Can You Wipe Out A Small Business Administration (SBA) Loan in Bankruptcy?
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.
