In unprecedented economic times, you may be considering shutting your business. But you have an SBA loan. Does an SBA loan bankruptcy apply to you? Read on.
Book a Consultation CallUnfortunately, the COVID pandemic and subsequent business shut downs and restrictions impacted many businesses. Moreover, you have decided you can no longer keep your business going. However, you have an outstanding SBA loan. Does an SBA loan bankruptcy for your business make sense?
SBA Loan Bankruptcy
In most situations, bankrupting your business if it is a C corporation, S corporation or limited liability corporation (LLC) will not make sense. Understand, the SBA loan process granted the lender a lien on all of the business assets. As such, the lender retains the right to foreclose on the business assets despite a bankruptcy filing. More than likely, no other assets will exists for the bankruptcy trustee to disperse to other creditors.
However, in certain situations you may want to consider an SBA loan bankruptcy for your corporation or LLC. For instance, if the business has certain assets that the SBA lender does not have a lien position and your business has multiple creditors, a Chapter 7 may make sense for an orderly winding down of the business and distribution of assets. Moreover, if one or more lawsuits involve your business a Chapter 7 bankruptcy would stop the lawsuits and allow a controlled winding down of the business.
If, however, you operated your business as a sole proprietorship then an SBA loan bankruptcy may make more sense. Under this scenario, you remain personally liable for the loan. Even if you only pledged business assets as collateral, the lender can still sue you to pursue recovery. Now, your personal assets are at risk. A Chapter 7 bankruptcy will half any collection actions and, importantly, discharge the SBA loan obligation.
On the other hand, if you pledged your house as collateral, a Chapter 7 bankruptcy will not prevent the lender from foreclosing on your house. The lender can obtain leave from the bankruptcy stay and pursue your house to repay the loan. To that end, read your loan documents carefully so you know what you are putting at risk.
If, as part of your loan, you did pledge your house as collateral, now you need to focus on saving your property. In this case, a Chapter 11 Subchapter V bankruptcy may be to your advantage. The Chapter 11 Subchapter V bankruptcy provides you with the opportunity to repay the debt on terms you can afford. Therefore, instead of paying the debt in full upon demand by the lender or face foreclosure, your bankruptcy plan can propose terms of repayment - over a number a years.
Therefore, although you will have to pay the debt, the Chapter 11 Subchapter V allows you to keep your house. The Chapter 11 process requires you to pay the secured debt (the lien on your house) in full. However, your remaining debts would be paid off proportionately under your bankruptcy repayment plan. To that end, unsecured creditors may be paid but not in full and only a portion of the debt.
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 personally guaranteed an SBA 7(a) loan for $100,000 from the lender. The SBA loan went into early default in 2006 less than 12 months from disbursement. The SBA paid the 7(a) guaranty monies to the lender and subsequently acquired the deficiency balance of about $96,000, including the right to collect against the guarantor. However, the SBA sent the Official 60-Day Due Process Notice to the Client's defunct business address instead of his personal residence, which he never received. As a result, the debt was transferred to Treasury's Bureau of Fiscal Service where substantial collection fees were assessed, including accrued interest per the promissory note. Treasury eventually referred the debt to a Private Collection Agency (PCA) - Pioneer Credit Recovery, Inc. Pioneer sent a demand letter claiming a debt balance of almost $310,000 - a shocking 223% increase from the original loan amount assigned to the SBA. Client's social security disability benefits were seized through the Treasury Offset Program (TOP). Client hired the Firm to represent him as the debt continued to snowball despite seizure of his social security benefits and federal tax refunds as the involuntary payments were first applied to Treasury's collection fees, then to accrued interest with minimal allocation to the SBA principal balance.
We initially submitted a Cross-Servicing Dispute (CSD) challenging the referral of the debt to Treasury based on the defective notice sent to the defunct business address. Despite overwhelming evidence proving a violation of the Client's Due Process rights, the SBA still rejected the CSD. As a result, an Appeals Petition was filed with the SBA Office of Hearings & Appeals (OHA) Court challenging the SBA decision and its certification the debt was legally enforceable in the amount claimed. After several months of litigation before the SBA OHA Court, our Firm Attorney successfully negotiated an Offer in Compromise (OIC) Term Workout with the SBA Supervising Trial Attorney for $82,000 spread over a term of 74 months at a significantly reduced interest rate saving the Client an estimated $241,000 in Treasury collection fees, accrued interest (contract interest rate and Current Value of Funds Rate (CVFR)), and the PCA contingency fee.
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.
The client personally guaranteed an SBA 504 loan balance of $375,000. Debt had been cross-referred to the Treasury at the time we got involved with the case. We successfully had debt recalled to the SBA where we then presented an SBA OIC that was accepted for $58,000.
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