Explore how Chapter 7 bankruptcy can affect SBA loan debts, including personal guarantees, collateral, and risks that require legal review.
Book a Consultation CallThe transcript of the video follows below for further review.
Are SBA Loan Debts Dischargeable in Chapter 7 Bankruptcy?
The short answer to this commonly-asked question is – generally, yes. But, there are significant risks that SBA business owners, SBA guarantors and SBA obligors should be aware of before making the final decision of filing for a Chapter 7 bankruptcy to discharge an SBA guaranteed loan.
Question: What significant risks can materialize if an SBA debtor files bankruptcy to discharge an SBA loan debt associated with an SBA Unconditional Guarantee?
Answer: The most significant risk that can occur is where the SBA 7(a) Lender, Certified Development Corporation (CDC) or the SBA files a Complaint initiating an Adversary Proceeding under 11 U.S.C.A. § 523(a)(2)(B) in response to an SBA debtor’s Chapter 7 bankruptcy filing.
Question: What are the allegations that can accompany a Complaint for an Adversary Proceeding?
Answer: Generally, the Plaintiff (SBA 7(a) Lender, CDC or the SBA) requests the federal bankruptcy court to find that the SBA loan balance is non-dischargeable because the SBA debtor obtained the SBA loan from the Plaintiff fraudulently by providing it with documented misrepresentations or false financial statements regarding the financial condition of the business or of the personal guarantor(s).
The Plaintiff would generally argue that, as a result of the SBA debtor’s fraud or misrepresentation, it has incurred losses in the outstanding amount of the SBA debt, plus costs, interest, attorneys’ fees, and expenses, for which it seeks a judgment.
Question: What federal laws govern non-dischargability of eligible debts under a Chapter 7 bankruptcy filing?
Answer: The non-dischargeability of debts is governed by 11 U.S.C.A. § 523, which provides, in
material part:
(a) A discharge under section 727[5] . . . of this title does not discharge an individual debtor from any debt —
(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained, by —
…
(B) use of a statement in writing—
(i) that is materially false;
(ii) respecting the debtor’s or an insider’s financial condition;
(iii) on which the creditor to whom the debtor is liable for such money, property, services, or credit reasonably relied; and
(iv) that the debtor caused to be made or published with intent to deceive[.]
…
(c)(1) Except as provided . . ., the debtor shall be discharged from a debt of a kind
specified in paragraph (2) . . . of subsection (a) of this section, unless, on request of the creditor to whom such debt is owed, and after notice and a hearing, the court determines such debt to be excepted from discharge under paragraph (2) . . ., as the case may be, of subsection (a) of this section. 11 U.S.C.A. § 523.
Question: What kind of proof must the shown against the SBA debtor in order to convince a court to issue an order of non-dischargeability of an SBA debt?
Answer: In general, a determination of non-dischargeability under § 523(a)(2)(B) requires proof that the Plaintiff (SBA 7(a) Lender, CDC or the SBA) loaned money after it reasonably relied upon false financial documents concerning the SBA debtor and/or an insider, provided to it by the SBA debtor either directly or indirectly, and that the SBA debtor intended to deceive the Plaintiff when doing so.
Question: Does fraudulent behavior expose an SBA debtor to criminal charges as well?
Answer: The kinds of behavior required to have an SBA debt be considered not dischargeable can sometimes result in criminal charges.
Where applicable, an SBA debtor can be charged with grand theft or other related fraud in connection with procuring an SBA guaranteed loan.
Question: What other kind of SBA debtor behavior can result in an SBA debt not being discharged in bankruptcy?
Answer: There are two other main kinds of potentially problematic behavior:
Fraud in a fiduciary capacity can be alleged through fraud, trick and device, with a preconceived design and intent, that an SBA debtor misappropriated monies from the Plaintiff SBA 7(a) Lender, CDC or SBA.
The allegations about injury can center around the SBA debtor’s actions and the claim that they were willful, malicious, and the proximate cause of the financial damages.
Question: Does the bankruptcy court have the power to decide whether a disputed claim re an SBA debt be discharged, and to determine the amount an SBA debtor owes?
Answer: Simply put, yes – a bankruptcy court has this power.
Although it's clear that Congress has the power to legislate about bankruptcy under the U.S. Constitution, for decades there have been big debates about how much power bankruptcy judges can have under the Constitution.
The situation was complicated a few years ago by an opinion of the U.S Supreme Court that somewhat restricted the power of bankruptcy judges.
However, the Supreme Court opinion does not apply to non-dischargeability issues, which are firmly within the jurisdiction of the federal bankruptcy courts.
If you are considering filing bankruptcy for an SBA loan debt stemming from an SBA Unconditional Guarantee or a Treasury/Bureau of Fiscal Service debt problem, contact us today for an initial consultation with an experienced SBA or Treasury workout attorney at 1-888-756-9969
We can analyze your SBA loan, Treasury/BFS debt or Private Collection Agency problem and advise you on a range of potential solutions.
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Millions of Dollars in SBA Debts Resolved via Offer in Compromise and Negotiated Repayment Agreements without our Clients filing for Bankruptcy or Facing Home Foreclosure
Millions of Dollars in Treasury Debts Defended Against via AWG Hearings, Treasury Offset Program Resolution, Cross-servicing Disputes, Private Collection Agency Representation, Compromise Offers and Negotiated Repayment Agreements
Our Attorneys are Authorized by the Agency Practice Act to Represent Federal Debtors Nationwide before the SBA, The SBA Office of Hearings and Appeals, the Treasury Department, and the Bureau of Fiscal Service.
Client received the SBA's Official 60-Day Notice for a loan that was obtained by her small business in 2001. The SBA loan went into default in 2004 but after hearing nothing from the SBA lender or the SBA for 20 years, out of the blue, she received the SBA's collection due process notice which provided her with only one of four options: (1) repay the entire accelerated balance immediately; (2) negotiate a repayment arrangement; (3) challenge the legal enforceability of the debt with evidence; or (4) request an OHA hearing before a U.S. Administrative Law Judge.
Client hired the Firm to represent her with only 13 days left before the expiration deadline to respond to the SBA's Official 60-Day Notice. The Firm attorneys immediately researched the SBA's Official loan database to obtain information regarding the 7(a) loan. Thereafter, the Firm attorneys conducted legal research and asserted certain affirmative defenses challenging the legal enforceability of the debt. A written response was timely filed to the 60-Day Notice with the SBA subsequently agreeing with the client's affirmative defenses and legal arguments. As a result, the SBA rendered a decision immediately terminating collection of the debt against the client's alleged personal guarantee liability saving her $50,000.
Our firm successfully resolved an SBA 7(a) loan default in the amount of $212,000 on behalf of an individual guarantor. The borrower’s business experienced a significant downturn in revenue and was unable to sustain operations, ultimately leading to closure and a remaining personal guaranty obligation.
After conducting a thorough financial review and preparing a comprehensive SBA Offer in Compromise (SBA OIC) submission, we negotiated directly with the SBA and lender to achieve a settlement of $50,000—approximately 24% of the outstanding balance. This favorable resolution released the guarantor from further personal liability and provided the opportunity to move forward free from the burden of enforced collection.
Client's small business obtained an SBA COVID EIDL for $301,000 pledging collateral by executing the Note, Unconditional Guarantee and Security Agreement. The business defaulted on the loan and the SBA CESC called the Note and Guarantee, accelerated the principal balance due, accrued interest and retracted the 30-year term schedule.
The loan was transferred to the Treasury's Bureau of Fiscal Service which resulted in the statutory addition of $90,000+ in administrative fees, costs, penalties and interest with the total debt now at $391.000+. Treasury also initiated a Treasury Offset Program (TOP) levy against the client's federal contractor payments for the full amount each month - intercepting all of its revenue and pushing the business to the brink of bankruptcy.
The Firm was hired to investigate and find an alternate solution to the bankruptcy option. After submitting formal production requests for all government records, it was discovered that the SBA failed to send the required Official 60-Day Pre-Referral Notice to the borrower and guarantor prior to referring the debt to Treasury. This procedural due process violation served as the basis to submit a Cross-Servicing Dispute to recall the debt from Treasury back to the SBA and to negotiate a reinstatement of the original 30-year maturity date, a modified workout, cessation of the TOP levy against the federal contractor payments and removal of the $90,000+ Treasury-based collection fees, interest and penalties.
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