Quick Answer
If your debts are primarily business debts rather than consumer debts, the Chapter 7 means test does not apply to you at all. That means a former business owner earning a good salary can often file Chapter 7 and discharge a personally guaranteed EIDL in three to four months, even at an income level that would disqualify a consumer filer. Whether that is true for you depends on the ratio of business to consumer debt.
The Situation
The pattern is consistent enough to be predictable. The business did not recover after 2021. You wound it down, sometimes formally and sometimes by just stopping. You took a W-2 job to support your family, and things stabilized.
Then a letter arrived. The SBA, or a Treasury collection contractor, or a private collection agency working a Treasury account. Sometimes a notice of proposed wage garnishment, which is the one that gets people to pick up the phone, because the wages at risk are from the job that is currently holding everything together.
The reason this is happening now rather than three years ago is a policy change rather than anything you did. The SBA’s temporary permission to keep servicing defaulted COVID EIDLs in-house expired on March 31, 2026, after which the agency transferred a very large volume of pandemic-era loans to Treasury and the Department of Justice for collection.
Why Your Salary Probably Does Not Disqualify You
The most common reason people in this position never call a lawyer is a belief that they earn too much for Chapter 7. Usually that belief is wrong, and the reason is a provision most people have never heard of.
The means test lives in 11 U.S.C. § 707(b). Read the opening language carefully: it applies to a case filed by an individual debtor “whose debts are primarily consumer debts.” Consumer debt is defined in 11 U.S.C. § 101(8) as debt incurred by an individual primarily for a personal, family, or household purpose.
An EIDL is not that. Neither is a guaranty of an EIDL, a business credit card, a personal guaranty on a commercial lease, or a business line of credit. These are business debts.
If more than half of your total debt by dollar amount is business debt, the means test does not apply. Your income becomes largely beside the point for eligibility purposes. A former owner earning $180,000 with a $300,000 guaranteed EIDL and a $250,000 mortgage may well qualify for Chapter 7 outright, where a consumer filer at that income would not come close.
Two cautions. Your home mortgage counts as consumer debt, and it is often the largest single number on the list, so the ratio can be closer than you expect. And the calculation is done by dollar amount rather than by number of creditors. This is worth actually computing rather than estimating.
What Chapter 7 Does and What It Costs
For a person in this position, Chapter 7 is usually the right tool. It discharges the EIDL guaranty, business credit cards, remaining trade debt you guaranteed, and most other unsecured obligations, typically in three to four months from filing.
The automatic stay stops the garnishment immediately on filing.
What you give up is non-exempt property. Exemptions vary by state and the applicable set depends on where you have lived, which is governed by 11 U.S.C. § 522(b)(3)(A) and can be counterintuitive if you moved in the last two years. New Jersey, Pennsylvania, Delaware, and Florida each treat homestead and personal property very differently, and Florida’s homestead protection is among the most generous in the country. This is the single most important thing to review before filing if you own a home with equity.
When Chapter 13 Is the Better Answer
Chapter 13 makes sense in a narrower set of circumstances.
You have home equity you cannot exempt. Chapter 13 lets you keep it by paying creditors the value of what they would have received in a Chapter 7 liquidation, spread over three to five years.
You are behind on your mortgage. Chapter 13 is the mechanism for curing arrears over time while keeping the house. Chapter 7 does not do this.
You do not pass, and cannot avoid, the means test. If your debts are primarily consumer debts and your income is above the applicable threshold, Chapter 13 is the available chapter.
You have nondischargeable debt to manage. Recent taxes, for example, can be paid through a plan without interest accruing outside the plan.
Chapter 13 has debt ceilings under 11 U.S.C. § 109(e) that are adjusted for inflation every three years, and a large EIDL balance can exceed the unsecured limit and make you ineligible. Where that happens, an individual Chapter 11 becomes the alternative, which is more expensive and slower but available.
In Chapter 13, the EIDL guaranty is treated as a general unsecured claim. It receives whatever percentage your plan pays to unsecured creditors, which is frequently a small fraction, and the balance is discharged at completion.
The Sequencing Question Nobody Asks
Two timing decisions carry real consequences.
Tax refunds. Once your loan is in the Treasury Offset Program, your federal refund is a target. A refund already intercepted is generally not recoverable. A refund not yet intercepted can often be protected through exemptions if you file first. If you are carrying this into a filing season, the calendar is doing something to you whether or not you engage with it.
The wage garnishment hearing window. If you receive a notice of proposed administrative wage garnishment, requesting a hearing within 15 business days of the notice date generally prevents the order from reaching your employer while the hearing is pending. Requesting later still gets you a hearing, but the garnishment may begin. If a bankruptcy filing is a few weeks out, that window is worth using.
The Entity Question
If the company is still a registered entity, decide what happens to it.
A separate corporate Chapter 7 is often unnecessary. A corporation or LLC receives no discharge under 11 U.S.C. § 727(a)(1), so filing one accomplishes little for a dissolved shell with no assets. Where the entity holds assets that need orderly liquidation, or where there is a dispute among owners, a corporate filing may be warranted. Otherwise, formal dissolution under state law combined with your individual filing is usually the cleaner and cheaper path.
What does not work is leaving the entity in limbo. An administratively dissolved company with unpaid franchise taxes and an outstanding UCC-1 creates problems later, particularly if you intend to start something new.
Frequently Asked Questions
Will my employer find out?
Bankruptcy filings are public records, but employers are not notified and there is no reason for one to look. A wage garnishment, by contrast, goes directly to your payroll department. Filing is the more discreet option, not the less.
Can I be fired for filing?
No. Section 525 of the Bankruptcy Code prohibits discriminatory treatment based on a bankruptcy filing, including by private employers.
I have not been at my job long. Does that affect garnishment?
It may. A federal agency generally cannot garnish the wages of someone employed in their current job for less than 12 months who was involuntarily separated from their prior job.
What if I never signed a guaranty?
Then you may not need to file at all. Confirm your liability before doing anything else, because a meaningful number of borrowers being pursued personally are not personally liable.
Do I have to list my closed business in the filing?
Yes. Prior business interests, ownership, and closures within the lookback period are all disclosed. Complete disclosure is not optional and incomplete schedules cause far more problems than the facts they omit.
This article is general information and is not legal advice. Eligibility for relief under any chapter depends on your specific financial circumstances.