SBA Loans and Chapter 7 Bankruptcy

An SBA Loan is a loan from the Small Business Administration that is backed by the U.S. Small Business Administration. To qualify the business must be for profit, doing business in the United States, and creditworthy. That last part is very important, and you will see why. The first and most important question is whether an SBA loan is dischargeable. The answer is yes; however, the SBA lender can file an adversarial proceeding asking the bankruptcy court to find the debt non-dischargeable.

This is where the creditworthy requirement becomes important. The usual basis for an adversarial proceeding by an SBA lender is that the SBA loan was obtained by fraud. Under the bankruptcy code a discharge “does not discharge an individual debtor from any debt…for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained, by…use of a statement in writing…(i) that is materially false; (ii) respecting the debtor’s or an insider’s financial condition; (iii) on which the creditor to whom the debtor is liable for such money, property, services, or credit reasonably relied; and (iv) that the debtor caused to be made or published with intent to deceive.

When a person seeks out an SBA loan, they will present documents and writings showing that the business is creditworthy. If any of that information is “materially false” then an adversarial proceeding will most certainly be filed. This is bad not only because the debt will not be discharged but it could open up criminal liability as well.

A debtor should think long and hard before filing bankruptcy to discharge an SBA loan.