Can I discharge my SBA EIDL loan in bankruptcy if my business failed?

When COVID-19 hit, the federal government began the Economic Injury Disaster Loan (EIDL) program. The program was designed to help businesses survive the massive slowdown of economic activity that took place in early 2020. Roughly 4 million businesses received EIDL loans. These loans amount to about $378,410,624,804. For some businesses, the loans were a godsend and allowed them to keep their businesses afloat. But many of those companies went under. Since then, many businesses have not recovered, and you may be asking what will happen to your loan.

Personal Guarantee

A business owner only owes an EIDL loan if they have signed a personal guarantee for that loan. When an owner signs a personal guarantee, they are agreeing to repay the loan if the business stops paying. The SBA normally requires personal guarantees for their 7(a) and 504 loans, and although the CARES Act waived the guarantee requirement for most EIDL loans, it still required a guarantee on loans of $200,000 or more. If you borrowed the EIDL loan in the name of the business alone, the SBA will look to the business assets to repay the loan. If a personal guarantee on an EIDL loan was signed, that obligation can generally be discharged like any other debt in a bankruptcy case. The SBA may try to object to your discharging EIDL loans if they can show that you obtained the loan by fraud or possibly have spent the proceeds in ways that are not permitted.

How You Would Handle an EIDL Debt

If your EIDL debt will be personally dischargeable, and if you are otherwise eligible for Chapter 7, then it is usually the best way to handle an EIDL debt. You get the benefit of a quick fresh start, and you can generally start rebuilding your credit sooner than you could with a Chapter 13. Chapter 7 won’t work for everybody, though. The other option is Chapter 13. In a Chapter 13 case, you pay the trustee each month and the trustee pays the creditors. You generally have to commit to making these monthly payments for 5 years. Your Chapter 13 plan must be approved by the court to become effective. After the case is filed, creditors must file a claim if they want to be paid. The time to file claims is generally 70 days for most creditors and 180 days for a loan from the Small Business Administration. Debtors may have to repay only a small share of their debts. This is probably how you would handle an EIDL debt if you are ineligible for Chapter 7, or if you have assets that you want to protect. Either chapter of bankruptcy brings with it the automatic stay, which halts nearly all collection efforts, including those dreaded phone calls, lawsuits, garnishments, and foreclosure sales.

If you didn’t sign a personal guarantee on an EIDL loan, you may wonder whether bankruptcy matters at all. Still, it is possible that you personally signed for other debts, such as business credit cards or other loans, or that you carry personal debt. Chapter 13 can be especially useful in dealing with personal guarantees for business debt, even if you are not eligible for a Chapter 7 case. Once the plan is complete, it also gives you a fresh start.

Subchapter V

If you need a complete reorganization for your business and want to keep it operating, there is a simplified form of Chapter 11 bankruptcy that is available only for small businesses. Subchapter V is more streamlined, efficient, and less costly than a traditional Chapter 11 case. In order to qualify for Subchapter V, you have to meet several tests. To start, you must be a person engaged in business or commercial activity. Your total noncontingent liquidated secured and unsecured debt must be under $7,500,000, and at least half of that debt must be from business or commercial activity.