Starting a business is an admirable endeavor. For many entrepreneurs, if they don’t have the personal funds to bootstrap their business, or if their business idea was rejected by Venture Capital firms and Angel Investors, their last resort is a Small Business Administration loan through an SBA-approved lender.
As most small business owners know – a lot of businesses fail in their first five years and often it’s because of circumstances that are out of their control, such as economic factors. When a small business is struggling to make ends meet, the owner starts to think, “What will happen to my SBA loan? Can I include it in bankruptcy? Will I lose my collateral?”
A lot of small business owners mistakenly believe that SBA loans cannot be discharged in bankruptcy – that is not the case. Read on as we explain.
Discharging SBA Loans in Bankruptcy
SBA loans CAN be discharged in bankruptcy. However, if you were to default on the loan and do nothing, the lender can take legal steps to recover the money you owe. More than likely, the lender can garnish your wages, sue you, and place a lien on your property.
If you’re in a panic right now because you can’t keep up with your payments, you may be able to eliminate the debt by filing bankruptcy. Unlike certain types of student loans, SBA loans can be discharged through bankruptcy but there’s a catch. If you used something, such as your home as collateral to get the SBA loan, the bankruptcy cannot eliminate the lender’s security interest in your home, or whatever collateral you used to secure it.
While the lender can’t sue you to pay back the debt, it’s still entitled to the collateral that you used to secure the loan. Meaning, it can take back the property through repossession or foreclosure. So, if you include the SBA loan in a bankruptcy, the lender is legally entitled to enforce a lien against your property to recover some of its losses.