Bankruptcy · Chapter 11 · Subchapter V
Bankruptcy is a game-changer
Every other option runs inside a system the government designed and controls. This one doesn’t.
It stops the referral — by regulation
Treasury’s own rule exempts a debt from mandatory referral while it is “in litigation,” and defines that to include a debt that is the subject of proceedings “including bankruptcy proceedings, whether initiated by the creditor agency, the debtor, or any other party.” 31 C.F.R. § 285.12(d)(2)(i)(B). The agency “shall notify Fiscal Service immediately” on learning of a filing. § 285.12(i).
Read together, the mechanism is plain: a filing is the one act that stops the conveyor to Treasury. And at Phase 3, the automatic stay halts garnishment and offsets the day you file.
It splits an undersecured SBA loan in two
Assume SBA has a blanket lien on substantially all business assets — in practice it does. That doesn’t make it fully secured. It makes it secured to the extent of the collateral’s value.
Under § 506(a) of the Bankruptcy Code, the SBA’s claim has two parts — secured and unsecured. Owed $500,000 against $150,000 of equipment and receivables, SBA holds a $150,000 secured claim and a $350,000 general unsecured claim. That deficiency is then paid at whatever percentage the unsecured class receives.
Nothing outside bankruptcy produces that result. No SOP. No Offer in Compromise — not while you’re operating. It’s why an SBA loan that looks unmanageable outside chapter 11 is frequently manageable inside it.
Subchapter V
For a small business this is the vehicle: no creditors’ committee, no disclosure statement, no competing plans, and the owner keeps the equity. Under § 1191(b) a plan can be confirmed over SBA’s objection if it commits projected disposable income for three to five years and is fair and equitable. The government gets no veto.
Eligibility turns on a debt ceiling of roughly $3.42 million in noncontingent, liquidated debt, with bipartisan legislation pending to restore it to $7.5 million.
The guarantor branch
The Supreme Court in Harrington v. Purdue Pharma ended nonconsensual third-party releases in plans. But a release and an injunction are different animals, and Purdue didn’t reach the second.
A plan can seek an injunction protecting the guarantor for the life of the plan, conditioned on performance — the theory being that the owner’s continued work is what makes the plan feasible, and that stripping the guarantor personally would drain the very resources funding the creditors. It is not a discharge. It dissolves the day the plan defaults.
This works frequently but not always. It’s judge-dependent, fact-dependent, and SBA fights it — the Agency’s position is that the guaranty is the entire point of having taken one, and its procedures leave staff almost no room to consent. Sometimes the plan injunction carries the guarantor through, and sometimes the guarantor needs a case of his own. Anyone who tells you which one applies to you before reading your documents is guessing.
Now you know what to ask
Come with your phase, your loan number, your guaranty (or the fact that you don’t have one), and the last letter you received. That’s a first conversation worth having. Lakelaw is a bankruptcy boutique. David P. Leibowitz has practiced bankruptcy law for more than fifty-two years. The first conversation costs nothing and is confidential.
Schedule a free consultation or call 312-662-5750.
Attorney advertising material. General information about SBA loans, federal debt collection, and bankruptcy — not legal advice. Reading it creates no attorney-client relationship. Every case turns on its own documents and facts.
Nothing here is a promise, guarantee, or prediction about any result. Prior results do not guarantee a similar outcome. Bankruptcy relief is available only to those who qualify.
Federal regulations, SBA standard operating procedures, statutory debt limits, and collection practices change — sometimes on short notice, as the March 31, 2026 expiration of SBA’s servicing waiver demonstrates. Figures are current as of publication and should be verified before you rely on them.
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