Can EIDL Loans Be Discharged in Bankruptcy in California?

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Can EIDL Loans Be Discharged in Bankruptcy in California?

If you received an Economic Injury Disaster Loan (EIDL) during the pandemic and are now facing financial struggles, you may be asking: “Can I include my EIDL loan in bankruptcy?” The good news is yes — EIDL loans are dischargeable in bankruptcy. There’s no special rule in the Bankruptcy Code that makes them different from credit cards, personal loans, or medical bills.

But as with most areas of bankruptcy, there are important details to understand, especially if you live in California.

How EIDL Loans Are Treated in Bankruptcy

When you file for bankruptcy, a trustee is assigned to review your case. The trustee’s job is to determine whether any of your loan money or assets can be used to repay creditors. Think of the trustee like a financial detective: they will review your bank statements, financial records, and investments to see where the EIDL loan funds went.

If you spent the money on normal living expenses — rent, utilities, food, or payroll — that usually won’t be an issue. Most of us pay with debit or credit cards, so the records are already there. But if you withdrew large amounts of cash or can’t account for how the funds were used, the trustee may ask tough questions.

What If You Invested Your EIDL Loan Funds?

Many business owners and individuals invested their loan money in stocks, cryptocurrency, or other markets. If those investments lost value, that’s usually fine — as long as you can show the records.

Here in California, bankruptcy law allows you to protect certain assets using exemptions:

• Jewelry and heirlooms: up to about $9,000

• Wildcard exemption: roughly $30,000 that can be applied to property like cars, savings, crypto, or other assets

• Vehicle exemption: about $7,500 for a car

These exemptions can help shield what’s left of your investments, but the limits matter. For example, if you paid off two cars worth $15,000 each, you could only protect part of their value under the standard vehicle exemption, and the rest would need to be covered by your wildcard.

Why Disclosure Is Critical

In bankruptcy, the rule is simple: disclose, disclose, disclose. If you hide assets, move money around, or fail to keep proper records, you risk losing your discharge — and in extreme cases, you could even face legal consequences.

On the other hand, if you’re open and honest about where the EIDL money went, even if it was lost on living expenses or poor investments, the system is designed to give you a fresh start.

Do UCC-1 Liens Affect Your Bankruptcy?

Many EIDL loans came with UCC-1 financing statements, which act as liens on business property. The good news is that in most cases, these liens do not attach to your real estate.

• If your business closed and has no assets left, the lien likely won’t matter.

• If you were a sole proprietor, the lien could extend to some personal property, so it’s important to review your loan paperwork carefully with a bankruptcy attorney.

The Bottom Line on EIDL Loans and Bankruptcy in California

So, can EIDL loans be discharged in bankruptcy? Yes, they can. The key is to keep records, disclose everything, and work with a knowledgeable California bankruptcy attorney who understands how to protect your exemptions and guide you through the process.

If you spent your EIDL loan on living expenses or lost it in investments, you’re not alone — thousands of Californians are in the same position. Bankruptcy can still wipe out your EIDL debt and give you the clean slate you need.

✅ Need help with an EIDL loan and bankruptcy in California? Contact our office today for a free consultation. We’ll review your situation, explain your options, and help you take the next step toward financial freedom.

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