleration, or Treasury notices
- Business bank statements and tax returns
- Records showing how the proceeds were used
- Information about remaining business property
- A list of personal and business debts
Do not delay seeking advice because one document is missing. The records you have can help identify what must be obtained next.
Get a Clear Answer About Your EIDL Loan with a South Jersey Bankruptcy Attorney
An EIDL balance alone does not establish whether you personally owe the debt, whether bankruptcy can discharge your liability, or what happens to property securing the loan. Those answers come from the signed documents and the facts surrounding your business and finances.
At the Law Office of Joel R. Spivack, I help individuals in Cherry Hill, Camden County, South Jersey, and the Philadelphia region understand their bankruptcy and debt-relief options. I can review the legal borrower, any personal guarantee, the SBA’s collateral rights, and whether Chapter 7 or Chapter 13 could address your personal liability.
If an EIDL loan is putting pressure on your household finances, contact the Law Office of Joel R. Spivack. You can use my contact form to schedule a consultation and determine whether bankruptcy offers meaningful relief in your circumstances.
The Law Office of Joel R. Spivack is a debt relief agency that helps people file for bankruptcy relief under the Bankruptcy Code.
Disclaimer: Results depend on the facts and legal circumstances of each matter. This article is for informational purposes only and is not a substitute for legal advice. Reading this article or contacting the firm does not, by itself, create an attorney-client relationship.