Are SBA Loans Dischargeable in a Chapter 7 Bankruptcy?

What Every Small Business Owner Needs to Know Before Filing

If your small business has been struggling and you’re considering filing for bankruptcy, you’re likely wondering: “Can my SBA loan be discharged in Chapter 7 bankruptcy?”

The answer: It depends. Here’s the full breakdown.

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💼 What Is an SBA Loan?

The U.S. Small Business Administration (SBA) offers loan programs to help entrepreneurs and small business owners start, grow, or recover their businesses. While these loans are partially backed by the government, they’re issued by partner lenders like banks and credit unions.

That means you’re on the hook for repayment, even if your business doesn’t survive.

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⚖️ Chapter 7 Bankruptcy 101

Chapter 7 is often called “liquidation bankruptcy.” It’s designed to give individuals and business owners a fresh financial start by wiping out unsecured debts—like credit cards and personal loans.

But what about SBA loans?

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📉 Are SBA Loans Considered Dischargeable Debt?

Here’s the key point:

SBA loans can be discharged in Chapter 7—but only under certain conditions.

Let’s break it down:

✅ SBA Loans May Be Dischargeable If:

• You personally guaranteed the loan

• The loan is unsecured (not backed by collateral)

• There’s no fraud, misrepresentation, or misuse of funds

❌ SBA Loans May Not Be Dischargeable If:

• The loan is secured by collateral (e.g., business equipment, property)

• You pledged personal assets (like your home or car) as security

• You committed fraud, failed to disclose assets, or used funds improperly

Even if the SBA loan is dischargeable, any lien or collateral tied to the loan may still be collected on, unless you take additional legal steps to address it.

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💡 Personal Guarantee vs. Business Liability

If you signed a personal guarantee for your SBA loan—as most borrowers do—then you’re personally responsible for paying it back, even if your business entity files bankruptcy.

But the good news? Chapter 7 can discharge your personal liability, giving you a fresh start.

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🔒 What Happens to Collateral Securing the Loan?

If your SBA loan is secured, you can’t just wipe away the lien with bankruptcy. The lender may still repossess or foreclose on any pledged assets unless you:

• Reaffirm the debt

• Redeem the asset (pay fair market value)

• Negotiate a settlement outside of bankruptcy

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👩🏽‍⚖️ Should You File Chapter 7 on an SBA Loan?

If your business has closed or is underwater, and you’re personally drowning in debt, Chapter 7 could be a lifeline. It won’t erase everything, but it can eliminate personal liability and help you reset your financial future.

As a bankruptcy attorney serving clients in California and Nevada, I’ve helped hundreds of entrepreneurs navigate this exact situation.

You don’t have to do this alone.

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📞 Next Steps: Let’s Talk

If you’re unsure whether your SBA loan is dischargeable, or if Chapter 7 is the right fit for your situation, schedule a free consultation today.

🌐 www.LiverpoolLegal.com

📱 818-714-2200

💌 Let’s get you back into alignment—with clarity, confidence, and peace.