Bankruptcy experience. A practical plan for SBA debt.
Karl Johnson is certified as a Business Bankruptcy Specialist by the American Board of Certification. His practice includes business and individual bankruptcy, restructuring and contested proceedings.
On October 27, 2026, Karl co-presented “When SBA Loans Meet Bankruptcy – Guarantees, Collateral and Restructuring” with Lindsay W. Cremona at Minnesota CLE’s 2026 Bankruptcy Institute. The program addressed SBA debt, personal guarantees, collateral, government collection rights and restructuring options.
Karl helps borrowers and guarantors understand who owes the debt, what property or income may be exposed, and which options fit the business’s and owner’s financial circumstances.
Information checked October 30, 2026. Serving clients throughout Minnesota from Minneapolis.
Cannot pay your EIDL loan? Start with the loan’s status.
A COVID-19 Economic Injury Disaster Loan is a direct SBA loan. The response to a missed payment depends on whether SBA still services the account, it has been referred for Treasury offset, or Treasury’s Cross-Servicing program or a collection agency is handling it.
Before default or Treasury referral
Review payment-assistance eligibility, the business’s ability to resume regular payments and the consequences of a sale or closure. SBA currently offers qualifying borrowers a temporary reduction in payments. Eligibility conditions include an operating business, account-status requirements and restrictions involving active bankruptcy cases. Confirm the current rules before relying on that option.
After a Treasury notice
Identify the collector, the asserted balance, each person or entity pursued and every response date. Treasury currently states that COVID EIDL debts sent to Cross-Servicing cannot be returned to SBA. Continuing to contact the wrong office can consume time needed to dispute a debt, seek an arrangement or evaluate bankruptcy.
What can Treasury do after an EIDL loan default?
Federal debt collection can reach money that a business owner may depend on. Some remedies do not require the government to obtain a court judgment first. Which remedies apply depends on who legally owes the debt, the payment or property involved and the required procedures.
Administrative wage garnishment
If an individual is liable, a federal agency may direct an employer to withhold up to 15% of disposable pay without first obtaining a court order. Protected earnings, notice requirements and hearing rights still apply.
Tax refunds and other payment offsets
The Treasury Offset Program can intercept eligible federal payments, including tax refunds, contractor payments and certain benefits. Some Social Security benefits may be reduced subject to federal limits; Supplemental Security Income is excluded. A payment arrangement does not necessarily stop offsets.
Collection costs and credit consequences
Interest, authorized penalties and collection costs may increase the balance. Delinquent debts can also be reported to credit bureaus and assigned to private collection agencies. The actual assessment should be reviewed rather than assuming a fixed percentage applies to every loan.
Collateral enforcement and litigation
Business assets pledged to SBA remain important even if their value has fallen. A debt may also be referred to the Department of Justice for litigation. An owner’s guarantee creates a separate exposure that must be reviewed alongside the business’s obligations.
Response deadlines require prompt attention
Wage-garnishment notices describe rights to contest the debt or proposed collection terms. A timely hearing request can affect whether garnishment begins while the dispute is reviewed. Preserve the notice and envelope, and obtain advice promptly. The deadline and delivery instructions on your notice matter.
Are you personally liable for the EIDL loan?
Business ownership and personal liability are separate questions. Review the named borrower, legal structure, note, loan increases, security agreements and any signed guarantee. The COVID EIDL program generally used these thresholds:
| Loan amount | Program requirements |
|---|---|
| $25,000 or less | No collateral or personal guarantee generally required. |
| More than $25,000 through $200,000 | Business collateral generally required; a personal guarantee generally was not. |
| More than $200,000 | Business collateral and personal guarantees generally required. |
For loans above $500,000, SBA also sought available business-owned real estate. A sole proprietor may be directly liable as the borrower even without a separate guarantee. An LLC owner who did not guarantee a loan is not automatically personally liable simply because the business defaults, but other grounds for liability may require separate analysis.
A blanket lien on business assets does not automatically mean SBA holds a mortgage on an owner’s home. A personal guarantee can nevertheless expose a guarantor to collection. The signed documents, applicable exemptions and enforcement process determine the actual risk.
Options for a defaulted EIDL loan
The right approach begins with a realistic financial picture. We evaluate the loan together with the business’s other debts, taxes, assets and operating needs, and the guarantor’s personal position.
- Servicing and payment assistance. Determine whether SBA assistance remains available and whether the business can sustain the payments that follow.
- Debt and guarantee disputes. Examine the balance, payment credits, identity of the obligors, notices, signatures and the documents supporting collection.
- Repayment or a possible compromise. Evaluate an affordable proposal with the office authorized to handle the debt. Treasury describes compromise as a possible resolution for eligible debts; availability and approval for a particular COVID EIDL require separate review. An offer is not an accepted settlement.
- Restructuring, a sale or an orderly closure. Address liens, consent requirements, sale proceeds and remaining guarantees before moving business assets.
- Business or personal bankruptcy. Compare the available chapters and the effect on collection, collateral, operations and each borrower or guarantor.
COVID EIDL loans do not have a PPP-style forgiveness program. A charge-off is not a release of the debt, and closing an LLC does not cancel the loan or a personal guarantee. SBA’s rules for other loan programs should not be assumed to apply to COVID EIDL.
Can bankruptcy address an SBA EIDL loan?
Yes. An EIDL loan is not automatically excluded from bankruptcy relief because SBA made the loan or Treasury is collecting it. Treatment depends on the debtor, chapter, collateral and any applicable exception to discharge.
An eligible individual may be able to discharge personal liability, including a guarantee. A business may evaluate Chapter 11, including Subchapter V when eligible, to address its debts while pursuing a viable plan. Chapter 7 can provide a liquidation process, but a corporation or LLC does not receive a Chapter 7 discharge.
A filing generally stays many collection actions against the filing debtor, subject to exceptions. A company’s filing ordinarily does not protect a nonfiling guarantor or release that person’s guarantee. Valid liens can survive a discharge, and fraud or misuse allegations may raise additional issues. These distinctions make coordinated planning important.
What to do when payments are becoming unmanageable
- Keep every notice. Record the date received, deadlines and who sent it. Save the loan portal’s current status and payment history.
- Locate the complete loan file. Include the original note, increases, guarantees, security agreements and any payment-assistance approvals.
- Assess the business and personal finances together. Identify other secured creditors, taxes, cash flow, asset values and whether operations can continue.
- Get advice before transferring collateral or signing a new agreement. A sale, closure or payment commitment can affect options for both the borrower and guarantors.
For an initial inquiry, provide the business name, the people involved, the approximate balance and any deadline. We will arrange a conflict check and a suitable method for sharing detailed records.
EIDL default: common questions
Can SBA take my personal assets if my EIDL was under $200,000?
The threshold alone does not answer the question. An entity borrower’s debt differs from its owner’s debt, while a sole proprietor may be personally liable as the borrower. Review the final loan amount, any increases, the documents and any asserted independent basis for personal liability.
What happens to my EIDL loan if my business closes?
Closure does not cancel the loan. SBA’s rights in business collateral and any personal guarantees still require attention. Plan the treatment of assets, sale proceeds and remaining obligations before dissolving the entity or distributing property.
Can Treasury garnish my wages for an EIDL loan?
Administrative wage garnishment may be available against an individual who owes the debt. Federal law permits garnishment without first obtaining a court order, but limits, notice requirements and hearing rights apply. An owner is not subject to personal collection solely because an LLC owes money.
Can a COVID EIDL loan be sent back to SBA from Treasury?
Treasury’s current published guidance says COVID EIDL debts referred to Cross-Servicing cannot be returned to SBA. Identify the office or collection agency handling the debt and direct any response or proposal to the appropriate party.
Can I settle an EIDL loan for less than the balance?
A reduced settlement requires authority and approval; it is not a general forgiveness entitlement. Treasury’s general guidance discusses compromise for eligible debts. A lawyer should assess the rules and collection stage for the specific COVID EIDL, the financial evidence and the terms of any proposed release.
Does my business’s bankruptcy eliminate my personal guarantee?
Ordinarily, no. The company and the guarantor have separate obligations. The company’s bankruptcy does not by itself discharge a nonfiling owner’s guarantee. The owner may need a separate negotiated resolution or personal bankruptcy analysis.
Talk with Karl Johnson about your EIDL loan.
Whether you are trying to avoid default, responding to a Treasury notice or deciding what comes next for the business, start with a clear assessment of the debt and your exposure.
Karl Johnson
Business Bankruptcy Specialist, certified by the American Board of Certification
612-961-0145
karl@mjblawmn.com