SBA Loan Default - Recoverable Fees
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Chapter 11 Subchapter V has redefined the process of small business bankruptcies. Learn what's changed (and how Protect Law Group can help) in this guide.
Book a Consultation CallSince the pandemic exploded across the United States in March of 2020, 60 percent of businesses that closed due to the pandemic are now permanent closures.
Data does show that the rate of small business closures is slowing. Though, many of those lucky enough to stay open face mounting financial struggles.
Chapter 11 Subchapter V
Of course, there is no blanket solution for each business. But, there are a few options small business owners can take when they feel they are at a dead end financially.
Chapter 11 Subchapter V bankruptcy may be the best option for small businesses struggling in such an uncertain time.
There are various options in the US bankruptcy code, depending on the circumstances. For small business bankruptcies, the newly-created Subchapter V poses unique benefits. This can make financial recovery much more achievable.
As with any major financial decision, it’s important to carefully weigh the pros and cons. But, doing this without the help of a professional can prove difficult to navigate.
For plain-text details on what it really means to declare Chapter 11 Subchapter V bankruptcy, keep reading.
Chapter 11 of the US bankruptcy code focuses on “reorganizing” a business. This allows it to stay alive while restructuring debt and making a plan to repay creditors over time.
Debtors who traditionally file under Chapter 11 are corporations that are not claiming they will never be able to repay their debts. Rather, they are seeking more time to restructure payments to be more manageable in the long-term.
Chapter 11 bankruptcy can be beneficial to some companies in providing a “fresh start” of sorts
But, the procedure for an ordinary Chapter 11 filing can also grow complicated and time-consuming.
It is the most complex—and also the most expensive—form of bankruptcy filing. With this in mind, companies must carefully consider their options. They must explore alternative options before filing under Chapter 11.
This was no longer workable in a large scope, with so many businesses struggling that were performing well pre-pandemic. Enter: Chapter 11 Subchapter V.
Chapter 11 Subchapter V was introduced by the passing of the Small Business Reorganization Act of 2019. The SBRA was signed into law in August 2019 and took effect in February 2020.
This new chapter was designed to aid those small businesses in severe financial distress, particularly given the COVID-19 pandemic. It streamlines some complexities and minimizes costs that make small business bankruptcies more difficult.
To be eligible for this option, a debtor must meet the following criteria:
When submitting the bankruptcy petition, the debtor must include various supporting documents. These include a balance sheet, statement of operations, cash flow statements, and federal tax returns.
The CARES Act further expanded the eligibility for businesses to qualify under this bankruptcy path.
This legislation increases the eligibility pool to also include companies with up to $7,500,000 in debt (both secured and unsecured) to reorganize under Subchapter V. This is a significant increase from the otherwise limit of $2,725,625.
This way, larger companies can reap the benefits that are usually reserved for small businesses with this measure.
Upon filing for Chapter 11 Subchapter V bankruptcy, the court will appoint a trustee. This is different than a traditional Chapter 11 case, as the trustee does not take possession of the debtor’s assets.
Instead, this trustee acts as an advisor of sorts.
They will work with the debtor to develop a reorganization plan. This trustee will also appear at major case hearings. It is their job to ensure the debtor continues to make payments according to the terms of the agreement.
The debtor does financially compensate the Subchapter V trustee for their services. This process can be significantly faster than the traditional Chapter 11 procedures. As such, it aids small businesses that are on the brink of total financial ruin.
The debtor must file its reorganization plan within 90 days of the original Subchapter V bankruptcy filing.
Under traditional Chapter 11 filing, the debtor would have to file a disclosure statement. This document serves to provide creditors with enough information to analyze and decide to vote for or against the plan.
This can delay and further complicate the process, making it more difficult for struggling small businesses to get relief. This is not required under Subchapter V.
Instead, debtors must include a short history of business operations and a liquidation analysis. They must also provide projections to prove the debtor’s ability to meet the repayment terms.
The process for filing Chapter 11 Subchapter V is much less complicated and expensive than regular Chapter 11 procedures. Subchapter V also makes it easier for debtors to keep their equity and control in the company.
Like other Chapter 11 plans, this path paves the way for staying in business while restructuring debt payment plans. But, Subchapter V makes the process much easier.
Declaring Chapter 11 Subchapter V bankruptcy—or any form of bankruptcy, for that matter—is a serious move that can carry major consequences down the line. But, it can also provide needed relief in the right situations.
The best bet is to contact a trusted debt attorney to determine the best course of action for your specific situation. They can help you weigh your options, and decide the most beneficial path that allows your small business to move forward.
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.
Clients borrowed and personally guaranteed an SBA 7(a) loan. Clients defaulted on the SBA loan and were sued in federal district court for breach of contract. The SBA lender demanded the Client pledge several personal real estate properties as collateral to reinstate and secure the defaulted SBA loan. We were subsequently hired to intervene and aggressively defend the lawsuit. After several months of litigation, our attorneys negotiated a reinstatement of the SBA loan and a structured workout that did not involve any liens against the Client's personal real estate holdings.
Client’s small business obtained an SBA 7(a) loan for $750,000. She and her husband signed personal guarantees exposing all of their non-exempt income and assets. With just 18 months left on the maturity date and payment on the remaining balance, the Great Recession of 2008 hit, which ultimately caused the business to fail and default on the loan terms. The 7(a) lender accelerated and sent a demand for full payment of the remaining loan balance. The SBA lender’s note allowed for a default interest rate of about 7% per year. In response to the lender's aggressive collection action, Client's husband filed for Chapter 7 bankruptcy in an attempt to protect against their personal assets. However, his bankruptcy discharge did not relieve the Client's personal guarantee liability for the SBA debt. The SBA lender opted to pursue the SBA 7(a) Guaranty and subsequently assigned the loan and the right to enforce collection against the Client to the SBA. The Client then received the SBA Official 60-Day Notice. After conducting a Case Evaluation with her, she then hired the Firm to respond and negotiate on her behalf with just 34 days left before the impending referral to Treasury. The Client wanted to dispute the SBA’s alleged debt balance as stated in the 60-Day Notice by claiming the 7(a) lender failed to liquidate business collateral in a commercially reasonable manner - which if done properly - proceeds would have paid back the entire debt balance. However, due to time constraints, waivers contained in the SBA loan instruments, including the fact the Client was not able to inspect the SBA's records for investigation purposes before the remaining deadline, Client agreed to submit a Structured Workout for the alleged balance in response to the Official 60-Day Notice as she was not eligible for an Offer in Compromise (OIC) because of equity in non-exempt income and assets. After back and forth negotiations, the SBA Loan Specialist approved the Workout proposal, reducing the Client's purported liability by nearly $142,142.27 in accrued interest, and statutory collection fees. Without the Firm's intervention and subsequent approval of the Workout proposal, the Client's debt amount (with accrued interest, Treasury's statutory collection fee and Treasury's interest based on the Current Value of Funds Rate (CVFR) would have been nearly $291,030.
Our firm successfully facilitated the SBA settlement of a COVID-19 Economic Injury Disaster Loan (EIDL) f borrower received an SBA disaster loan of $150,000, but due to the severe economic impact of the COVID-19 pandemic, the business was unable to recover.
Despite the borrower’s efforts to maintain operations, shutdowns and restrictions significantly reduced the customer base and revenue, making continued operations unsustainable. After a thorough business closure review, we negotiated with the SBA, securing a resolution where the borrower paid only $6,015 to release the collateral, with no further financial liability for the owner/officer.
This case demonstrates how businesses affected by the pandemic can navigate SBA loan settlements effectively. If your business is struggling with an SBA EIDL loan, we specialize in SBA Offer in Compromise (SBA OIC) solutions to help close outstanding debts while minimizing financial burden.
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