How Liens, Judgments & Bankruptcies Affect Your SBA Loan

Credit Blemishes Don’t Always Mean “Game Over” for Your SBA Loan

If you have a lien, judgment, or bankruptcy in your past, you’ve probably been told — or at least worried — that you can’t get an SBA loan. The truth is more nuanced than a simple yes or no. Liens, judgments, and bankruptcies absolutely affect your SBA loan application, but they don’t necessarily disqualify you.

The key is understanding exactly how each type of blemish impacts the underwriting process, what the waiting periods are, and how to present your situation to lenders in the most favorable light.

At GoSBA, we’ve helped fund over $320 million in SBA loans in 2025, including many deals where the borrower had credit blemishes that other brokers said were deal-killers. We know which lenders are more forgiving, what explanations work, and how to structure deals to overcome these challenges.

How Liens Affect Your SBA Loan Application

Liens come in several varieties, and each type is viewed differently by SBA lenders.

Tax Liens (IRS and State)

Tax liens are among the most common credit blemishes we encounter — and they’re also one of the most misunderstood when it comes to SBA lending.

• Outstanding federal tax liens are a serious problem. Most SBA lenders will not approve a loan if you have an unresolved IRS tax lien. The SBA’s own standard operating procedures (SOP) require that tax liens be addressed before loan approval
• However, being on an IRS installment agreement changes everything. If you have a tax lien but are current on an IRS payment plan, many lenders will work with you
• The lender’s perspective: They need to know that (1) you’ve acknowledged the debt, (2) you have a structured plan to repay it, and (3) the payment plan won’t jeopardize your ability to service the SBA loan
• What you need to provide: Copy of the IRS installment agreement, proof of current payments (at least 3-6 months of on-time payments), and the remaining balance
• State tax liens: Treated similarly to federal liens — unresolved is bad, on a payment plan is manageable

How IRS Payment Plans Are Viewed by Lenders

• Full-pay installment agreements (where you’re paying the full amount owed over time) are viewed most favorably
• Partial pay installment agreements (where the IRS has accepted less than the full amount) are acceptable to some lenders but may raise questions
• Offers in Compromise (OIC) — where the IRS has settled for a reduced amount — are actually viewed positively if completed, because the debt is fully resolved
• Currently Not Collectible (CNC) status is trickier — it means the IRS has temporarily stopped collection, but the debt still exists. Most lenders want to see active repayment
• Key metric: Lenders will add your monthly IRS payment to your total debt obligations when calculating your debt service coverage ratio (DSCR). Make sure the numbers still work

Mechanic’s Liens and Judgment Liens

• Mechanic’s liens (filed by contractors for unpaid work) and judgment liens (resulting from court judgments) are viewed as indicators of financial distress
• Resolved liens (paid and released) are far less damaging than active liens
• Active liens against your property can complicate collateral requirements and may need to be subordinated or paid off as a condition of the SBA loan
• A single old mechanic’s lien that was resolved is a minor issue. Multiple active liens suggest a pattern that concerns lenders

UCC Liens

• UCC (Uniform Commercial Code) filings are not the same as derogatory liens — they’re standard security interests filed by lenders against business assets
• Existing UCC liens on the business you’re buying will typically need to be released at closing
• UCC liens against your personal assets or existing businesses may affect available collateral
• These are generally not a credit blemish but do need to be accounted for in the deal structure

How Judgments Affect Your SBA Loan Application

Civil judgments — court-ordered payments resulting from lawsuits — are another common concern for SBA borrowers.

Satisfied (Paid) Judgments

• A judgment that has been fully paid and satisfied is generally not a deal-killer
• It will appear on your credit report and your personal financial statement
• Lenders will want a written explanation: what happened, why, and what you’ve done to prevent similar situations
• A single satisfied judgment from several years ago is usually a minor factor in the overall decision

Unsatisfied (Outstanding) Judgments

• Active, unpaid judgments are a significant problem. Most SBA lenders require all judgments to be satisfied or on a documented payment plan before approval
• The SBA’s SOP states that unresolved judgments must be addressed as part of the loan process
• If you have an outstanding judgment, options include: paying it off before applying, negotiating a settlement, or establishing a court-approved payment plan
• Some lenders will approve your loan with the condition that the judgment is paid from loan proceeds or personal funds at closing

Multiple Judgments

• A pattern of judgments — even if they’re all satisfied — raises red flags about financial management and legal risk
• If you have multiple judgments, be prepared with detailed explanations for each one
• Context matters enormously: judgments related to a failed business venture are viewed differently than judgments from unpaid personal debts

How Bankruptcy Affects Your SBA Loan Application

Bankruptcy is often seen as the ultimate credit blemish, but the SBA actually has clear guidelines on how to handle it — and they’re more reasonable than many people expect.

Chapter 7 Bankruptcy (Liquidation)

• SBA guidelines: There is no automatic disqualification period after a Chapter 7 bankruptcy. However, most lenders have their own internal policies
• Common lender requirements: Most banks want to see at least 3-4 years since discharge, though some will consider applications as early as 2 years post-discharge
• What matters most: Evidence that you’ve rebuilt your credit and financial stability since the bankruptcy — clean credit since discharge, rebuilt savings, and stable income
• The explanation letter is critical. Was the bankruptcy caused by a medical crisis, a failed business, a divorce? Context matters enormously to underwriters

Chapter 13 Bankruptcy (Reorganization)

• Chapter 13 involves a court-supervised repayment plan, typically lasting 3-5 years
• If you’re still in an active Chapter 13 plan: Most SBA lenders will not approve you until the plan is completed and discharged. The court may also need to approve new debt
• After discharge: Lenders generally want 1-2 years of clean credit history post-discharge
• Chapter 13 is sometimes viewed more favorably than Chapter 7 because you made an effort to repay creditors

Chapter 11 Bankruptcy (Business Reorganization)

• If your previous business went through Chapter 11, lenders will want to understand what happened and what’s different about this acquisition
• A business bankruptcy is generally viewed as less personally damaging than a personal bankruptcy — especially if the business faced industry-wide challenges
• Time since discharge and evidence of lessons learned are key factors

How Long Do You Really Need to Wait After Bankruptcy?

Here’s a practical timeline based on our experience at GoSBA:

• 0-2 years post-discharge: Very difficult. Most lenders won’t consider you unless there are extraordinary circumstances
• 2-3 years post-discharge: Possible with the right lender, strong credit rebuilding, significant liquidity, and a compelling explanation. You’ll need a broker who knows which lenders will look at this
• 3-5 years post-discharge: The sweet spot where many lenders become comfortable. You’ll still need to disclose and explain, but the bankruptcy becomes less of a focal point
• 5-7 years post-discharge: Most lenders treat this as historical. The bankruptcy is still on your credit report but carries much less weight
• 7+ years post-discharge: The bankruptcy falls off your credit report (Chapter 13 at 7 years, Chapter 7 at 10 years). Many lenders won’t even ask about it

How to Explain Credit Blemishes to Lenders

The explanation letter — sometimes called a Letter of Explanation (LOE) or LOX — is one of the most important documents in your loan package if you have any credit blemishes. Here’s how to write one that works:

Be Honest and Direct

• Don’t minimize, deflect, or make excuses. Lenders have seen it all and they respect transparency
• State clearly what happened: “In 2019, I filed Chapter 7 bankruptcy due to…”
• Avoid blaming others unless it’s genuinely relevant (a business partner’s fraud, for example)

Explain the Circumstances

• Medical crisis: Unexpected medical bills are one of the most sympathetically viewed causes of financial distress
• Divorce: Common and understandable — lenders see this regularly
• Business failure: Especially if the industry faced systemic challenges (COVID, regulatory changes, etc.)
• Job loss: Particularly during economic downturns
• Provide specific dates, amounts, and context — vague explanations don’t build confidence

Show What’s Changed

• This is the most important part. Lenders want to see that the conditions that led to the blemish won’t repeat
• Document your credit rebuilding: current credit score, on-time payments since the event, savings accumulated
• Show financial stability: steady income, growing net worth, responsible use of credit
• If applicable, describe what you learned and how you’d handle similar situations differently

Keep It Professional

• 1-2 pages maximum. Concise and factual
• Use professional tone — this is a business document, not a diary entry
• Include supporting documentation: payment plan agreements, discharge papers, credit monitoring showing improvement

Which Lenders Are More Forgiving?

This is where having the right broker makes all the difference. Not all SBA lenders view credit blemishes the same way:

• Big national banks tend to have rigid credit policies with little room for exceptions. If their system says “no,” it’s usually no
• Community banks often have more flexibility, especially if you can tell your story directly to a decision-maker
• Some SBA lenders specialize in “second chance” borrowers and have built their business model around working with people who have imperfect credit histories
• Credit unions sometimes offer more flexibility than banks, particularly for members with established relationships
• Non-bank SBA lenders may have more nuanced credit evaluation processes that look beyond the score

The problem for most borrowers: You don’t know which lenders fall into which category. You might waste months applying at a rigid bank when a more flexible lender would have approved you in weeks. This is exactly why working with an experienced SBA broker is so valuable.

Tips for Getting Approved With Credit Blemishes

1. Check your credit report before you apply. Know exactly what’s there — and dispute any errors before you start the process
2. Resolve what you can. Pay off outstanding judgments, get current on IRS payment plans, and release any liens you can address
3. Build your credit score. If you have time before applying, every point above 680 helps. Pay down credit card balances, don’t open new accounts, and keep utilization low
4. Increase your down payment. More equity reduces lender risk and can offset credit concerns. Going from 10% to 20% down can make the difference
5. Bring a strong co-borrower or guarantor. A spouse or business partner with clean credit can strengthen the application
6. Get your explanation letter right. This is not an afterthought — it’s a critical piece of your application that needs to be well-crafted
7. Work with a broker who knows the landscape. The right broker can immediately identify which lenders will work with your specific situation

GoSBA Knows Which Lenders Will Work With Your Situation

This is one of the biggest advantages of working with GoSBA. With over 50 lenders in our network, we know exactly which banks are more forgiving of credit blemishes — and which ones aren’t worth your time.

• We’ve closed deals for borrowers with past bankruptcies, tax liens, and judgments. We know it’s possible because we’ve done it
• We help you craft your explanation letter. We know what underwriters want to hear and how to present your story effectively
• We match you with the right lender for your specific situation. Instead of guessing which bank might be flexible, we go directly to the ones we know will consider your application
• Free business plan and financial projections: A strong business plan can help offset credit concerns by showing lenders that the deal is solid and you’re prepared — this $2,500-$5,000 value is included at no cost
• $320M+ funded in 2025: Our track record and lender relationships give us credibility that individual borrowers simply don’t have
• Completely free service: GoSBA is paid by the lender. You pay nothing for our expertise, lender matching, and deal preparation — whether your credit is perfect or imperfect

Don’t Let Your Past Define Your Future

A lien, judgment, or bankruptcy is a chapter in your financial story — not the whole book. Thousands of entrepreneurs have overcome credit blemishes to successfully buy businesses with SBA financing. The difference between those who succeed and those who give up often comes down to one thing: having the right guidance.

Contact GoSBA today for a confidential, free consultation. Tell us about your situation — the good, the bad, and the blemishes — and we’ll give you an honest assessment of your options. We’ll identify the right lenders, help you prepare your application, build your business plan for free, and guide you through the process from start to finish.

Your past doesn’t have to stop your future. Let’s talk →