FEMA and SBA Loan Recapture in Texas Bankruptcy Cases

 Posted on November 07, 2025 in Bankruptcy

Following a Texas natural disaster, such as a hurricane, flood, or wildfire, financial help from the Small Business Administration (SBA) and FEMA can be a true lifeline. Unfortunately, for some, this relief can later turn into yet another hardship. Texans are receiving recapture letters, demanding repayment of disaster grants or loans months or even years after rebuilding is complete.

Should those debts become unmanageable, bankruptcy relief may end up being the only option. It is important to have a full understanding of how FEMA and SBA debts are treated in Texas bankruptcy courts, what determines whether those debts are dischargeable, and how you can prepare before filing for bankruptcy. A highly skilled Wise County, TX bankruptcy lawyer can help you navigate these debts during bankruptcy.  

When SBA Disaster Assistance Could Require Repayment

SBA loans, including EIDL and 7(a) loans, do not have special priority under the U.S. Bankruptcy Code and are treated like other government debt. The personal liability for an SBA loan can be discharged in a personal bankruptcy, either Chapter 7 or Chapter 13. If the SBA placed a lien on a specific business or personal asset, the lien will usually survive the bankruptcy discharge.

The SBA may not sue the debtor personally for the remaining debt, but it can foreclose or seize the pledged collateral.  Many SBA loans require a personal guarantee, making the business owner personally liable. Filing for personal bankruptcy can discharge this liability, but liens would remain intact.

If the SBA can prove the loan was obtained through fraud or material misrepresentation, such as false information on the original application, the debt may be deemed non-dischargeable. If the debtor files Chapter 11 or Chapter 13 bankruptcy, the loan may be restructured into a manageable court-approved repayment plan.

When FEMA Grants Could Require Repayment

FEMA grants provide direct housing, repair, and emergency funds, and, typically, these funds do not require repayment unless they are later found to be ineligible. This means that recipients of FEMA grants are not typically subject to "recapture" in the same way a loan is collected; however, FEMA cannot duplicate benefits from other sources, such as insurance or an SBA loan.

Therefore, if a person receives a FEMA grant and later receives funds from another source for the same purpose, that individual may be required to return the FEMA funds. If an applicant is later deemed ineligible or overcompensated, FEMA may instigate recapture or "clawback" procedures. This generally occurs only when there were errors in income verification or the individual allegedly misrepresented material facts during the application.    

Can FEMA Grants and SBA Assistance Be Discharged Through Bankruptcy?

Unless the claim is based on fraud, FEMA recapture debts are generally classified as unsecured government claims and can be discharged during a Chapter 7 or Chapter 13 bankruptcy. If an SBA loan is unsecured, it can potentially be discharged, but if it is secured by home or business assets, the agency can place a lien on those assets.

Secured liens survive discharge unless the property is surrendered or redeemed. If the SBA proves that fraud or misuse of funds has occurred, the discharge can be blocked. It is essential to wait until all recapture claims are finalized before filing for bankruptcy so that they can be included in the petition. Additionally, all disaster assistance must be fully disclosed on bankruptcy schedules, as any omission could appear intentional.

Contact an Arlington, TX Bankruptcy Lawyer

Texas disaster survivors can face more disruptions to their lives when a FEMA or SBA recapture notice arrives. Thankfully, bankruptcy laws do provide financial relief for honest debtors, whether through Chapter 7 liquidation or Chapter 13 repayment.

Speaking to a Wise County, TX Chapter 13 bankruptcy attorney from Acker Warren P.C. can help you eliminate or restructure these federal debts and move forward. Our clients always speak with an attorney, rather than a paralegal. In many cases, we can complete a bankruptcy case virtually, with an extremely fast turnaround. Call 817-752-9033 to schedule your free consultation.