Discharge an SBA Loan in Bankruptcy Like Any Other Unsecured Debt
SBA Loans: Not Excepted from Discharge by The Bankruptcy Code
Unless a debt is one of the specific types of debt specifically excepted from the Chapter 7 or Chapter 13 bankruptcy discharge by Section 523 of The Bankruptcy Code (the Federal law governing the bankruptcy process in the U.S.), it is dischargeable. Among the non-dischargeable debts found in that Section, such as child support or recent tax obligations, nowhere to be found are SBA or Small Business Administration loans.
Thus, an SBA loan, as a matter of personal liability, is dischargeable through Chapter 7 or Chapter 13 bankruptcy. That means that, after a Chapter 7 or Chapter 13 process is completed, you no longer have any personal obligation to repay the debt for the remainder of your life.
That doesn’t mean, however, that the business which may be co-obligated to the debt, is free and clear from SBA collections procedures.
SBA Loans: Collateral and Business Assets Still at Issue
A personal Chapter 7 or Chapter 13 bankruptcy filed by a business owner personally will discharge their individual, personal obligations to repay debt incurred by the business which he or she may have personally guaranteed (most small business loans do require a personal guarantee).
That does not mean that the personal bankruptcy discharges the liability of the business entity itself, if the business has been organized as a separate corporate or other entity. If that is so, the business is a separate legal person which has not itself filed a bankruptcy just because its owner personally has. It remains liable for any debt it separately owes, including SBA loans.
Additionally, discharge of any secured debt (a debt with collateral attached such as a home mortgage or car loan) through Chapter 7 or Chapter 13 bankruptcy will discharge the filing debtor’s personal liability—but it never means that the debtor gets to keep the collateral if they are no longer making payments on the debt it secures. (If you discharge a mortgage in bankruptcy, in other words, you don’t get a free house out of the deal! The bank holding the mortgage can still foreclose to reclaim the house—its collateral.)
The SBA, likewise, can still proceed to reclaim any collateral which secures its loan. The assets of the business, therefore, may be subject to repossession or seizure after a bankruptcy, even if the SBA cannot proceed to collect any money from the person filing the Chapter 7 or Chapter 13.
SBA Loans and Bankruptcy: The Bottom Line
The bottom line is that, if you are a business owner holding SBA or other business loans and are considering filing for bankruptcy, you should consult an experienced bankruptcy attorney—particularly if your hope is to continue operating the business during and after the bankruptcy. Business assets are at issue not only with regard to the Small Business Administration, but, more vitally, with regard to the Chapter 7 Trustee, who may take your business and dissolve it out of existence.
If you are a Michigan resident and would like to explore your options for a Chapter 7 or Chapter 13 bankruptcy with an experienced Michigan bankruptcy attorney, please contact us at (866) 674-2317 or click the button below to schedule a free, initial consultation.
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