Can Bankruptcy Get Rid of SBA Loans or EIDL Loans?

The COVID-19 pandemic pushed many small businesses and self-employed individuals to seek help through SBA loans—particularly EIDLs (Economic Injury Disaster Loans). Years later, some borrowers are still struggling with the debt. If are struggling to pay any of your debt, especially business debt, it is important to understand your options to get rid of SBA loans and other outstanding business liabilities.

If you’re wondering whether bankruptcy can help eliminate your SBA or EIDL loan, the answer is: typical yes, but it really depends. The loan type, how it was structured, and your personal liability all matter. If you have any SBA loans, it is important to understand how bankruptcy affects SBA and EIDL loans, and what small business owners should consider before deciding how to move forward.

SBA and EIDL Loans: The Basics

During the pandemic, the Small Business Administration (SBA) offered multiple relief programs:

• EIDL Loans (Economic Injury Disaster Loans): 30-year loans with low interest, often unsecured.
• PPP Loans (Paycheck Protection Program): Loans that were forgivable under certain conditions—these typically aren’t a concern if forgiveness was granted.

Other SBA loans that have been offered during the years. These SBA programs include SBA 7(a) or 504 Loans, which are long-standing SBA loans, usually for equipment, real estate, or operating capital that are typically offered through traditional lenders and guaranteed by the SBA.

⚠️ Not All EIDL Loans Created Personal Liability

Here’s a key fact: Personal guarantees on EIDL loans were only required for loans over $200,000.

If your loan was under that threshold and taken out by  your business (i.e., the LLC or corporation), you should not be personally liable. That means:

• If your business closes, and there’s no personal guarantee, the SBA likely cannot come after you personally.
• A formal business closure (aka a business winddown or dissolving the business) may be all you need to eliminate the debt, without filing personal bankruptcy.

On the other hand, if you were a sole proprietor or self-employed and took out an EIDL loan in your name (or a personal DBA)—or personally guaranteed it—you will be personally liable, and a personal bankruptcy might be necessary to eliminate that obligation.

Can SBA or EIDL Loans Be Discharged in Bankruptcy?

✅ Yes, in many cases—but the details matter:

1. Was There a Personal Guarantee?

• For EIDLs under $200,000, the program required no personal guarantees.
• For larger EIDLs and most traditional SBA loans (like 7(a) or 504), personal guarantees were standard.

If you’re personally liable, Chapter 7 or Chapter 13 bankruptcy can often eliminate that liability.

2. Is the Loan Secured or Unsecured?

• EIDL loans are typically unsecured against specific property, but the SBA often filed blanket liens on business assets (sometimes called a UCC lien).
• Traditional SBA loans are often secured by equipment, real estate, or other collateral. For high balance SBA loans, business owners may have required to put up personal collateral, like their real estate.

In bankruptcy:

• Unsecured SBA debt is generally dischargeable.
• Secured SBA debt can also be discharged, but liens on property may remain unless the property is surrendered or paid off. With the general UCC lien, the SBA just requests that any property is sold and proceeds turned over to them.

What If I’m Being Collected On by the Treasury or a Private Collection Agency?

If you’ve defaulted on an SBA or EIDL loan, you may eventually be contacted by the U.S. Treasury Department’s Bureau of the Fiscal Service or a private debt collection agency. Here’s what to know:

• The government can offset tax refunds and even garnish wages administratively, without a lawsuit.
• Filing bankruptcy can stop these collection efforts immediately through the automatic stay.
• If the debt is personally owed, bankruptcy can discharge the liability even if it has been transferred to the Treasury.

What About Treasury Offsets and Garnishments?

If your SBA loan or EIDL has gone into default, you may already be facing:

• Federal tax refund interception
• Social Security offsets
• Administrative wage garnishment (AWG)

Filing bankruptcy will stop these actions, but timing matters. If the government seized your refund before you file, it may be harder (or impossible) to recover.

How to Check If You Personally Guaranteed the Loan

Many people are unsure whether they’re personally liable. You can:

• Review the loan documents and EIDL portal messages
• Check if you signed a personal guarantee or you signed the documents under your individual name
• Request a copy of your file from the SBA if you’re uncertain

If there’s no personal guarantee, and your business was the only borrower, you may not be responsible personally—even if the business is gone.

Red Flags That Could Affect Dischargeability

While most EIDL and SBA loans are dischargeable in bankruptcy, be aware of these exceptions:

• Fraud or misrepresentation on the loan application (e.g., inflated revenue, misuse of funds)
• Improper use of EIDL funds for personal expenses
• Loans taken out while insolvent with no intent to repay

These situations could lead the SBA or U.S. Attorney to challenge the discharge in bankruptcy. That’s rare—but not impossible.

What If I’m Still Operating a Business?

Bankruptcy can still be an option, even if your business is still open. However:

• In a sole proprietorship, all assets and debts are part of your personal case. If you file, you can still continue to operate. If the business has assets, a Trustee will review the assets to determine if the assets are exempt or not.
• If you operate through an LLC or corporation, the business itself may need to shut down (or file a separate Chapter 7 liquidation) if you’re trying to fully walk away from the debt. Alternatively, if the business can continue to run, but cannot afford the regular payments, the business may need to file a Chapter 11 to restructure the debt.

Some business owners opt to restructure the debt or eliminate the debt personally through bankruptcy and start a new business cleanly after wiping out old liabilities. Remember that when there is a personal guarantee of the business debt, the owner and the business are both liable on the debt; you need to address the liability of both parties.

Can I Settle an SBA or EIDL Loan Through an Offer in Compromise?

• ✅ Traditional SBA loans may qualify for an Offer in Compromise (OIC) if the owner closes the business/has liquidated assets and the borrower can show hardship.
• ❌ EIDL loans do NOT qualify for the SBA OIC process.

If you’re facing EIDL debt and are personally liable, your options may include bankruptcy;  negotiating directly with the SBA  for EIDL debt is not permitted at this time.

What If I Have a High Income? Can I Still File Chapter 7?

Normally, high-income earners may not qualify for Chapter 7 bankruptcy due to the means test. However, there’s an exception that benefits business owners:

If the majority of your debt is non-consumer debt — such as business loans or tax debt — you may be exempt from the means test entirely.

This exception can be critical for:

• Entrepreneurs with SBA or EIDL loans
• Business owners or individuals with large tax liabilities
• Individuals with high mortgage balances or business-related real estate

️ Note: The means test still includes mortgage and car debt when calculating whether your debts are primarily consumer or business-related. Each case requires a careful legal analysis.

Is Bankruptcy Always the Best Option to Get Rid of SBA Loans?

Bankruptcy isn’t always necessary or ideal. Alternatives include:

• Negotiating a hardship payment plan/Offer in Compromise (for traditional SBA loans — OIC process is not available for EIDLs)
• Letting the business entity dissolve if there’s no personal guarantee

You may not have to do anything right now, but if you’re facing lawsuits, garnishments, or aggressive collections—it’s worth exploring seriously. The SBA, since it is a government entity, can refer your account over to the treasury for collection, which allows the government to garnish tax refunds, bank accounts and even offset from your Social Security payments. Bankruptcy prevents this from happening.

Real Example: EIDL Debt Discharged in Chapter 7

Sarah was a gig worker and delivery driver who took out a $60,000 EIDL loan during the pandemic. She operated as a sole proprietor and couldn’t make the required payments once the repayment period started.

When her business income dropped and the SBA began collection efforts, Sarah filed Chapter 7 bankruptcy. Her EIDL loan—unsecured and personally owed—was discharged, and she kept her car and retirement savings using available exemptions in her bankruptcy case.

Bottom Line: Know Your Liability, Then Know Your Options

Not every SBA or EIDL loan requires bankruptcy. But if you’re personally liable, and the SBA is threatening collections, bankruptcy may be your best solution.

Still unsure whether you’re personally liable for your SBA or EIDL loan? Our team can review your documents and help you understand your options. Whether it’s bankruptcy, business closure, or a strategic settlement, we’ll help you find a path forward that protects your future. Schedule a free consultation with Ashley F Morgan Law, PC.