SBA Loans In Bankruptcy
Small business loans or SBA loans are generally eliminated or discharged by a bankruptcy. One exception to discharging SBA loans in bankruptcy, is when the SBA loan is secured by collateral of the debtor. In that event, depending upon its position relative to other secured creditors, your SBA loan may survive your bankruptcy filing.
What Is An SBA Loan?
An SBA loan is a loan granted by the Small Business Administration. These loans are given to individuals to assist with opening a business or continuing to operate a business. You may choose an SBA loan because it is difficult to get financing as a small business, or perhaps because the terms of the SBA loan are more favorable than other types of financing available.
Personal Guarantees For SBA Loans
In almost all cases, you will be required to personally guarantee your SBA loan. This means that if the business defaults on the loan, the lender’s recourse is not only the business assets but also your personal assets. You can generally tell if you have personally guaranteed an SBA loan if you sign the loan documents once for the business and a second time in an “Individual” capacity. If you did personally guarantee your SBA loan or any other loan for your business, do not feel bad—most lenders will not give you the loan without the personal guarantee.
Does A Bankruptcy Address A Personal Guaranty?
Yes. Consumer bankruptcy comes in the form of Chapter 7 and Chapter 13. Both bankruptcy chapters address your personal debt as well as your personal obligation on business debt. The goal of the bankruptcy is to receive a discharge of the debt as to you, the individual. If you own a business which obligated itself on debt, typically you will dissolve the business with the NC Secretary of State in conjunction with filing bankruptcy. This serves to eliminate the business obligation on the debt, while the bankruptcy serves to eliminate the personal obligation.
Secured SBA Loans In Bankruptcy
Secured debt in bankruptcy is treated differently than unsecured debt. This is true whether it is a mortgage, a vehicle loan, or an SBA loan. If you want to keep the property, you must keep the debt associated with the property. For instance, if you own a vehicle worth $14,000 with a loan balance of $13,000, you can choose between surrendering the vehicle (and the debt) to the lender, OR you can retain the vehicle after bankruptcy and continue to make payments on the vehicle loan.
Most SBA loans are secured by real property, or real estate. If you own a home with a fair market value of $450,000 with a mortgage balance of $300,000, the mortgage is fully secured. This is because the balance of the mortgage is less than the FMV of the home. You may have an SBA loan with a balance of $50,000 which is also secured by the real property. While the SBA loan is in second place as a creditor behind the mortgage lender, but the SBA loan is still fully secured.
SBA Loans After Bankruptcy
If your SBA loan is discharged by your bankruptcy, you will have no further obligation to pay it. The SBA loan is treated like all other unsecured debt. If your SBA loan is secured, it will survive the bankruptcy and you will be obligated to continue to pay on it after bankruptcy. Most clients find that if they can discharge all other unsecured debt by way of bankruptcy, they can manage to pay the monthly amounts due on their secured debt. In many ways, when simply looking at the numbers, the discharge of debt in bankruptcy translates into giving yourself a raise.
Speak With A Bankruptcy Attorney Today
Getting started with bankruptcy planning is easy and we are happy to discuss SBA loans in bankruptcy. You can call us at 704.749.7747 for a free consultation or click HERE to request a phone call. A lawyer will call you today.