Many South Florida small business owners took out SBA loans or Economic Injury Disaster Loans (EIDL) to survive. Some of those businesses have since closed or are still struggling. If you are one of those owners, you may be wondering whether bankruptcy can help with those debts. This guide explains how the Bankruptcy Code treats SBA and EIDL loans in plain terms.

What Are SBA and EIDL Loans?

The Small Business Administration (SBA) backs loans made to small businesses through its 7(a), 504, and other programs. EIDL loans were direct loans issued by the SBA, many of them during the COVID-19 pandemic. Both types of loans can leave a business owner with significant federal debt.

Here is why that matters for bankruptcy purposes:

  • Personal liability. Most SBA loans above a certain size required the business owner to sign a personal obligation to repay the debt. If the business cannot pay, the SBA can pursue the individual owner for the full balance.
  • Collateral. Larger SBA loans and most EIDL loans above a threshold were secured by business assets. Some were also secured by real property.
  • Federal creditor. The SBA is a federal agency. It has collection tools that many private creditors do not, including Treasury offsets.

Understanding whether your SBA or EIDL debt is secured, unsecured, or both is the first step in figuring out how bankruptcy may apply.

How Bankruptcy Classifies These Debts

Bankruptcy law does not treat SBA or EIDL loans differently just because the lender is the federal government. The Bankruptcy Code looks at whether a debt is secured or unsecured.

Secured debt means the loan is backed by collateral. If the SBA holds a lien on business equipment or real estate, that debt is secured to the extent of the collateral's value.

Unsecured debt means there is no collateral, or the collateral is worth less than the loan balance. The portion of the loan that exceeds the collateral value is treated as unsecured. A personal obligation to repay an SBA loan with no collateral securing the individual owner is also treated as unsecured debt in a personal bankruptcy case.

What About Personal Liability on an SBA Loan?

This is one of the most common questions from business owners. If you personally agreed to be liable on an SBA or EIDL loan and the business has already closed or cannot pay, that personal obligation does not disappear just because the business is gone.

A personal bankruptcy (Chapter 7 or 13) can address that personal liability directly. The SBA, like any other creditor, must follow bankruptcy rules once a case is filed.

Under Chapter 7, the Bankruptcy Code allows eligible filers to receive a discharge of qualifying unsecured debts, which may include the unsecured portion of an SBA or EIDL obligation. Under Chapter 13, a filer proposes a 3-to-5-year repayment plan, and the unsecured balance may be reduced to what the filer can actually pay over that period.

Past results do not predict future outcomes.

The Automatic Stay and SBA Collections

When a bankruptcy case is filed, 11 U.S.C. 362 triggers the automatic stay. This generally pauses most collection actions, including SBA collection letters, Treasury offsets in some circumstances, and lawsuits to collect the personal obligation, while the case is open. There are exceptions and limits, particularly for repeat filings.

To learn more about how the automatic stay works, see our post on the automatic stay explained.

The stay applies to the SBA the same way it applies to a private bank. Filing the case is what triggers it.

Chapter Options for Florida Small Business Owners

Chapter 7

Chapter 7 is a liquidation bankruptcy. A trustee reviews your assets and liabilities. Most filers keep their exempt property and receive a discharge of qualifying unsecured debts.

Florida filers use Florida exemptions. Key ones include the homestead exemption (up to half an acre inside a municipality or 160 acres outside, subject to ownership-period rules for recent purchases), up to $1,000 in personal property (more under the wildcard exemption if no homestead is claimed), up to $1,000 in vehicle equity, head-of-family wage protections, and protected retirement accounts such as 401(k)s and IRAs.

To qualify, you must pass a means test based on your household income compared to the Florida median. A credit counseling course from an approved agency is required before filing.

Chapter 13

Chapter 13 is a repayment plan lasting 3 to 5 years. It can be useful when a filer has assets they want to protect or income above the Chapter 7 threshold. Many filers use Chapter 13 to address secured debts on a structured schedule while reducing what they owe on unsecured obligations.

Subchapter V of Chapter 11

For small businesses that are still operating, Subchapter V of Chapter 11 offers a streamlined reorganization path. It is designed to be faster and less expensive than a full Chapter 11 case. The business proposes a plan to repay creditors over time while continuing to operate. SBA and EIDL debts can be addressed within that plan. See our overview of Chapter 11 reorganization basics for more background.

The Southern District of Florida

If you file in Miami, Fort Lauderdale, or West Palm Beach, your case is heard in the Southern District of Florida. This district has divisions covering those cities and the surrounding areas.

About a month after filing, you will attend a 341 meeting of creditors. In the Southern District of Florida, these meetings are routinely held by video or phone. The trustee asks questions about your finances and your petition. Creditors, including the SBA, may attend but rarely do in straightforward cases.

Before receiving a discharge, you must complete a debtor education course from an approved provider.

What Bankruptcy Cannot Do

Bankruptcy is not a complete solution for every debt. Some obligations generally survive a discharge, including most student loans, recent tax debts, domestic support obligations, and court fines. SBA and EIDL loans do not fall into any of those automatic exceptions, but every case is different.

Secured claims also survive unless the underlying collateral is surrendered or the lien is otherwise addressed in the case.

Costs and Next Steps

Many filers have questions about what bankruptcy costs. Attorney fees, court costs and filing fees are explained in writing before any case begins. Fee waivers may be available for qualifying low-income filers in Chapter 7.

If you are a business owner dealing with SBA or EIDL debt, the general categories above are a starting point. A review of your specific debts, assets, income, and goals will shape which chapter, if any, makes sense for your situation. Many filers find that simply understanding the options reduces a great deal of stress.

Wondering if a fresh start fits your situation?

Attorney fees, court costs and filing fees are explained in writing before any case begins. Take the free 2-minute case review or call Recalde Law Firm at (305) 792-9100.