EIDL Loans Are Generally Dischargeable
Unlike some government debts (taxes, student loans), SBA EIDL loans are generally dischargeable in bankruptcy. They are treated as standard commercial debts. Chapter 7 can eliminate the personal liability entirely. Chapter 13 can include the debt in a repayment plan and discharge the remaining balance at completion.
Personal Guarantee Discharge
If you signed a personal guarantee on the EIDL, Chapter 7 bankruptcy can discharge that personal liability. The SBA can still pursue the business assets (the UCC lien survives if the business is not in bankruptcy), but your personal assets are protected by the discharge. This is one of the most powerful uses of bankruptcy for EIDL borrowers.
Business Bankruptcy Considerations
If the business files Chapter 7, the business is liquidated and all assets are distributed to creditors (SBA has priority due to the UCC lien). If the business files Chapter 11, it can reorganize and continue operating while restructuring the EIDL debt. Chapter 11 Subchapter V is designed for small businesses and is more affordable than traditional Chapter 11.
Timing Considerations
File before Treasury offset begins to preserve tax refunds. File before the SBA obtains a judgment to prevent liens on personal property. File before significant business assets are liquidated outside of bankruptcy (which could be a preference). Consult a bankruptcy attorney experienced with SBA debt for optimal timing.
Frequently Asked Questions
Will the SBA object to my bankruptcy discharge?
The SBA rarely objects to discharge of EIDL loans unless there is evidence of fraud in the loan application. If you applied honestly, the discharge should proceed normally.
Can I keep my business and discharge the EIDL?
In Chapter 7, the business may be liquidated. In Chapter 13, you can keep the business and repay a portion of the EIDL over 3-5 years. In Chapter 11 Subchapter V, you can reorganize the business and restructure the EIDL.
What about the EIDL advance -- do I owe that back if I file bankruptcy?
No. The EIDL advance was a grant and does not need to be repaid regardless of bankruptcy. Only the loan portion is a debt.
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