Financing After Chapter 7 Business Bankruptcy: 6 Lenders' Underwriting Rules

A lender reviewing an owner whose last company ended in chapter 7 is not asking whether the bankruptcy happened; the file already says it did. The lender is asking what the bankruptcy cost someone else, and whether the next business will be able to carry its payments without the habits that ended the first one.

Most of the written rules on that question belong to the Small Business Administration, because its lending manual, SOP 50 10, is public and most conventional credit policies are not. The six rules below come from SOP 50 10 8 and from version 8.1, which takes effect October 1, 2026; the passages quoted read the same in both unless noted. Banks and online lenders outside the SBA programs write their own criteria, and anyone who claims to know a particular lender's cutoff should be asked where the document is.

1. A Federal Loss Discharged in Bankruptcy Closes the SBA Door Until It Is Paid

The SBA's lender procedures state the rule without ornament: "An Applicant is not eligible for a 7(a) or 504 loan if there is a prior loss to the Federal government." The definition of loss is where a chapter 7 enters. It "includes any amount compromised for less than the full amount, discharged through bankruptcy," and the rule reaches not only the applicant but "Any other business owned, operated, or controlled by the Applicant or an Associate of the Applicant" that defaulted on a federal loan, or guaranteed one, leaving the government short.

Federal loan, for this purpose, means "Any loan that is made for business purposes (including Federal disaster loans) by any Federal agency or department either directly or on a guaranteed basis." An owner whose first company carried an SBA-guaranteed loan or a disaster loan into its chapter 7 should therefore assume the new application begins with that history. Lenders "must check the Credit Alert Verification Reporting System (CAIVRS)," which searches by Social Security number or EIN, so the check follows the person as well as the old entity.

The rule has an exit, and it is expensive. "If a Prior Loss to the Government is fully satisfied, the application can be processed." A narrow waiver exists for an owner who held less than 20 percent of the failed business, was not a guarantor or co-borrower on the defaulted SBA loan, and had no control over it; SBA then weighs the circumstances case by case, and the waiver does not reach SBA disaster loans (EIDL) or non-SBA federal debt.

The delinquent-federal-debt rule sits beside this one and behaves differently. A debt "discharged from ... in a bankruptcy proceeding" is not counted as delinquent, yet the manual adds that if a loss was associated with the debt, "the Applicant remains subject to the Prior Loss rule." The bankruptcy, in other words, cures the delinquency and preserves the loss. An owner reading the first half of that sentence without the second will apply with confidence and receive a decline.

Where the old company's creditors were all private (a stack of merchant cash advances, a bank line, trade vendors, and a landlord who has since relet the space), this rule does not apply, and the analysis moves to the ones that follow.

2. The Filing Goes Into the Credit Memorandum, and No Waiting Period Takes It Out

For a standard 7(a) loan, the lender's credit memorandum must include "Discussion of any liens, judgments, bankruptcy filings or pending litigation including divorce proceedings," and the lender must "Review and analyze the Applicant(s)' owner(s), and Guarantor(s) personal credit reports and discuss any credit issues." The SOP sets no number of years after which a bankruptcy stops mattering. For SBA Express loans it leaves the matter to judgment: "the credit decision, including how much to factor in a past bankruptcy or whether to require an equity injection, is left to the business judgment of the Lender."

Whether the filing appears on the owner's personal report depends on whose case it was. Under 15 U.S.C. 1681c, a consumer report may carry a bankruptcy case for 10 years from the order for relief, and that limit falls away entirely for a report used on credit of $150,000 or more. An LLC's own chapter 7 is not the owner's case, though the owner will be asked about it all the same.

3. The New Company Is Underwritten as a Start-Up

SBA treats a business as a start-up if it has been "in operation (i.e., generating revenue from intended operations) for 1 year or less," and "All 7(a) loans made to a Start-Up Business require a 10% equity injection based on the project cost." A company formed after the old one liquidated has no history of its own to show, so the application runs on projections that must reflect debt service coverage of at least 1.15 "within 2 years from loan funding."

The equity has to come from somewhere the lender will accept: cash that is not borrowed, a personal loan repaid from a source other than the business (the owner's salary from the business does not qualify), full-standby seller debt, or certain assets and verified prepaid expenses. The owner emerging from a liquidation often has the experience and lacks the ten percent. You can know the trade and still not have the money.

4. Weak Credit Is Part of the Case for an SBA Guaranty

SBA lends only where credit is not otherwise available on reasonable terms, as 13 CFR 120.101 puts it, and the manual lists the acceptable reasons. Among them are a lender policy that "normally does not allow loans to new businesses (e.g., a business that has been in operation for a period of not more than 2 years)" and "business and personal credit history." A past bankruptcy can, in that narrow sense, help explain why the guaranty is needed.

Only so far. The lender "may not cite the Applicant's inability to meet the SBA Lender's or Third Party Lender's conventional credit score policy as the sole reason that credit is not available elsewhere." The memo still needs a repayment story.

5. The Owner Signs Again

SBA's guaranty chapter requires that "Any individual who has direct and/or indirect ownership of 20% or more of an Applicant must provide an unlimited full guaranty," and a six-month lookback keeps an owner who recently reduced a stake below 20 percent inside the rule unless completely divested. The owner whose last guaranty survived the company's chapter 7 (an entity receives no discharge, and section 524(e) leaves other obligors liable, so the old funder's claim against the owner may well still be open, reported, or reduced to judgment, all of which the new lender will read about in the personal credit review described in the second rule) is asked for a fresh one on the new loan. The prior guaranty is the first thing the new underwriter will want explained.

6. Cash Flow Is Measured on Paper the Lender Can Verify

Standard 7(a) requires a debt service coverage ratio of at least 1.15 on a historical or projected basis and 1:1 on a global basis, with debt service defined as "the future required principal and interest payments on all business debt inclusive of new SBA loan proceeds." Lenders must obtain tax return transcripts and reconcile them with the applicant's figures, and for 7(a) Small Loans under version 8.1 they must review the two most recent months of commercial bank statements to confirm that every obligation made it into the calculation. A daily debit from a merchant cash advance is, if we are being exact, the kind of line those statements are read to find.

On refinancing, SOP 50 10 8 declares that "Merchant cash advances and factoring agreements are not eligible for refinancing." Version 8.1 opens a narrow door: a sales-based agreement qualifies only once it "has been converted to a term loan, has amortized for at least 24 months," and no further agreements have followed.

Before the Application, the Old Balances

Delancey Street is not a lender and not a law firm, and it does not arrange financing. Its service is a free, confidential initial look at the advances and related business obligations, with independently licensed counsel coordinated for legal questions. For an owner who guaranteed advances that the chapter 7 left untouched, resolving those guaranties by agreement, where a funder will agree, can change what the second and fifth rules find. An owner whose remaining exposure is a federal loss, or who needs a personal bankruptcy to address the guaranties, needs counsel rather than a settlement company. Underwriting rewards the applicant whose paper tells one consistent story. The rest is arithmetic, and the arithmetic is patient.