At Delancey Street, a business debt settlement company, we negotiate with lenders and merchant cash advance funders for business owners who are struggling. Many of the owners we talk to are carrying an SBA loan, and many of them are wondering about bankruptcy. Before you decide anything, it helps to know what bankruptcy actually does to a business loan. In general, SBA loans get discharged in bankruptcy. One big exception occurs when the loan is secured by the debtor’s collateral. In that case, depending on the position of the SBA loan in the mix of secured creditors, the loan may survive bankruptcy. Here are five things that happen to a business loan in bankruptcy.
The first thing to understand is what kind of loan you have. What’s an SBA loan? It’s a loan from the Small Business Administration to a business owner, either to open a business or to help it stay open. People get them because they couldn’t find other financing, or because the terms are better than other financing. If it’s an unsecured loan, then it’s generally discharged in bankruptcy and treated just like all your other unsecured debts. When your unsecured SBA loan is discharged, you don’t owe it anymore.
Personal Guarantee
The second thing is the personal guarantee, and this is where many owners get caught off guard. Since the SBA loan required a personal guarantee (almost every SBA loan requires a personal guarantee), the lender could go after your personal assets in addition to the assets of the business. Odds are you can tell from the loan documents themselves whether you signed one. Check it out. If you signed it once to show the loan agreement is approved by your company, and then you signed it a second time in your Individual capacity, yep, you gave a personal guarantee. And don’t feel too bad about it. Most lenders won’t touch the loan without one.
Third, how does bankruptcy affect your personal guaranty? In consumer bankruptcy, which is a fancy way of saying Chapter 7 or Chapter 13, you can deal with your personal debts and your personal guarantee of business debt. The end result is that you want the debt wiped out (discharged) as far as you are concerned. Usually if the debt is the company’s debt, you dissolve the business with the state and file bankruptcy in the same motion. That settles the business’s responsibility, and the bankruptcy addresses your own personal liability.
A Secured SBA Loan Isn’t Wiped Out in Bankruptcy
The fourth thing is that a secured loan does not simply go away. There’s a big difference in secured debt and unsecured debt in bankruptcy, whether the debt is a mortgage, a car payment or an SBA loan. If you want to hang on to the property, you’re going to have to hang on to the debt that goes with it. So let’s say you own a car worth $14,000 and owe $13,000 on it. You have two options, either you can turn in the car and the debt and give them to the bank, or you can keep the car and keep making the payments after bankruptcy.
The fifth thing is where your loan sits in line. Most SBA loans are secured by real estate. Say you’ve got a home that’s worth 450,000 dollars, and the mortgage balance on it is 300,000 dollars. The mortgage lender is fully secured, because the balance is lower than the home’s value. Now let’s say you’ve also got an SBA loan for 50,000 dollars, and it’s secured by the same home. The SBA loan would be in second place behind the mortgage lender, but it would still be fully secured. A secured SBA loan isn’t wiped out in bankruptcy. You’ll have to keep paying it, after the bankruptcy anyway. That may sound scary, but the reality is that once you’ve got the rest of your unsecured debt gone, you’re often able to handle the monthly payments on the secured debt. As a numbers game, a bankruptcy discharge is a lot like getting a raise.
We’re Not a Law Firm
A word about us: we’re not a law firm. If bankruptcy is the better option, we’ll refer the owner to an independent attorney. And if bankruptcy is a better fit than settlement (like Subchapter V), we say so on that first phone call. First call is free and confidential. If you’re sitting there asking whether bankruptcy is your next step - or whether settling your business debt makes more sense - call us first.
