Can You discharge Small Business Administration debts? It depends. The law does not prohibit you from declaring bankruptcy if you owe SBA loans. You just must meet certain criteria. For example, you must prove that you cannot make payments on the debts. Unlike federally guaranteed student loans, SBA loans do not have tax consequences. Also, once you have declared bankruptcy, the original lender and the SBA cannot collect on your debts. However, the lien left by the SBA on your property will survive the bankruptcy. You must pay or surrender the property pledged as collateral.
The US Bankruptcy Code governs the process of filing for bankruptcy. However, there are certain types of debts that the SBA does not directly make. For example, SBA loans are not specifically excluded from Chapter 7 bankruptcy. But, the Bankruptcy Code does specifically exempt certain types of debt. SBA loans do not fall under this category. So, if you owe this type of debt to your small business, you can discharge it in bankruptcy.
Many people make the mistake of thinking that SBA loans are not dischargeable in bankruptcy. In reality, the SBA loans are repayable by any other SBA-approved lender. However, even if you file bankruptcy, your SBA lender may pursue legal action to collect money owed to them. Hence, you must take care not to miss payments to avoid losing your assets. When filing for bankruptcy, be sure to declare your SBA loans as secured debt.