Can You Discharge an SBA Loan in Bankruptcy?

Bankruptcy discharges your unsecured debt.  If you have a secured loan, the only way to discharge the loan is to surrender the security.  Many small business owners are having a hard time staying in business and paying their SBA loans.  A large number of these businesses have had to file Chapter 7 or Chapter 13 bankruptcy.  There is a myth that all government loans are not dischargeable in bankruptcy. That is not true.  A SBA loan bankruptcy discharged is allowed if it is an unsecured debt.  However, if your SBA loan is secured by personal or business assets, only the portion of the remaining loan balance that is not secured by assets is allowed to be discharged, unless you surrender those assets.  The only government loan that cannot be discharged in bankruptcy is a student loan, although there may be exceptions if there is no possibility of the individual being able to repay the loan and/or the person is permanently disabled. You should speak with a bankruptcy attorney to determine which bankruptcy Chapter you need to file under.   

Chapter 7

Individuals and businesses can file under Chapter 7, which is a complete liquidation.  There is no minimum debt limit. Chapter 7 allows you to get rid of all your debt, except statutory excluded debts, and start fresh.  SBA loan bankruptcy discharge is allowed.  You may be able to keep your home, car and some personal assets if they are exempted under the bankruptcy statutory exemption laws.

Chapter 13

Chapter 13 is used by businesses to reorganize if they want to keep the business running and retain business assets.  The business must enter into a court-approved reorganization of debt payment plan with creditors.  Generally, your creditors will agree to reduce your debts, which are repaid over a 3-5 year period.  In order to file under Chapter 13, the amount of your secured debt as of April 1, 2010, cannot exceed $1,081,400 and unsecured debt cannot exceed $360,475.  If your debt exceeds these limits, you can file under Chapter 7 for an individual or business and Chapter 11 for an individual.

Statutory Debts that Cannot Be Discharged in Bankruptcy

Certain debts cannot be discharged in bankruptcy.  The most common types of debts that cannot be discharged include:  

• Taxes and tax liens (exception for federal taxes that are 3 years or older)
• Student loans (See also Instances which Student Loans Are Discharged)
• Alimony and child support  
• Debts obtained through fraud
• Debts for willful and malicious injury
• Government fine and penalties
• Debts for judgments in wrongful death or personal injury lawsuits 
• Condominium fees or assessments

Hire a Bankruptcy Attorney 

Bankruptcy matters should be handled by a bankruptcy attorney.  The attorney can answer your questions regarding SBA loan bankruptcy discharge and other bankruptcy questions.  A bankruptcy attorney can prepare the bankruptcy petition, all other documents and represent you in court.