SBA EIDL Loans and Subchapter V Bankruptcy

Two clients recently came to my firm with the same problem: an LLC had guaranteed an SBA EIDL loan, the loan was in default, and they wanted to know whether a Subchapter V filing could put the loan back on track.

The short answer: yes, in most cases the LLC can restructure the debt through a confirmed Subchapter V plan. But the outcome — and whether the business will have enough cash flow to actually make the payments — depends on where the loan sits in the collection pipeline when the case is filed. And a Subchapter V filing does not, by itself, protect a personal guarantor.

How Subchapter V Treats SBA EIDL Debt
An LLC in Subchapter V can propose to pay the SBA claim over the plan term and bind the SBA if the plan is confirmed under Chapter 11, Subchapter V. SBA EIDL debt is treated like other commercial secured or unsecured debt — subject to the loan documents, any collateral, and any guaranties.

If the loan was accelerated or placed in default, a confirmed plan may provide for cure and maintenance, or other restructured treatment, depending on the note, the maturity date, and whether the debt is secured.

The real question for most clients isn't whether the debt can be restructured — it's whether the LLC will have the disposable income to service it post-confirmation. That analysis depends on where the loan is in the servicing chain.

1. The Loan Is Still Serviced by the SBA (Best Case)
If the loan has not yet been referred to Treasury for cross-servicing, the debtor can generally propose to:

Cure prepetition payment defaults through the Subchapter V plan.
Reinstate the loan on its original maturity schedule (typically 30 years).
Resume regular monthly payments.

The SBA has frequently accepted Chapter 11 plans that cure arrears over the life of the plan (or another negotiated period), leave the remaining loan balance in place, and continue the original interest rate. This functions much like reinstatement, though the Bankruptcy Code does not use that term for ordinary secured or unsecured loans outside certain specific contexts.

2. The Loan Has Been Referred to Treasury
Once the SBA refers the loan to the U.S. Department of the Treasury for cross-servicing, Treasury takes over collection, adds administrative fees of 30%, and may initiate offsets and other collection efforts.
Filing Subchapter V triggers the automatic stay under 11 U.S.C. § 362, which stops most collection activity. However, Treasury does not automatically return the loan to the SBA simply because a bankruptcy case is filed.
In practice:

Treasury will usually suspend collection during the case.
The SBA participates as a creditor in the bankruptcy.
After confirmation, the agencies determine who services the loan going forward.

Whether servicing returns to the SBA is an administrative decision, not a right created by the Bankruptcy Code.
3. Treasury Has Already Accelerated the Debt
Acceleration alone does not necessarily prevent Chapter 11 treatment. The debtor may still propose a plan that restructures repayment, modifies payment terms (subject to applicable Code provisions), or pays the claim over time — provided the plan satisfies confirmation requirements. Subchapter V gives debtors considerably more flexibility than Chapter 7 or Chapter 13 to restructure business debt.

4. The SBA's Position in Subchapter V
The SBA generally evaluates:

Feasibility under 11 U.S.C. § 1191.
Adequate treatment of its claim.
Cash flow.
Collateral value.
Continued business operations.
Likelihood of repayment.

Bifurcating the Claim Under Section 506(a)
If the EIDL loan is between $25,000 and $200,000, it is secured by a blanket UCC-1 lien on all corporate personal property. If the liquidation value of that collateral is less than the loan balance, the debtor may be able to use 11 U.S.C. § 506(a) to bifurcate the claim into secured and unsecured components.
Example: If the collateral is worth $20,000 and the SBA EIDL loan balance is $150,000, the SBA holds a secured claim of $20,000 (the value of the assets) and an unsecured claim for the $130,000 deficiency.
Plan treatment: Rather than reinstating the original contract, the debtor can propose a non-consensual cram-down plan under 11 U.S.C. § 1191(b). The $20,000 secured claim is paid over time with appropriate cram-down interest, and the remaining $130,000 is treated as a general unsecured claim, receiving pro-rata distribution from the debtor's disposable income over a 3-to-5 year plan period. Any unpaid unsecured balance is discharged under 11 U.S.C. § 1192.
In Side Yard Public House, Inc. and Milovan, Inc., No. 25-04126 (Bankr. S.D. Cal. June 26, 2026), a bankruptcy court in the Southern District of California confirmed an Amended Subchapter V Plan classifying SBA COVID EIDL loan claims into secured and unsecured classes. The plan was confirmed on a consensual basis under 11 U.S.C. § 1191(a), based on SBA ballots cast in favor of the plan with proper DOJ/SBA authorization. The court noted this was the first known instance of the SBA voting in a Subchapter V plan in that district.

The Guarantor Problem
While the LLC can use Subchapter V to modify, reinstate, or strip down the EIDL debt, the corporate filing does not automatically protect or reinstate the position of a personal guarantor (required on EIDL loans exceeding $200,000).

The automatic stay is entity-specific. The filing triggers the automatic stay under 11 U.S.C. § 362(a) for the LLC only. It does not extend to non-debtor guarantors.
Treasury cross-servicing continues regardless. If the loan has already defaulted and been referred to Treasury for cross-servicing or the Treasury Offset Program (TOP), the government can — and will — continue administrative wage garnishments, Social Security offsets, and federal tax refund seizures against the individual guarantor, despite the LLC's pending Subchapter V case.
No non-debtor discharges. Following the Supreme Court's ruling in Harrington v. Purdue Pharma L.P., non-consensual third-party releases in a Chapter 11 plan are strictly prohibited. The LLC's Subchapter V plan cannot be used to force a release or modification of the individual owner's personal guarantee without the SBA's express consent.

Resolving Guarantor Exposure
To address the guarantor's exposure alongside the LLC's reinstatement or cram-down, two mechanisms are generally available:

Parallel individual bankruptcy. The individual files a concurrent Chapter 7, Chapter 13, or Subchapter V case personally to discharge or manage the guarantee liability — effectively piggybacking on the asset valuations established in the corporate Subchapter V case.
Consensual post-petition settlement. Propose an out-of-court administrative settlement or Offer in Compromise (OIC) directly with the SBA/Treasury, using new value (such as third-party funds or exempt personal assets) to buy out the guarantee, structured conditionally upon confirmation of the LLC's Subchapter V plan.

Bottom line: If a Subchapter V plan is confirmed, the personal guarantor remains fully liable for the entire deficiency or unpaid balance of the EIDL loan, absent a separate workout with the SBA or Treasury, or a bankruptcy filing by the guarantor. Confirmation of a Subchapter V plan that alters, reduces, or discharges the LLC's liability does not alter or discharge the liability of a third-party non-debtor guarantor.