Can You File Bankruptcy on EIDL Loan? (Here is The Answer)

In the aftermath of global crises, financial relief often arrives like a much-needed rain after a scorching drought. Among the prominent lifelines extended to small businesses recently was the Economic Injury Disaster Loan (EIDL).

However, as with all financial aid, there’s a catch—the responsibility of repayment. But what if the storm rages on, and the waters of debt rise higher than your ability to repay?

There’s a looming question on the minds of countless entrepreneurs: “Can I file for bankruptcy on an EIDL loan?” It’s a question that doesn’t just touch on the intricacies of financial law and the very survival of dreams, businesses, and the livelihoods of many.

With the economic landscape as unpredictable as it has been, it’s essential to be armed with the proper knowledge to navigate these choppy waters.

In this deep dive, we’ll explore the layers of this pressing question, clarifying the uncertainties surrounding EIDL loans and Bankruptcy.

Whether you’re a business owner seeking answers or someone intrigued by the financial intricacies of our times, this exploration is tailored for you. Let’s embark on this journey together and find the answers you seek.

What is bankruptcy?

When life throws financial curveballs, sometimes debt becomes too much to bear. That’s where Bankruptcy comes into play. Think of Bankruptcy as a reset button—a legal way for individuals and businesses to find relief from overwhelming debts.

There are mainly two flavors of Bankruptcy: Chapter 7 and Chapter 13.

Chapter 7, often referred to as liquidation bankruptcy, is pretty straightforward. Here, a bankruptcy trustee sells off the debtor’s assets that aren’t protected (non-exempt). The money from these sales is then used to pay off the creditors.

On the other hand, Chapter 13, or reorganization bankruptcy, is more about restructuring. Instead of selling assets, the debtor plans to repay their debts. This plan stretches the payments over a span, usually between 3 to 5 years.

Knowing the basics of these two types can help individuals make informed decisions about which path might be right for them, especially when facing financial challenges.

What is an EIDL loan?

When unforeseen events, like natural disasters or sudden economic downturns, hit businesses, they can be left scrambling to keep the lights on.

Enter the EIDL loan. Short for Economic Injury Disaster Loan is a lifeline extended by the Small Business Administration (SBA) specifically to aid businesses going through tough times.

The cool part about the EIDL loan is that it’s super flexible. Whether a business needs to stock up on inventory, keep the daily operations running, or invest in new equipment, this loan has its back.

It’s like a financial safety net, ensuring businesses have the resources to bounce back from unexpected setbacks and continue serving their communities.

Also read: How To Make Money with Flash Loans?

Can You File Bankruptcy on EIDL Loan

Can you file bankruptcy on an EIDL loan?

Let’s face it: sometimes, even the best safety nets, like the EIDL loan, can become a tightrope for businesses. So, what happens when a company struggles to repay its EIDL loan? Can Bankruptcy be an option? Absolutely!

EIDL loans, in the world of Bankruptcy, fall under the category of unsecured debts. Here’s what that means: in a Chapter 7 bankruptcy scenario, these loans can be wiped out or discharged.

It’s like getting a clean slate. On the other hand, if a business opts for Chapter 13 bankruptcy, the EIDL loan will become part of the repayment plan. Essentially, the company commits to a structured plan to repay the loan over a set period, usually a few years.

So, while taking an EIDL loan is about getting support during tough times, knowing there are ways out if repayment becomes a mountain too steep to climb is reassuring.

Here’s some sunshine for those clouded by EIDL loan worries. If the bankruptcy proceedings progress smoothly and everything is in order, there’s a particular highlight for EIDL loans under $25,000. Ready for the good news? After your bankruptcy case, these loans will be discharged.

Imagine it like this: it’s as if the weight of that loan, so long as it’s below the $25,000 mark, evaporates, giving businesses a fresh start and a lighter load to carry forward. It’s a testament to the system’s understanding that sometimes, businesses need a little extra help to find their footing again.

Also read: Can You Get a Loan with Your Direct Express Card?

The pros and cons of filing bankruptcy on an EIDL loan:

Deciding to file for Bankruptcy on an EIDL loan is like standing at a crossroads. There are paths leading in different directions, each with benefits and challenges. Let’s take a moment to understand both sides of the coin.

The Upsides:

  1. A Clean Slate: One of the most significant reliefs of filing for Bankruptcy is the potential to wipe out your EIDL loan debt entirely. It’s like a financial do-over, a chance to start anew without the looming shadow of debt.
  2. Goodbye, Persistent Creditors: Are you tired of those constant calls and reminders about your debt? Bankruptcy can put a stop to that, giving you some much-needed peace.
  3. Stretch It Out: With Chapter 13 bankruptcy, there’s a silver lining. You can spread your EIDL loan repayments over a longer duration, possibly even snagging a lower interest rate.

The Downfalls:

  1. Credit Score Takes a Hit: One of the significant drawbacks of filing for Bankruptcy is the dent it can make in your credit score. And this isn’t a short-term thing—it can linger for several years.
  2. Future Financial Hurdles: With Bankruptcy on your record, things like getting a new loan or credit card can become more challenging. Lenders might be wary because of your past.
  3. Parting with Assets: If you choose the Chapter 7 bankruptcy route, be prepared. You may have to let go of some of your assets. This could be anything from a cherished car to other valuables, all to settle the score with your creditors.

While Bankruptcy can offer a way out of EIDL loan debt, it’s essential to consider the long-term implications and what you’re willing to compromise.

Can You File Bankruptcy on EIDL Loan

How to file bankruptcy on an EIDL loan?

Taking the plunge to file for Bankruptcy on an EIDL loan might feel daunting, but breaking it down step by step can make the journey more transparent and more manageable. If you’re considering this path, here’s a simple roadmap to help you understand what’s ahead.

  1. Find Your Bankruptcy Sidekick: The first step? Get yourself a bankruptcy attorney. Think of them as your financial guide. They’ll help you make sense of your options and walk you through each stage of the filing process.
  2. Gather Your Money Story: It’s time to do some financial homework. Pull together all your important financial documents. The bankruptcy court will want to see the big picture—your income, expenses, what you own, and what you owe.
  3. Kickstart Your Bankruptcy Journey: The official start is when you file your bankruptcy petition. This formal document says, “I’m beginning my bankruptcy journey.” You can rub it online or visit the bankruptcy court clerk’s office.
  4. Face-to-Face with Creditors: Once you’ve filed, there’ll be a meeting of creditors. Here, you’ll meet your creditors, and they’ll ask you questions about your finances. It’s a financial Q & A session.
  5. The Grand Finale: You’ll eventually receive a discharge order if all goes well and your bankruptcy case sails smoothly. This is the golden ticket—your debts have been officially wiped out.

Remember, while the process might feel overwhelming, taking it one step at a time and leaning on your attorney’s expertise can make all the difference.

Which Type of Bankruptcy is Right for EIDL?

Facing the decision of which bankruptcy route to take with your EIDL loan can feel like standing at a buffet—each option offers something different, and you need to pick what suits your taste (or, in this case, your situation) best.

So, let’s break it down:

Chapter 7 Bankruptcy:

Consider this the “wipe the slate clean” option. If you don’t have a ton of assets but are drowning in debt, this might be your go-to.

By going the Chapter 7 way, many of your debts, including that EIDL loan, can be discharged. The catch? If you have non-exempt assets, they might be sold off to pay back some of you owe.

Chapter 13 Bankruptcy:

If you’re reading this and thinking, “I’ve got assets I’d really like to hold onto and a pretty stable income,” then Chapter 13 might be calling your name.

This route is more about restructuring your debts. Instead of selling off assets, you’ll create a repayment plan to clear your debts over time, all while keeping those prized possessions.

In essence, your choice boils down to your financial landscape. Take a close look at where you stand, and remember, a chat with a bankruptcy attorney can clarify which path aligns best with your goals.

What Happens to Your EIDL Loan in Bankruptcy?

What happens to your EIDL loan when you dive into Bankruptcy? Let’s pull back the curtain and see what’s in store.

Once you decide to file for Bankruptcy, your EIDL loan doesn’t just vanish—it becomes part of your “bankruptcy estate.” This is a fancy term for everything you own and owe that gets bundled together under the watchful eye of the bankruptcy trustee.

Now, depending on which bankruptcy path you’ve chosen, your EIDL loan will have a different destiny:

Chapter 7 Bankruptcy:

Going this route can feel like a breath of fresh air because there’s a chance your EIDL loan gets completely wiped out. In layperson’s terms, you’re off the hook from repaying it. But there’s a twist.

If you have assets that aren’t protected from Bankruptcy (think a second car or a vacation home), they might get sold off. The money from this sale is then used to settle scores with your creditors, and yes, that includes the folks at the SBA.

Chapter 13 Bankruptcy:

Here’s where things get structured. With Chapter 13, your EIDL loan receives a spot in your repayment plan. Every month, you’ll send payments over to the trustee.

Think of them as the middleman—they collect from you and then share the love (or, in this case, the money) with your creditors. Stick to the plan, make all your payments, and at the end of it all, any leftover debts, including your EIDL loan, get a goodbye kiss.

In short, the future of your EIDL loan in Bankruptcy is like a choose-your-own-adventure story, with the ending shaped by the type of Bankruptcy you opt for.

EIDL Loans: A Few Things to Chew On

Deciding to file Bankruptcy on an EIDL loan? Hold on a second! There are a couple of unique twists and turns to keep in mind. Let’s take a quick stroll through them:

1. Personal Guarantees:

Did you pinky-promise (or, in legal terms, sign a personal guarantee) when taking out your EIDL loan? If so, you might still be on the hook even if you wave the bankruptcy magic wand. That’s right; you might have to repay the loan, even if the business is off the hook after Bankruptcy.

2. No Sneaky Business:

Did you play some tricks or bend the truth when getting your EIDL loan? That’s a no-no. If any mischief or fraud was involved when you secured the loan, Bankruptcy might not be your get-out-of-jail-free card. The debt might stick around, haunting your financial dreams.

3. The Tax Tango:

Bankruptcy doesn’t just dance in its circle; it can also waltz into your tax world. Filing for Bankruptcy can mean new steps on your tax dance floor. Before you make any moves, it’s a brilliant idea to chat with a tax guru (or advisor) about what this means for your tax situation.

While EIDL loans offer great support, they come with quirks when Bankruptcy is in the picture. Being aware of these can help you make a well-informed decision.


Diving into the world of EIDL loans and Bankruptcy can feel like uncharted waters, full of questions and what-ifs. But every journey, no matter how winding, reaches its destination. And as we wrap up ours, there are a couple of key takeaways to pocket.

Firstly, filing Bankruptcy on an EIDL loan isn’t a light-switch decision. It’s more like adjusting a dimmer—taking time to gauge the brightness and shadows of the situation. While Bankruptcy can offer a much-needed breath of fresh air, it also comes with challenges. It’s a balance of potential relief and long-term implications.

Lastly, walk this path with others. There’s no shame in reaching out for a helping hand. Bankruptcy attorneys have been down this road many times and can provide the guidance and clarity needed.

Before pulling any triggers, sit down for a chat with someone who knows the ins and outs. They’ll help you see the whole picture, ensuring you choose to align with your business and personal goals.

Here’s to informed decisions, fresh starts, and always seeking the knowledge to make the best choices for your journey.


Can I keep my business running if I file Bankruptcy on my EIDL loan?

Yes, many businesses continue to operate after filing for Bankruptcy. The type of Bankruptcy you choose will influence how you run the company during the process. For instance, with Chapter 13, businesses can continue operations while repaying their debts under a structured plan. However, in Chapter 7, while companies can technically remain open, they may face challenges, mainly if assets are liquidated to repay debts.

Will filing Bankruptcy on my EIDL loan affect my chances of getting future SBA loans?

Filing for Bankruptcy can impact your ability to secure future loans, including those from the SBA. While it doesn’t automatically disqualify you, lenders may view you as a higher risk. It’s essential to rebuild your credit and demonstrate financial responsibility post-bankruptcy to increase your chances of future loan approvals.

How long will a bankruptcy on an EIDL loan stay on my credit report?

Typically, Chapter 7 bankruptcies remain on your credit report for ten years, while Chapter 13 bankruptcies stay for seven years. This can vary based on jurisdiction and specific circumstances, but it’s essential to know that Bankruptcy can have long-term effects on your credit history.

Can I still file for Bankruptcy if I’ve only used a portion of my EIDL loan?

Yes, you can still file for Bankruptcy even if you’ve only used a part of your EIDL loan. The bankruptcy process will consider all your debts, including the outstanding balance on your EIDL loan, regardless of how much of the loan you’ve utilized.

Can the SBA seize my assets if I don’t file for Bankruptcy but can’t repay my EIDL loan?

If you default on your EIDL loan, the SBA can recover the loan amount. This could mean seizing assets, especially if you signed a personal guarantee or collateral was involved. Filing for Bankruptcy may protect against asset seizure, depending on the type and specifics of your situation.

Olivia is a finance expert with years of experience in the industry. She is passionate about helping people make informed decisions about their finances, and her expertise lies in the areas of loans and insurance policies.

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