Can SBA Loans Be Discharged in Bankruptcy?

Written By: Emil FleysherApril 5, 2022


Building a small business comes with huge risks and investments. Often, financial resources are insufficient to support a business. This challenge will prompt you to seek assistance or loans to keep your business running. Unfortunately, it doesn't always end well. You may find yourself asking "can SBA loans be discharged in bankruptcy?" Understanding the specific information related to loans and loan removal is crucial if this is your case.

This blog post covers the information you need to understand when revoking a small business loan.

SBA Loan: What You Need to Know!


An SBA loan is a business loan program by the government the Small Business Administration. The SBA eases the risks for financial institutions when providing loans to small business owners.

SBA is not the one providing the loan to a small business owner. The SBA has a network of partnerships with multiple financial institutions, such as traditional banks.

To apply for an SBA loan, you will need to initiate a loan application to a lender (i.e., the financial institution). The lender will apply to SBA for a loan guarantee. If the SBA approves the loan guarantee, the government will pay the lender a partial amount of up to 85% when you default.

You will also need to file a personal guarantee when applying for an SBA loan. A personal guarantee allows the department to seize your personal assets if your business cannot repay the loan.

Suppose that your business went bankrupt. In that case, you can file for bankruptcy relief. Can SBA loans be discharged in bankruptcy? The answer is probably yes. Filing for bankruptcy relief may release you from the SBA loan obligations.

Discharging SBA Loans in Bankruptcy


Discharging SBA loans in business bankruptcy is possible. If you wish to eliminate your SBA loan, you will need to file for bankruptcy before it's too late. Once you default on the loan, the lender can take legal action to recover their loss.

However, discharging SBA loans in bankruptcy is not necessarily secure. Although bankruptcy can revoke your loan, it cannot remove the lender's security interest in the collateral property you pledged, such as personal and business assets.

The lender may lose its right to pursue legal action against you. However, they can implement liens against the collateral property to recover their losses.

Bankruptcy Does Not Eliminate SBA Loan Security Interests

As established above, business or personal bankruptcy does not relieve the lender's security interest. Your liabilities can be classified into two different types of debts.

  • Secured debt: These debts pertain to your collateral properties. Liabilities classified here are subjected to foreclosure or repossession. A good example of secured debts are mortgages and car loans.
  • Unsecured debt: Unlike secured debts, unsecured debts are not protected by a lien. When a borrower defaults on unsecured debt, the lender will not be able to recover their losses. For this reason, unsecured debt has a significantly higher interest rate.

Bankruptcy relief does not guarantee asset security. The lender may not be able to sue you for their losses. However, they can still repossess your collateral property.

Points to Remember When Discharging an SBA Loan


An SBA loan is not so different from most debts. The Bankruptcy Code allows borrowers to discharge a small business loan. However, there are important terms you need to keep in mind when removing an SBA loan.

Determine Which of Your Assets Are Secured by the SBA Loan

When applying for bankruptcy, you first need to determine which of your assets are secured by the SBA loan. This includes any personal property or assets used as collateral for the loan.

When you take out an SBA loan, the government may place a blanket lien on your personal assets. This means that the government has a security interest in all your property. The SBA can seize them if you fail to repay the loan.

A blanket lien is different from a regular lien. A regular lien is specific to a particular asset. In contrast, a blanket lien gives the lender authority over all your assets.

If you have any questions about this process, it is best to consult with a bankruptcy lawyer. An attorney can help you understand your rights and guide you through your bankruptcy case.

Discharge Paycheck Protection Program Funding or SBA Loan in Bankruptcy Provided Under the CARES Act


The CARES Act is a stimulus package signed into law in response to the COVID-19 pandemic. The package provides aid to individuals, businesses, and state and local governments.

One of the key regulations of the CARES Act is the Paycheck Protection Program (PPP) loans. The PPP aims to assist small business owners in keeping their businesses running during the pandemic. You can use PPP loans for business-related expenses (e.g., salary, rent, utilities).

The CARES Act does not require a personal guarantee. This means that you don't need to file bankruptcy individually if your business fails to pay the PPP loan.

Thoroughly Analyze Strategy to See if the Small Business Administration Loan Can Be Modified or Restructured in Bankruptcy

Restructuring or modifying an SBA loan is possible under certain circumstances. The Bankruptcy Code lays out all the information you need to understand how bankruptcy affects your small business loan. A bankruptcy attorney can assist you in navigating the law. They can help you find the best way to modify your current SBA loans.

Planning to Obtain an SBA Loan After Bankruptcy? Here Are Some Tips for You


On the other note, if you are planning to avail a Small Business Administration loan, here are some tips to help you get started.

Obtaining an SBA loan after you file bankruptcy may be more challenging than filing for the first time. But it is possible.

Your bankruptcy record will appear in your credit report for seven (7) to ten (10) years. Bankruptcy is a significant financial hurdle, and it can hold you back from obtaining loans or financial assistance.

Seeking assistance for your small business is more complicated with a bankruptcy record. You need to present your case effectively to obtain an SBA loan again.

Prepare to Present a Business Plan

You will need to show your potential lenders that you have a solid and foolproof business plan. Establishing a strategic business plan will improve your lenders' trust in your business and your ability to pay loans.

In addition, it's also best to explain to your lenders why you need to file bankruptcy before and how your financial status has changed today.

Prepare yourself to answer challenging questions. Keep in mind that you are in a tough spot right now. Potential lenders will rigorously assess your ability to manage your debts and scrutinize your business plan.

Keep Your Debt Low After The Bankruptcy Discharge


Bankruptcy allows you to start back at square one. This means that you are no longer responsible for the debts incurred before you filed your bankruptcy case. You can even discharge SBA loans in bankruptcy.

You can take advantage of this 'clean slate' by minimizing your current and future debts. As much as possible, keep your debt to a manageable level. Furthermore, potential lenders are more inclined to lend money to financially responsible business owners.

Providing solid proof such as a positive statement of account helps establish that you are now in a better financial situation.

Prepare Factual Explanations

When applying for an SBA loan, you must prepare yourself to respond to challenging questions. This includes providing factual explanations for any financial difficulties your business may have encountered in the past.

Some potential lenders may be hesitant to lend money to businesses with a history of bankruptcy. Suppose you want to heighten your odds of getting approved for an SBA loan. In that case, it is essential to explain why you filed for bankruptcy.

Moreover, a clear explanation of how you have rectified the situation can further improve your chances. Lenders want to see that you have taken steps to improve your financial situation and are now in a better place to repay a loan.

Demonstrate Consistent Income


A constant income shows the lender that you can repay the loan regularly. In addition, it also indicates that they are not diving into a significant risk by lending you money.

If your business has encountered financial difficulties in the past, you may want to consider waiting until your financial situation has improved before you apply for an SBA loan. This will demonstrate to the lender that you can manage your debts and are serious about repaying the loan.

Bankruptcy can be a major setback for your small business. However, it doesn't mean that you cannot apply for an SBA loan again. There are ways to boost your chances of obtaining an SBA loan.

Additional Tips

Potential lenders look at various factors before approving your loan. Aside from your credit history, they may also factor in your total monthly income, total debt in the past, the estimated value of the loan, and other factors. Here's what you can do if you're finding it hard to apply for a loan:

  • Consider alternative lending options: Traditional banks may use your bankruptcy to reject your loan application. You may consider going to credit unions to seek financial assistance for your business.
  • Wait for your time: Your bankruptcy record will show up on your credit report for up to ten (10) years. Waiting until your history clears up might be your only option.
  • Look for a co-signer: A traditional bank may allow you to apply for a loan if you have a cosigner. Your co-signer must be someone with an established credit record since they will take the fall if you default.

Contact a Bankruptcy Lawyer if You Need Further Assistance | We'd Be More Than Happy to Help You Discharge Your SBA Loan in Bankruptcy


A bankruptcy case is unlike other business-related matters. Seeking professional help is the best way to proceed in this situation. We can help you seek bankruptcy or debt relief to discharge your loans.

Our lawyer has extensive knowledge of Chapter 7 and 13 Bankruptcy, Debt Settlement, and Asset Protection. We can help you construct a solid legal defense for your case.

Our law firm values the attorney-client relationship, and we assure you that we will handle all case details with confidentiality. Call The Law Offices of Emil Fleysher now at 888-886-0020 for a free evaluation. You can also schedule a consultation using our website's contact page.

Request A
Free Consultation

"*" indicates required fields


*Required Fields

This field is for validation purposes and should be left unchanged.
Cape Coral
Deerfield Beach
Lake Worth
Palm Beach Gardens
Port St. Lucie
chevron-down linkedin facebook pinterest youtube rss twitter instagram facebook-blank rss-blank linkedin-blank pinterest youtube twitter instagram