An SBA Loan You Cannot Pay: What Bankruptcy Can Do in Hawaiʻi
This guide is legal information, not legal advice, and reading it does not create an attorney-client relationship. Every situation is different, and the right move in your case depends on your facts. For advice about your own situation, start with my free questionnaire or call me at (808) 468-7000.
I work hard to keep this page accurate, but errors or omissions are possible and the law can change. The information here is current only as of the date above.
Can bankruptcy erase an SBA loan?
Yes. An SBA loan is an ordinary debt in bankruptcy, with no special protection and no exception written for it in the Bankruptcy Code. If you are personally liable for the loan, a Chapter 7 discharge erases that personal liability the same way it erases a credit card. Two questions change the picture: whether you actually guaranteed the loan, and whether the loan is secured by property. Both are worth checking before you do anything else.
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Your loan may have come from a business that has since closed. It may have come after the 2023 wildfires. You may not be sure what kind of loan it is, only that the payments have started and the letters have begun to arrive. Whichever it is, two questions come first: who signed for the loan, and what it is attached to. SBA debt is not a special category in bankruptcy, and those two answers decide what follows.
Key Takeaways
- SBA debt is dischargeable. There is no exception in the Bankruptcy Code for SBA, EIDL, or disaster loans.
- Check the guarantee first. If the business was an LLC or a corporation and no one signed a personal guarantee, the loan may not be your debt at all.
- Sole proprietors are personally liable. There is no separate entity standing between you and the loan.
- A lien can survive even when the debt does not. If the loan is secured against property, the discharge erases what you owe personally, and the lien stays with the property.
- Falling behind leads to Treasury, not to court. A charged-off SBA loan is referred to the U.S. Treasury, which can garnish wages without a court order and offset tax refunds and other federal payments.
- Business debt can open the door to Chapter 7. When more than half of your total debt is business debt, the means test does not apply to you.
Start Here: Are You Personally Responsible for the Loan?
The first question in every one of these cases is whether the loan is your personal debt or the business’s debt, and the answer turns on two questions: how the business was organized, and whether anyone signed a personal guarantee.
If you operated as a sole proprietor, there is no separate entity between you and the loan. The business’s debt is your debt, guarantee or no guarantee. The same is true of any loan you signed in your own name.
If the business was an LLC or a corporation, the loan belongs to the company, and you are personally liable only if you signed a personal guarantee. That distinction carries real weight here, because the COVID EIDL program required a personal guarantee only on loans greater than $200,000. A borrower whose company took a smaller COVID EIDL, and whose company is now closed with no assets, may owe nothing personally at all. It is what I check first, and sometimes it is the whole answer. The other half matters too. A company cannot get a Chapter 7 discharge at all, so the loan stays the company’s debt whatever happens in your own case. If the company is closed and owns nothing, that is usually academic. If it still owns something, or the loan is secured against something it owns, the lender can go there, and your discharge does not change it.
Your loan documents will tell you. Look for a separate guaranty page signed in your own name rather than as an officer of the company.
You May Have an EIDL and Not Know the Name
People call it an SBA loan, which is accurate, but the SBA runs several different programs and the differences change what happens next.
COVID EIDL. An Economic Injury Disaster Loan made during the pandemic, on a thirty year term at a fixed rate, with payments deferred for the first two years. Many borrowers have never used the acronym and know it only as an SBA loan. Collateral was required above $25,000, and a personal guarantee above $200,000.
Disaster loans. After a declared disaster, the SBA lends to homeowners and renters to repair or replace real estate and personal property, and to businesses for physical damage and for economic injury. The Lahaina wildfire loans belong in this group.
7(a) loans. These come from a bank, not from the SBA. The SBA guarantees part of the loan to the lender. When one of these loans defaults, the sequence is different, and I walk through it below.
Which program yours came from decides the collateral rules and the collection path. It does not decide whether bankruptcy can erase it.
The Lahaina Wildfire Disaster Loans
The SBA approved more than $300 million in disaster loans after the 2023 Hawaiʻi wildfires, and more of that money went to households than to businesses. The phrase small business loan makes this sound like only a business problem. It is not. A homeowner or a renter in Lahaina who borrowed to repair or replace what burned is carrying an SBA loan too.
The deferment period on those loans has ended. Payments that felt far away in 2023 are due now, in a Maui economy that has not recovered. That is the combination bringing these borrowers to my office.
Whether your loan is secured comes down to its size and to when it was approved. Under the rules in effect when the wildfire loans were made, the SBA generally did not take collateral below a set threshold, so a loan under that line was written unsecured. The threshold has been raised since. If your loan is unsecured, a discharge ends the matter as to that debt, and nothing survives it.
Where the SBA did take collateral, the rule points to a lien on the damaged property or on the property that replaces it. If your loan is secured, read the next section closely.
People ask what happens when the collateral itself burned. The lien does not disappear with the structure. It stays with the land, and the rule that created it reaches the replacement property as well, so a home rebuilt on the same lot is generally still covered. Where the property has since been sold, the lien was almost certainly paid or released at closing, because a title company will not close over it. Either way, the discharge erases what you owe personally, and the lien remains the separate question.
Secured or Unsecured Changes What Bankruptcy Can Do
If your SBA loan is unsecured, bankruptcy treats it the way it treats a credit card. The discharge erases your personal obligation to pay it, permanently, and the debt cannot be collected from you afterward.
If your SBA loan is secured, the discharge still erases your personal obligation, and that is real relief on its own. What it does not do is remove the lien from the property. The claim against the property survives the case.
A lien recorded before you file can survive the bankruptcy. That is true whether the lien secures an SBA loan, a mortgage, or a judgment. If there is property you want to keep, the lien is a separate question from the discharge, and it needs its own answer. Tell me at the start if any of your debts are secured against something you intend to hold onto, because it can change which chapter makes sense.
What Happens When You Fall Behind
An SBA loan does not head for state court the way a credit card does. It follows a federal administrative path instead, and the steps are predictable.
The SBA gives notice and demands payment first. If the account stays delinquent, the loan is charged off and referred to the U.S. Treasury for collection. Federal rules require agencies to hand eligible delinquent debts over after a set period of delinquency, generally within a few months. Once the transfer happens the SBA no longer services the loan, and you are dealing with Treasury directly.
A recent change matters if this is your situation. For two years the SBA held a waiver from the requirement to hand these loans over, so a great many delinquent COVID EIDLs stayed with the SBA instead of moving to Treasury. That waiver expired on March 31, 2026, and the transfers have resumed. If you have been carrying a delinquent SBA loan since the pandemic, your file may have moved this year even though nothing changed on your end.
Treasury collects through its Cross-Servicing Program, which sends its own demands, can negotiate a repayment agreement, can report the debt, and can refer it on for further collection.
The first is the Treasury Offset Program. It intercepts federal payments owed to you, including federal income tax refunds, Social Security benefits, and federal contractor payments, and applies them to the balance. Federal rule does protect part of a Social Security payment from offset, both a set monthly amount and a limit on the share of the rest that can be taken, so it is not all of it.
The second is administrative wage garnishment. A federal agency collecting a debt like this one can order your employer to withhold from your paycheck without going to court first, up to 15% of your disposable pay. You have the right to ask for a hearing before it starts, and if you ask within 15 business days of the notice, the garnishment waits for the hearing. That is a real difference from an ordinary credit card, where a creditor generally has to sue you and win a judgment first. Filing bankruptcy stops it either way, the same as it stops a garnishment that came out of a state court case. If you have had a bankruptcy case dismissed in the past year that protection can be much shorter or may not arrive at all, so tell me if you have filed before, and my guide to stopping wage garnishment covers how that works.
There is also a cost to being there. When a debt is transferred, the government may add the cost of collecting it to what you owe, so the balance you are dealing with at Treasury is generally larger than the one you left the SBA with.
All of which is a reason to look at the timing. If your loan is still with the SBA, it is better to have the conversation now than after the file moves.
What the SBA Offers Short of Bankruptcy
The SBA has its own relief programs, and they are worth understanding before you decide anything.
The Hardship Accommodation Plan. For COVID EIDL borrowers, this cuts the payment by 50% for six months. To qualify, the loan has to be less than 90 days past due, the business has to be open and operating, and neither the borrower nor any owner can be in an active bankruptcy. It is available once every five years and is requested through the SBA loan portal. Interest keeps accruing during the reduced period, so it buys time rather than reducing what you owe.
Offers in compromise. The SBA can settle a loan for less than the balance. In general terms, the business must be permanently closed and its assets liquidated, and the borrower submits SBA Forms 1150 and 770 along with financial documentation. On a 7(a) loan the request goes through the lender first, under the SBA’s servicing and liquidation procedures. As of this writing, a compromise on a COVID EIDL is a narrow path. The conditions are strict, and once a loan has moved to Treasury the request is handled there rather than by the SBA.
A note on scope: I do not handle SBA offers in compromise. I explain the process because you cannot weigh your options without knowing it exists.
One point matters whichever route you take. When a lender or the government cancels a debt outside of bankruptcy, the cancelled amount is generally treated as taxable income. Debt discharged in bankruptcy is not. My Chapter 7 guide covers that difference.
If Your Loan Came Through a Bank: How 7(a) Works
A 7(a) loan is a bank loan with an SBA guarantee behind it.
The bank is your lender, so the bank acts first. It pursues the loan, and if there is collateral it liquidates it. If a balance remains after that, the bank asks the SBA to honor its guarantee. The SBA pays the lender its guaranteed share, and collection of what is left generally moves to the SBA. From that point forward you are dealing with the federal government rather than with the bank, and the same charge-off and Treasury referral described above applies.
Two points follow from that. First, who you are actually dealing with changes depending on where you sit in the sequence, so a request that had to go through the lender at one stage may sit with the SBA, or with Treasury, at the next. Second, none of it changes the bankruptcy analysis. Whether the debt is held by the bank, by the SBA, or by Treasury, if you are personally liable for it, a discharge erases that personal liability.
How Bankruptcy Treats an SBA Loan
An SBA loan is an ordinary debt in bankruptcy. There is no exception in the Bankruptcy Code for SBA or EIDL debt and no special rule that keeps it alive. In a Chapter 7 it is discharged alongside credit cards and medical bills.
There is an exception, and the main one is fraud. If a lender or the SBA believes the loan application contained false statements, it can object to the discharge of that debt by filing a complaint in the bankruptcy case before a court-set deadline, and it has to prove the claim rather than simply raise it. Where the false statement was about your finances or the company’s, the law asks more of the lender rather than less: the statement has to have been in writing, and the lender has to have relied on it reasonably. On a loan approved on what the borrower certified, with nothing verified, that second requirement is a real question. Fraud is not the only door, though. Where the SBA holds a security interest, an objection can rest on what happened to the collateral instead of on anything said in the application. If nothing is filed, the debt is discharged with everything else. My guide to debts that cannot be discharged explains how that process works. That question takes a specific shape with SBA loans, and I come back to it below.
The means test may not apply to you at all. The means test is an income and expense formula that decides who can use Chapter 7, and it applies only when your debts are primarily consumer debts. If more than half of your total debt came from running a business, counting SBA loans, guarantees you signed for the company, and business taxes, the test does not apply at all, whatever your income is. For a former owner carrying a large EIDL, that may be the difference between qualifying and not. My Chapter 7 means test guide covers the exception in detail.
When Chapter 13 belongs in the conversation. Chapter 7 is the usual answer when the goal is to erase the debt and move on. Chapter 13 comes up when there is property you want to keep, a secured disaster loan against a home, or taxes to catch up on. My guide to choosing between the two walks through that decision the way I do on a first call.
One last piece. If the business also owed payroll taxes withheld from employees, or Hawaiʻi general excise tax, those follow different rules from the SBA loan itself. My guide to debts that cannot be discharged covers them.
What If the Money Was Not Spent the Way the Loan Required?
Disaster loan money comes with a written purpose, and the loan documents say what it can be spent on. A COVID EIDL, for example, was working capital for the business.
If the SBA concludes that proceeds were knowingly used for something else, the rule allows it to call the loan and to assess a civil penalty of one and one half times the amount disbursed. The SBA gives written notice and a chance to respond first, and whatever records you kept of how the money was spent matter at that point.
The fraud exception described above connects here. It reaches a debt that was obtained by a false statement, so it is about the loan application rather than about the spending. Your loan application carried a certification about what the money would be used for, which is why later spending can become the government’s evidence that the certification was not true when you signed it. Using the money differently, on its own, is not the same, and the government would still have to object and prove its case.
Let’s talk about your options.
I have helped more than a thousand people through bankruptcy in Hawaiʻi. Tell me what you are dealing with and I will tell you what you may qualify for: Chapter 7, Chapter 13, or another path entirely.
Frequently Asked Questions
Can bankruptcy discharge an SBA EIDL loan?
Yes. An EIDL is an ordinary debt in bankruptcy. There is no exception in the Bankruptcy Code for SBA or EIDL loans, so if you are personally liable for one, a Chapter 7 discharge erases that personal liability the same way it erases a credit card balance.
Am I personally liable for my business’s SBA loan?
Sometimes. It depends on how the business was organized and on what you signed. A sole proprietor is personally liable, because there is no separate entity. If the business was an LLC or a corporation, you are liable only if you signed a personal guarantee, and the COVID EIDL program required one only on loans greater than $200,000.
What happens if I stop paying my SBA loan?
The loan moves onto a federal collection path rather than into state court. The SBA sends a due process letter and then a demand notice, and if the account stays delinquent the loan is charged off and referred to the U.S. Treasury. Once that referral happens the SBA no longer services the loan, and you deal with Treasury directly.
Can the government take my tax refund or Social Security for an SBA loan?
Yes, once the loan has been referred to the U.S. Treasury. Treasury can offset federal payments owed to you, including federal income tax refunds, Social Security benefits, and federal contractor payments, and apply them to the balance. A bankruptcy discharge ends the personal liability that the offset is collecting on.
Can the SBA garnish my wages without going to court?
Yes. A federal agency collecting an SBA debt can order your employer to withhold from your paycheck without first suing you and winning a judgment, up to 15% of your disposable pay. You are entitled to written notice and to request a hearing before it starts. Filing bankruptcy stops the garnishment.
Can I discharge an SBA disaster loan from the Hawaiʻi wildfires?
Yes, if you are personally liable for it. Disaster loans made to homeowners and renters are personal debts and are discharged like any other. Check whether the loan is secured against property, because a lien recorded before you file survives the bankruptcy even though your personal obligation to pay does not.
Does bankruptcy remove the SBA’s lien on my property?
No. A discharge erases what you owe personally, but a lien recorded before you file stays with the property. That is true of any secured debt, not only SBA loans. If there is property you want to keep, tell me at the start, because it can change which chapter makes sense.
Key Terms, Explained
- EIDL
- An Economic Injury Disaster Loan, made by the SBA to cover operating expenses after a declared disaster, including the pandemic.
- 7(a) loan
- A loan made by a bank with a partial SBA guarantee behind it, rather than a loan made by the SBA itself.
- Personal guarantee
- A separate promise, signed in your own name, to pay a company’s debt if the company does not.
- Hardship Accommodation Plan
- An SBA program that reduces a COVID EIDL payment by 50% for six months for borrowers who qualify.
- Charge-off
- The point at which the SBA stops carrying the loan as collectible on its own books and refers it elsewhere.
- Cross-Servicing Program
- The U.S. Treasury program that takes over collection of delinquent federal debts after referral, at which point the SBA no longer services the loan.
- Treasury Offset Program
- The federal program that applies payments owed to you, such as a tax refund, against a delinquent federal debt.
- Offer in compromise
- A request to settle a federal debt for less than the full balance.
- Discharge
- The permanent court order at the end of a bankruptcy case that erases your legal obligation to pay qualifying debts.
- Lien
- A recorded claim against a specific piece of property that secures a debt.
- Wrongful misapplication
- Using disaster loan proceeds for something the loan authorization did not allow, which carries its own civil penalty.
- Means test
- An income and expense formula that decides who can use Chapter 7, and which applies only when a person’s debts are primarily consumer debts.
Sources & Legal Authorities
The authorities behind this guide.
- United States Code. 11 U.S.C. § 362(a)(6); § 362(a)(7); § 523(a)(2)(A); § 523(a)(2)(B); § 523(a)(4); § 523(a)(6); § 523(c); § 524(a)(1); § 524(a)(2); § 524(e); § 707(b)(1); § 727(a)(1); § 727(b); 26 U.S.C. § 108(a)(1)(A); 31 U.S.C. § 3711(g)(1); § 3716(c)(3)(A); § 3717(e); § 3720A; § 3720D(b)(1)
- Federal regulations. 13 C.F.R. § 123.9; § 123.11; 31 C.F.R. § 285.4(e)(1); § 285.11(f)(4); § 285.12; 89 Fed. Reg. 59826 (Sept. 9, 2024)
- Rules. Fed. R. Bankr. P. 4007(c)
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