If you took out an SBA loan for your business and things didn’t go as planned, you may be asking:
- Am I personally liable?
- Can bankruptcy eliminate my SBA loan?
- Will the government come after me?
- What happens if my business closes?
SBA loans are unique — but they are not immune from bankruptcy protections.
Here’s how it works.
First: Most SBA Loans Require Personal Guarantees
Nearly all SBA loans require:
- A personal guarantee
- Possibly a lien on business assets
- Sometimes a lien on personal assets
That means if the business fails, the lender can pursue you personally.
Many business owners are surprised to learn that their LLC does not shield them from SBA loan liability because of the guarantee.
What Happens If You File Chapter 7?
If you file personal Chapter 7 bankruptcy:
- Your personal liability on the SBA loan may be discharged.
- The lender may still pursue business assets.
- Secured collateral may be repossessed.
If you pledged:
- Equipment
- Inventory
- Business property
- Personal property
The lender may enforce those liens.
However, your remaining personal liability can often be eliminated.
What About SBA Fraud or Misrepresentation?
Bankruptcy generally eliminates SBA loan guarantees unless:
- There was fraud.
- Funds were misused intentionally.
- False statements were made in the loan application.
Fraud-based debts may be non-dischargeable.
But ordinary business failure is not fraud.
What Happens in Chapter 13?
Chapter 13 may allow you to:
- Repay part of the SBA debt over time.
- Stop lawsuits.
- Prevent wage garnishment.
- Manage tax obligations.
If your business is still generating income, Chapter 13 may provide breathing room.
Can the SBA Garnish Wages?
If a lender obtains a judgment against you, collection options may include:
- Wage garnishment (depending on state law)
- Bank levies
- Property liens
Bankruptcy triggers an automatic stay that stops collection actions.
What If the Business Closes?
If your business shuts down:
- The lender may liquidate business assets.
- They may pursue you personally for any deficiency.
- Bankruptcy may eliminate that personal deficiency balance.
The key issue is your personal guarantee.
The Bottom Line
SBA loans feel intimidating because they are government-backed.
But they are still subject to bankruptcy law.
In many cases, personal bankruptcy can discharge your SBA loan guarantee — unless fraud is involved.
If you are facing collection on an SBA loan, timing and strategy matter.
