Chapter 11 Subchapter V: A Viable Solution for Small Businesses Struggling with SBA EIDL?
Many small businesses relied on SBA Economic Injury Disaster Loans (EIDLs) during the COVID-19 pandemic but now they are having trouble paying them off. While government support programs have mostly ended, a viable option exists. Subchapter V of Chapter 11 business bankruptcy provides a more affordable and efficient alternative to traditional Chapter 11 bankruptcy, giving business owners with an outstanding EIDL a way to reorganize their debt and continue operating.
The complex procedural hurdles and expensive administrative fees of a traditional Chapter 11 bankruptcy put small businesses at a disadvantage, and the likelihood of a debtor successfully reorganizing is very slim.
In 2019, Congress enacted The Small Business Reorganization Act (SBRA), introducing a new amendment: Subchapter V to the Chapter 11 Bankruptcy Code. Unprecedented in structure and scope, the new Subchapter V streamlines the bankruptcy process and provides a cost-effective solution to small businesses seeking to restructure their debts and continue operating.
Unlike a traditional Chapter 11, which can take one to five years, the timeline for Subchapter V is much shorter, with a reorganization plan due within 90 days of filing. Debtors maintain control of their assets and business operations and aren't required to pay quarterly U.S. Trustee fees, a notoriously hefty expense in a traditional Chapter 11. The SBA does impose eligibility requirements that state debt cannot exceed $3,024,725, excluding debt owed to the business owner, and 50% of the debt must come from business or commercial operations.
What if Your Business Received an SBA Economic Injury Disaster Loan (EIDL) and is Struggling with Payments?
Usually available on a 30-year term, EIDL were given with the expectation that the business will repay in full over that extended term. As of March 2025, the SBA no longer provides offer-in-compromises nor automatic enrollment in hardship plans. What that means is borrowers with existing hardship accommodations can continue their reduced payments until their current term expires, but automatic renewal is not an option.
Many business owners realize the debt they took on just to survive is no longer affordable. This is exacerbated by the fact that depending on the loan size, you're facing personal liability, too. This is called a personal guarantee, which means if the business cannot make payments, then the owner is financially responsible.
Loan Amount & What it Means for You
If the SBA EIDL Loan was less than $25,000
- Smaller loans like this don't require collateral or a personal guarantee.
- The government may seize federally held assets like income tax refunds, but they will not be able to seize your personal funds or assets owned by the business.
If the SBA EIDL Loan was more than $25,000 but less than $200,000
- At these levels, the SBA requires collateral from the business and will put a "blanket lien" covering all assets and accounts of your business.
- If the business ceases to operate or otherwise defaults on the loan, the SBA will have the right to seize business assets and accounts.
- For example, if your business has money at a financial institution or accounts receivable, owns real estate, machinery, or vehicles, the government has a lien against them and will seek to seize these assets to satisfy the outstanding debt.
- If your business has few assets or receivables with which to pay the SBA debt, to diligently document the use of the money and expect the SBA to ask tough questions, review your business and personal bank records, and verify that the terms of the contract were followed.
If the SBA EIDL Loan was more than $200,000
- If your company took an EIDL for more than $200,000, a personal guarantee was required. This means that if the business can't make payments, the business owner is financially responsible.
- In addition to a blanket lien on the business, the SBA can seize many of the business owner's personal assets. If your business took an EIDL greater than $200,000, the small business debtor’s personal assets and finances are at extreme risk.
If your business faces mounting pressure from an SBA EIDL loan you can no longer afford, Subchapter V of Chapter 11 may offer the lifeline you need. It provides a streamlined, affordable path to restructure debt, protect both business and personal assets, and regain financial stability. Understanding your loan’s terms and the risks involved is crucial, so is knowing your options. Consult a qualified bankruptcy attorney like the ones at The Lane Law Firm to explore whether Subchapter V is the right move for your business and take proactive steps toward a sustainable future.
With over 15 years of experience handling complex business debt cases, The Lane Law Firm assists numerous businesses and their owners in utilizing bankruptcy to regain control of their finances and pursue a more stable future.
Get the process started by scheduling a free, no-obligation, 100% confidential consultation.
