If you have been deemed liable for an SBA debt due to a breach of an SBA loan agreement or personal guarantee, you may have to consider a couple of resolution options. Either, you may have to explore an SBA Offer in Compromise or a Treasury Department (DOT) Compromise Offer versus either a Chapter 7, 11 or 13 bankruptcy filing.
Below is a discussion regarding bankruptcy as an option to resolve your SBA loan problem or DOT collection case.
Preliminary Bankruptcy Analysis
An SBA Offer in Compromise or a compromise offer to the Treasury Department (DOT) is an out-of-court settlement request and is an alternative to filing for bankruptcy.
Depending on an SBA debtor's income/expenses and assets/liabilities, the SBA debtor may or may not qualify for a Chapter 7 bankruptcy, a Chapter 13 bankruptcy or even a Chapter 11 bankruptcy. It all depends on a number of several conditions and factors.
Generally speaking, to file a Chapter 13 bankruptcy, a debtor’s unsecured debts must exceed at least $383,175 and/or the secured debts must exceed at least $1,149,525
Chapter 13 bankruptcy requires debtors to repay creditors via a repayment plan that can last for up to 5 years. Such a repayment plan would include SBA loan debt. Moreover, debtors should be aware that over 67% of all Chapter 13 cases generally DO NOT result in a discharge.
For Chapter 7 – It is important to discover if your median annual gross income for your household in your zip code meets the requisite thresholds. If you are interested in a Chapter 7 bankruptcy, go to https://www.legalconsumer.com/bankruptcy/means-test/ to find out if you may qualify.
Please note that even if you are under the median gross income for your area, any equity you may have in any of your reachable assets may be at risk to be seized by the bankruptcy trustee and sold to repay your debts. You may be entitled to certain exemptions in the equity you have in your assets, but if any verifiable equity exceeds the statutory exemption amounts, your assets may be vulnerable to pay creditors.
To file bankruptcy, a debtor may have to do a great deal of expensive pre-filing asset protection transactions (which could also expose the debtor to certain fraudulent conveyance issues, a DOJ investigation and possibly a non-dischargeability finding by a bankruptcy judge). This would be an expensive Chapter 7 and one where there appears to a great deal of risk that could materialize with an SBA debtor possibly losing some of his or her assets.
In addition, filing for a Chapter 7 can be overwhelming. Click here to get a glimpse of a flow chart for a typical Chapter 7 bankruptcy filing and the various steps and hoops that one must confront: Chapter 7 BK Flowchart
Chapter 11 – Individuals can file under a Chapter 11 reorganization. However, Chapter 11 cases can be expensive and it is estimated that only 10% to 15% of Chapter 11 cases result in successful reorganizations. Most cases are dismissed or converted to Chapter 7 liquidations.
Even for a “simple Chapter 11” you can expect a qualified attorney to demand a $25,000 retainer fee. Chapter 11 cases, unlike Chapter 7 or Chapter 13 cases, are often not done on a flat fee basis but, instead, on an hourly basis and you can expect that retainer to be used up fairly quickly. If the case gets dismissed or converted, you are in the same situation you are in now and at risk to lose assets, plus you will be out a significant amount of money for bankruptcy attorney fees and costs.
In conclusion, although Chapter 7 or Chapter 11 bankruptcies are potential options, there appears to be a great deal of risk and those options do not seem to be any less expensive than dealing directly with the SBA debt as part of a bankruptcy alternative settlement.
Disadvantages Of Chapter 7
o Taking bankruptcy can weaken your ability to get credit, especially at a low interest rate. Also, your bankruptcy may haunt you when a prospective employer looks up your credit report as part of a reference check.
o The trustee takes over complete control of your debts and finances from the day you file until the judge discharges your case. You can't spend anything without the trustee's approval.
o For Sole Proprietors and Partnerships: The costs, hassles and surrendering of your property could cause you to close your business.
o You may lose a large amount of wealth if you have a large amount of nonexempt personal property or a large amount of equity in secured assets such as your house and cars. There is a chance you could lose any rental properties to the trustee.
Disadvantages Of Chapter 13
o You may pay much more to settle your bankruptcy under Chapter 13 than Chapter 7.
o You may have more hassle and headaches. For three or five years, you have a trustee running your financial life.
o If you miss payments under the plan, you may be at risk of having your bankruptcy dismissed and you are back at square one. Over 67% of Chapter 13 filings end up dismissed or converted to Chapter 7.
o You can't take on any more debt while you're in Chapter 13. This can stop business growth when you are a sole proprietor and limit your lifestyle options.
Disadvantages Of Chapter 11
o The process of obtaining approval of your reorganization plan is long and expensive.
o Chapter 11 cases are subject to much more assertive and aggressive creditor action, including adversary actions (lawsuits filed against you within the context of the bankruptcy proceeding). Active creditors make Chapter 11 cases more expensive and more drawn out for long periods of time, thereby increasing your attorney’s fees.
o As a general rule of thumb, Chapter 11 cases can cost upwards of $50,000 at a minimum.
Final Thoughts on Filing Bankruptcy
o Filing for bankruptcy also has a “hidden” cost. Operating in the business world is complicated when the borrower files for bankruptcy, and these complications can cost real money over the 10 years that a bankruptcy is reported on a credit report.
It has been estimated that the "hidden" cost of filing bankruptcy is between $75,000 – $150,000. Stated another way, if an SBA debtor can afford an SBA Offer in Compromise or DOT settlement for less, it is probably a good idea to try and obtain an SBA Offer in Compromise or DOT compromise. However, if the SBA Offer in Compromise or DOT compromise settlement cost is higher than the “hidden” bankruptcy cost, then the SBA debtor should probably seek protection through a bankruptcy.
If you are struggling with circumstances that involve SBA loan default, you deserve professional aid! Our attorneys all know how to win SBA Offer in Compromise cases. If you contact us, we help you resolve your SBA loan problems once and for all. After you schedule an appointment, you confer with a dedicated SBA Offer in Compromise lawyer and Treasury Department Practitioner who helps you through your administrative legal battle. After your claim is resolved, you never again have to worry about your SBA loan problems haunting you. Our team of lawyers has assisted many clients through the years. Now it is your turn! You truly can resolve your SBA loan problems for good!
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' 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.
Client personally guaranteed SBA 7(a) loan balance of $58,000. The client received a notice of Intent to initiate Administrative Wage Garnishment (AWG) Proceedings. We represented the client at the hearing and successfully defeated the AWG Order based on several legal and equitable grounds.
Client personally guaranteed SBA 7(a) loan for $350,000. The small business failed but because of the personal guarantee liability, the client continued to pay the monthly principal & interest out-of-pocket draining his savings. The client hired a local attorney but quickly realized that he was not familiar with SBA-backed loans or their standard operating procedures. Our firm was subsequently hired after the client received the SBA's official 60-day notice. After back-and-forth negotiations, we were able to convince the SBA to reinstate the loan, retract the acceleration of the outstanding balance, modify the original terms, and approve a structured workout reducing the interest rate from 7.75% to 0% and extending the maturity date for a longer period to make the monthly payments affordable. In conclusion, not only we were able to help the client avoid litigation and bankruptcy, but our SBA lawyers also saved him approximately $227,945 over the term of the workout.
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