The Short Answer
Yes, an SBA loan is a dischargeable debt in personal bankruptcy. If you personally guaranteed the loan — which is almost always required — you can wipe out that personal liability in either Chapter 7 or Chapter 13. In Chapter 7, discharging the debt means the SBA and the lender can no longer come after you personally if the business defaults. Keep in mind, though, that discharging an SBA loan in bankruptcy will likely prevent you from obtaining a new SBA loan in the future if you want to start another business.
The short answer is, yes, a Small Business Administration (SBA) loan is considered a dischargeable debt.
New entrepreneurs or small business owners who are looking to revamp their business sometimes need an additional guarantor on a loan, due to certain factors, such as not having enough collateral. A guarantor takes responsibility for the debt and promises that the loan will be paid back in full. The Small Business Administration (SBA) is a government funded entity that was created to encourage and support the success of small businesses. The SBA can guarantee up to 85% of the loan, leaving 15-20% to the small business owner to provide evidence of collateral, in addition to proving there will be sufficient cash flow from the proposed business to make the necessary monthly payments. The more risk involved with the success of the business, the smaller the percentage the SBA loan will be cover. This is of course necessary just in case the loan goes into default.
An SBA loan has 5 different headings that owners may apply under: 7(a) loan, the 504 economic Development loan, microfinance loan, disaster recovery loan, and the special purpose loan. A small business owner or a new entrepreneur may apply for a loan at a lending institution of their choosing. From there, the lending institution may require the business to apply for one of the SBA loans in order to guarantee the loan.
When filing for bankruptcy, depending upon the type of bankruptcy you file, you may be required to include all of your debts (and you should probably list down all of your debts either way). If you file a Chapter 13 bankruptcy you must list down the SBA loan as a personal debt, if you personally guaranteed the debt, which you almost always do. In a Chapter 7 bankruptcy you can choose to list the SBA loan and discharge the debt so they cannot collect from you personally if the business defaults on the loan. However, if you discharge the debt personally and the businesses defaults on the loan you probably will not be able to get a new SBA loan in the future if you try to restart your business.
Again, a loan from the Small Business Administration may be discharged in a personal bankruptcy. They may, however, still come after the business to try to collect on the debt if the business defauls on the loan and has assets.
Key Takeaways
- An SBA loan is treated as a dischargeable personal debt in bankruptcy if you signed a personal guarantee, which nearly all SBA borrowers do.
- In Chapter 7, discharging the SBA loan eliminates your personal liability, but the lender may still pursue the business itself for repayment if the business has assets.
- In Chapter 13, the SBA loan must be listed as a personal debt and is handled through your repayment plan, potentially allowing you to catch up or restructure what you owe.
- Discharging an SBA loan in bankruptcy will very likely disqualify you from receiving a new SBA loan in the future, which is a serious trade-off if you plan to restart a business.
- SBA loans come in several types — 7(a), 504, microfinance, disaster recovery, and special purpose — but the type of loan does not change whether it can be discharged in bankruptcy.
- You should list every debt, including SBA loans, when you file — omitting a debt does not protect it and can create serious legal problems.
Attorney Insight
The trade-off I make sure every small business owner understands before we file is this: discharging an SBA loan clears your personal liability, but it also closes the door on future SBA financing — potentially for good. I've had clients who discharged the debt, got back on their feet, and then couldn't access SBA programs when they were ready to try again. If restarting a business is part of your long-term plan, that consequence has to factor into which path you choose. The relief is real, but so is the cost.
