Discharging an SBA Loan in Bankruptcy

August 22, 2013

Defaulting on a Small Business Administration (SBA) Loan has serious consequences. An SBA loan is a private loan for small business owners, made by a bank that is guaranteed by the federal government. Usually SBA loans require the business owner to personally guarantee payment and may also include a lien on real property. When an SBA loan is defaulted, the lender will attempt to collect from the borrower. Any amount the lender is unable to collect is paid by the SBA as an insurance claim.

The collection process may include seizing income tax refunds, off-setting against government entitlements (such as Social Security), a legal judgment, wage garnishment, or other asset seizure. Fortunately, the SBA has an offer in compromise program to negotiate debt forgiveness. Unfortunately, participation in this program may result in a taxable event when the debt is compromised. For instance, you may offer to pay $10,000 on a $30,000 debt, but the $20,000 that the SBA forgives is taxed as income.

SBA loans are eligible for discharge during bankruptcy. Unlike federally guaranteed student loans, there is no “undue hardship” test to pass before discharging the debt. There is no tax consequence if the SBA loan is discharged, and neither the original lender nor the SBA can collect from the debtor personally (including benefit off-sets, lawsuits, wage garnishments, or other asset seizures). Note that if the SBA loan is guaranteed by real property, the property lien will survive a personal bankruptcy discharge. Property pledged as collateral to the SBA must be paid or surrendered.

If you have defaulted on an SBA loan, speak with an experienced bankruptcy attorney at Fears Nachawati Law Firm to discuss your options. A skilled insolvency attorney can help you weigh the pros and cons of your options and carve a path to financial health. For a free consultation, contact us here or call our office at 1.866.705.7584.

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