Did you know that personal bankruptcy doesn't always mean you can walk away from your SBA loan? Here's what you need to know about SBA loan collateral.
Book a Consultation CallDid you know that 50% of small businesses fail in their 5th year? The reasons could be different in each case, but about 82% of those that fail cite cash flow problems as the reason.
This may be why banks consider small businesses as a high risk, which reduces the chances of securing a loan. That's why many of them turn to an SBA loan, which poses fewer risks for financial institutions.
You may have already availed of this option but are now facing a bankruptcy. You might be wondering now what happens to your SBA loan collateral then.
If you want to learn more about SBA loans, defaulting, and bankruptcy, read on. Find out everything that happens when you default on an SBA loan and when you file for a bankruptcy.
SBA Loan Collateral
An SBA loan is a loan for small businesses, a partial amount of which has a guarantee by the US Small Business Administration. This alleviates some of the risks that a private financial institution might face. This then makes it easier for a small business to obtain a loan if the other traditional channels don't work.
The partial guarantee by the federal agency can cover up to 85% of the loan. However, the application process is strict and tedious, so you'll need to have a lot of patience to secure it.
You'll also have to sign a personal guarantee in most cases. The lender can then sue you or place a lien on your property if you default.
There are some steps you can take before filing for a bankruptcy in case of an SBA loan default. First, let's make a distinction between delinquency and default.
A delinquency is when you're falling behind your payments but not too far behind for the lender to consider you unable to pay. A default happens when you've been unable to make a payment for a long period of time. That period depends on your terms with the lender.
The best thing to do when facing a loan default is to prevent it in the first place. When you've been delinquent for too long, contact the lender right away instead of waiting for the loan to default.
The financial institution would much prefer it if you come forward yourself. They don't like going through the default process, so they may rather hear you out.
In some cases, they'll be willing to work with you and figure out a solution that's best for both of you. Defaulting a loan is a hassle for everyone involved, even with the lender.
The SBA will have to approve the agreement, though.
If you're unable to work a deal with the lender and SBA, you will be more likely to go into a loan default. The lender will acquire your business assets.
If that's not enough to recover their losses, they'll go after your personal assets, too. They can do this because you likely signed a personal guarantee.
The only time they'll go to the SBA to get the guarantee is when your assets are not enough to cover the loan amount. In that case, you won't have any problems with the lender anymore. Your next problem, however, is going to be the government who will go after you to get back the money it gave to the lender.
Still, the government would rather you pay up than punish you. You'll be able to work out a repayment plan in most cases. What happens if you declare a bankruptcy, though?
It's a popular misconception that an SBA loan is not dischargeable due to it being a loan from a federal agency. However, as we've explained above, the SBA is not the one giving out the loan, it's only a partial guarantor. Moreover, many other government loans are still dischargeable through bankruptcy.
With that said, an SBA loan is dischargeable through bankruptcy. Still, do note that there are still some things that you'll be liable for.
A bankruptcy will erase your personal liability for your debts. However, it will not be able to erase the lender's lien or security interest on your property. That means that if you have a secured debt, which requires you to submit a collateral, the bankruptcy will only be enforceable on the debt itself and not on the collateral.
The SBA's definition of collateral consists of business and personal assets. Your personal assets include your car or your mortgage.
The business assets can include your building, equipment, and accounts receivable. In some cases, it can also include your inventory. These can be a collateral as long as the bank can sell them for cash.
Whichever you used as a collateral, lenders will be able to acquire the assets either through repossession or foreclosure. Banks and other financial institutions can also contest your bankruptcy.
When a lender objects to the bankruptcy, their lawyers scrutinize the filing. This is to see if the debtor has breached any requirement in the contract.
For example, the lender finds out that you disposed of your collateral. They may find that you relinquished your claim on the property or transferred it via a gift transaction to other third parties.
This can open a complaint process, which can disqualify the discharge on some of your debts. This is also a criminal fraud, and so you might even face federal indictment.
Whatever it is that's worrying you, whether it's an SBA loan default, your SBA loan collateral, or a bankruptcy, talk to your lawyer. He/she will be able to discuss these things with you.
Contact us now if you need any help with your SBA loan.
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.
The client personally guaranteed an SBA 7(a) loan for $150,000. His business revenue decreased significantly causing default and an accelerated balance of $143,000. The client received the SBA's Official 60-day notice with the debt scheduled for referral to the Treasury’s Bureau of Fiscal Service for aggressive collection in less than 26 days. We were hired to represent him, respond to the SBA's Official 60-day notice, and prevent enforced collection by the Treasury and the Department of Justice. We successfully negotiated a structured workout with an extended maturity date that included a reduction of the 14% interest rate and removal of substantial collection fees (30% of the loan balance), effectively saving the client over $242,000.
Client’s small business obtained an SBA 7(a) loan for $150,000. He and his wife signed personal guarantees and pledged their home as collateral. The SBA loan went into default, the term or maturity date was accelerated and demand for payment of the entire amount claimed was made. The SBA lender’s note gave it the right to adjust the default interest rate from 7.25% to 18% per annum. The business filed for Chapter 11 bankruptcy but was dismissed after 3 years due to its inability to continue with payments under the plan. Clients wanted to file for Chapter 7 bankruptcy, which would have been a mistake as their home had significant equity to repay the SBA loan balance in full as the Trustee would likely seize and sell the home to repay the secured and unsecured creditors. However, the SBA lender opted to pursue the SBA 7(a) Guaranty and subsequently assigned the loan and the right to enforce collection to the SBA. Clients then received the SBA Official 60-Day Notice and hired the Firm to respond to it and negotiate on their behalf. Clients disputed the SBA’s alleged balance of $148,000, as several payments made to the SBA lender during the Chapter 11 reorganization were not accounted for. To challenge the SBA’s claimed debt balance, the Firm Attorneys initiated expedited discovery to obtain government records. SBA records disclosed the true amount owed was about $97,000. Moreover, because the Clients’ home had significant equity, they were not eligible for an Offer in Compromise or an immediate Release of Lien for Consideration, despite being incorrectly advised by non-attorney consulting companies that they were. Instead, our Firm Attorneys recommended a Workout of $97,000 spread over a lengthy term and a waiver of the applicable interest rate making the monthly payment affordable. After back and forth negotiations, SBA approved the Workout proposal, thereby saving the home from imminent foreclosure and reducing the Clients' liability by nearly $81,000 in incorrect principal balance, accrued interest, and statutory collection fees.
Clients' 7(a) loan was referred to Treasury's Bureau of Fiscal Service for enforced collection in 2015. They not only personally guaranteed the loan, but also pledged their primary residence as additional collateral. One of the clients filed for Chapter 7 bankruptcy thinking that it would discharge the SBA 7(a) lien encumbering their home. They later discovered that they were mistakenly advised. The Firm was subsequently hired to review their case and defend against a series of collection actions. Eventually, we were able to negotiate a structured workout for $180,000 directly with the SBA, saving them approximately $250,000 (by reducing the default interest rate and removing Treasury's substantial collection fees) and from possible foreclosure.
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