Can Sba Loans Be Discharged In Bankruptcy?

Small Business Administration (SBA) loans provide essential funding for entrepreneurs, but what happens when the borrower files for bankruptcy? Are SBA loans dischargeable in bankruptcy? This is a complex topic that requires a careful examination of the bankruptcy code and…

Small Business Administration (SBA) loans provide essential funding for entrepreneurs, but what happens when the borrower files for bankruptcy? Are SBA loans dischargeable in bankruptcy? This is a complex topic that requires a careful examination of the bankruptcy code and SBA loan requirements. In this article, we’ll explore the ins and outs of SBA loan dischargeability in bankruptcy and what small business owners need to know. So, whether you’re a borrower struggling with SBA loan payments or an attorney advising clients on bankruptcy options, keep reading to learn more about this important issue.

Can Sba Loans Be Discharged in Bankruptcy?

Can SBA Loans Be Discharged in Bankruptcy?

If you are a small business owner who has taken out a Small Business Administration (SBA) loan and are facing financial difficulties, you may be wondering if your loan can be discharged in bankruptcy. Unfortunately, the answer is not a simple one.

Understanding SBA Loans

SBA loans are provided by the Small Business Administration to help small businesses start, grow, expand, and recover from disasters. These loans are backed by the federal government, which means that if a borrower defaults on their loan, the government will pay a portion of it back to the lender.

The Types of SBA Loans

There are several types of SBA loans, including:

  • 7(a) loans: general-purpose loans for small businesses
  • 504 loans: loans for real estate and equipment purchases
  • Microloans: small loans for startups and growing businesses

The SBA Loan Repayment Process

SBA loans are usually repaid over a period of years, with monthly payments. If a borrower defaults on their loan, the SBA will try to collect the debt. If they are unable to do so, they may turn to the federal government for reimbursement.

The Bankruptcy Process

Bankruptcy is a legal process that allows individuals and businesses to eliminate or repay their debts under the protection of the bankruptcy court. There are two types of bankruptcy that individuals can file for: Chapter 7 and Chapter 13.

Chapter 7 Bankruptcy

In Chapter 7 bankruptcy, a debtor’s assets are liquidated to pay off their debts. The debtor’s remaining debts are then discharged, meaning they are no longer responsible for paying them. However, not all debts can be discharged in Chapter 7 bankruptcy.

Chapter 13 Bankruptcy

In Chapter 13 bankruptcy, the debtor creates a repayment plan to pay off their debts over a period of three to five years. Once the repayment plan is complete, any remaining debts are discharged.

SBA Loans and Bankruptcy

Unfortunately, SBA loans are not typically dischargeable in bankruptcy. This is because they are backed by the federal government, which means that the government will have to pay back the lender if the borrower’s debt is discharged.

The Exceptions

There are some exceptions to this rule. If you can prove that paying back your SBA loan would cause you undue hardship, you may be able to have it discharged in bankruptcy. However, this can be difficult to prove.

The Benefits of SBA Loans

While SBA loans may not be dischargeable in bankruptcy, they do offer several benefits to small business owners. These include:

  • Lower interest rates than traditional loans
  • Longer repayment terms
  • Access to capital that may not be available through traditional lenders

SBA Loans vs. Traditional Loans

When comparing SBA loans to traditional loans, there are several factors to consider. SBA loans often have lower interest rates, longer repayment terms, and are easier to qualify for than traditional loans. However, they can also take longer to obtain and may require more paperwork.

Conclusion

In conclusion, SBA loans are not typically dischargeable in bankruptcy. However, there are exceptions to this rule. If you are struggling with an SBA loan, it is important to speak with a bankruptcy attorney to explore your options. While SBA loans may not be dischargeable, they do offer several benefits to small business owners.

Frequently Asked Questions

What is an SBA loan?

An SBA loan is a loan made by a bank or other financial institution that is guaranteed by the Small Business Administration (SBA). These loans are designed to help small businesses get the financing they need to start or grow their business.

SBA loans can be used for a variety of purposes, including working capital, purchasing equipment or inventory, buying real estate, and refinancing existing debt.

What happens to an SBA loan in bankruptcy?

While SBA loans are backed by the government, they are not immune to being discharged in bankruptcy. If you file for bankruptcy and have an SBA loan, the bankruptcy court will consider the loan just like any other debt you owe.

However, discharging an SBA loan in bankruptcy can be more difficult than other types of debt. This is because the SBA has specific rules and regulations governing the discharge of their loans, and they may fight harder to prevent the loan from being discharged.

Can an SBA loan be included in a Chapter 7 bankruptcy?

Yes, an SBA loan can be included in a Chapter 7 bankruptcy. In a Chapter 7 bankruptcy, most of your debts will be discharged, including your SBA loan, as long as you meet the eligibility requirements.

However, it’s important to keep in mind that the SBA may challenge the discharge of the loan, and you may need to hire an attorney to help you navigate this process.

Can an SBA loan be included in a Chapter 13 bankruptcy?

Yes, an SBA loan can be included in a Chapter 13 bankruptcy. In a Chapter 13 bankruptcy, you will create a repayment plan to pay back your debts, including your SBA loan, over a period of three to five years.

However, it’s important to keep in mind that the SBA may challenge the discharge of the loan, and you may need to hire an attorney to help you navigate this process.

What are the consequences of defaulting on an SBA loan?

If you default on an SBA loan, the consequences can be severe. The SBA may seize your assets, including your business, and sell them to pay off the loan.

In addition, defaulting on an SBA loan can damage your credit score and make it difficult to get financing in the future. The SBA may also pursue legal action against you to collect the debt.

Do SBA Loans Get Wiped Out in Bankruptcy?


In conclusion, the answer to whether SBA loans can be discharged in bankruptcy is not a straightforward one. It depends on several factors, including the type of bankruptcy filed, the nature of the loan, and how it was used. While it may be possible to discharge an SBA loan in bankruptcy, it is not always a guaranteed outcome.

That being said, individuals and businesses facing financial difficulties should not be discouraged from exploring bankruptcy as an option. Even if an SBA loan cannot be discharged, bankruptcy may still provide relief in the form of restructuring or repayment plans.

It is important to consult with a bankruptcy attorney who can help assess your specific situation and guide you through the process. With the right guidance and support, individuals and businesses can overcome financial challenges and move forward towards a brighter financial future.

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