What Happens to Your SBA Loan if You File for Bankruptcy?

With rising costs, inflation and general economic uncertainty, some small-business owners may find it increasingly difficult to keep up with their SBA loan payments. If you’re considering bankruptcy, it’s important to know that SBA loans don’t automatically go away. How they’re treated depends on the type of bankruptcy you file, your loan terms and whether you personally guaranteed the debt.

Although SBA loans are backed by the federal government, they’re treated much like other business debts when you file for bankruptcy. A common misconception is that SBA loans cannot be discharged, or erased, through bankruptcy — but in reality, they can be, depending on the type of bankruptcy you file and how the loan is structured.

Chapter 7 bankruptcy, also known as liquidation bankruptcy, is the most common type of bankruptcy. Under Chapter 7, the business typically shuts down and its assets are sold off to repay creditors.

If your SBA loan is unsecured, the remaining balance can often be discharged along with other unsecured debts. But, if the loan is secured by collateral, such as equipment or real estate, that collateral must usually be given up or sold to repay the lender.

Personal guarantees can complicate the process. If the business files for bankruptcy but you signed a personal guarantee, the SBA or its lending partner can still pursue you for any unpaid balance. In that case, you would need to file for personal bankruptcy to discharge the debt.

For secured loans, if the sale of your assets doesn’t fully cover the loan balance, the SBA can also pursue you (or other guarantors) for the remaining amount. Once again, filing personal bankruptcy is typically the only way to eliminate that outstanding debt. If the debt remains unpaid, the SBA may send it to the Treasury Department for collection — which means the government can garnish your wages, withhold tax refunds or seize Social Security benefits to recover what you still owe.

A Chapter 11 bankruptcy, also known as reorganization bankruptcy, allows a business to remain open while repaying its debts under a court-approved plan.

For SBA loans, this means the debt is not erased but restructured — often by extending payments, lowering the interest rate or adjusting terms as part of the plan.

If your SBA loan is secured, the collateral is typically protected while you make payments. The SBA or lender won’t seize assets as long as you’re following the plan, but they’ll keep a lien in place until the debt is fully repaid.

The same treatment generally applies to personal guarantees. As long as payments continue under the restructuring plan, the SBA typically will not pursue guarantors. However, guarantors remain legally responsible for the debt unless they file for personal bankruptcy themselves.

Chapter 13 bankruptcy can be filed only by individuals — including sole proprietors with business debt — but not by LLCs or corporations. Also known as a wage earner’s plan, Chapter 13 lets you set up a payment plan to repay your debts over a period of three to five years.

For SBA loans, the debt is not erased immediately. Instead, it becomes part of your repayment plan.

If the loan is unsecured, or if a portion of the balance is not backed by collateral, it’s treated like other unsecured debt in Chapter 13. You repay what you owe through your plan, and any remaining balance at the end of the three to five years can usually be discharged.

If your SBA loan is backed by collateral, you must continue making payments during the plan to keep your assets. Although the SBA or your lender won’t seize your assets as long as you’re paying on time, the lien remains in place until the debt is fully repaid.

SBA loan personal guarantees are managed under your Chapter 13 repayment plan. As long as you stay current on your payments, the SBA or your lender won’t pursue you directly during bankruptcy. Once the plan is complete, any remaining unsecured debt tied to your personal guarantee can be erased — but again, secured portions will need to be paid if you want to keep your collateral.

If you’re considering bankruptcy, your best resource is an experienced bankruptcy attorney. You should look for a professional in your area who regularly works with small-business owners and has handled bankruptcies involving SBA loans.

An attorney can help you determine if bankruptcy is the right option for your needs, or if there are other actions (like an offer in compromise) that can be taken. If you and your attorney decide bankruptcy is the appropriate route, they’ll be able to support you through the entire process.

Your attorney will help you choose the type of bankruptcy to file — based on your financial situation and the terms of your SBA loan. They’ll then prepare and file the necessary paperwork and represent you in court.