Can You Discharge an SBA Loan in Bankruptcy?

(Note: The author is not an attorney and this article should not be construed as legal advice.)

This question seems to come up a lot, so I figured that it’s time to address it with an article. The best way to answer the question is this way: In bankruptcy, SBA guaranteed debt is treated like any other debt. It gets no special treatment because it carries an SBA guarantee. In many cases, the fact that the loan is SBA guaranteed never enters the equation. Why? Because when someone files for BK protection, they are required to create a list of creditors, which is a list of everyone they owe money to. So when a debtor lists their SBA loan, they don’t list the SBA as a creditor, they list the originating lender. In order words, if I have an SBA guaranteed loan from the Bank of Jason Tees, then I list The Bank of Jason Tees as the creditors, not the SBA.

So if an SBA loan can be discharged, why would anyone ever bother to settle?

– In some cases, it will be cheaper to settle than to pay a BK attorney to file for BK.

– Many people won’t qualify for BK because of their income or assets.

– Filing BK will kill your credit for years to come, and every lender will know you filed for BK for at least 7 years.

– BK does not discharge liens on collateral, so if you pledged your home, filing for BK won’t release your home.

Let’s keep in mind that when I say that an SBA loan can be discharged, I’m mainly talking about unsecured debt. If you owe money on an SBA loan and that loan is secured with real estate or some other valuable assets, filing for bankruptcy will not get you off the hook. In many cases, the lender just needs to prove to the court that there is value in the assets, and the court will allow the lender to go ahead and foreclose. The point here? Bankruptcy is not a “cure all” solution to working out your SBA debt issues.

The only way that I’ve seen an SBA not get discharged was when fraud was suspected. In those situations, the banks actually filed something called a “non-dischargeability action”, claiming that the loan was made under false pretenses. In most cases, the bank claims that the borrower lied on the loan application, and that had the borrower told the truth, the bank would not have granted the loan. Interestingly, all the attorneys I’ve spoken to about this tell me that proving fraud can be difficult and costly for the lender, especially if the borrower claims that someone else signed the loan application on their behalf.

Overall, I always advise prospective clients to do their homework and explore all options, because there are some cases where bankruptcy is the right path, and other situations where the borrower would be better off attempting to settle their debt.