Discharging Small Business Administration Loans in Bankruptcy

What Is an SBA Loan?

Starting a small business can be challenging, and one of the ways to fund it is by taking out a Small Business Administration (SBA) loan. The SBA is a federal agency that provides support to small business owners by guaranteeing a portion of the loan and making it easier for them to obtain financing.

When you apply for an SBA loan, you usually have to sign a personal guarantee, making you personally liable for the obligation. If your business fails, you may find yourself unable to pay back the loan, leading to lawsuits, wage garnishments, or liens against your property. But there’s a way out – filing for bankruptcy can eliminate your obligation to pay back the SBA loan.

Discharging Your SBA Loan Through Bankruptcy

Filing for bankruptcy can discharge most government loans, including SBA loans, except for student loans. If you can’t pay back your SBA loan, bankruptcy can eliminate your liability for the debt. However, if you used any assets as collateral, bankruptcy will not wipe out the lender’s security interest in that property.

While bankruptcy eliminates your personal liability for your debts, it does not eliminate a lender’s lien or security interest in your property. If you took out an SBA loan and used any assets as collateral, the lender can still enforce its lien, even if you file for bankruptcy.

Bankruptcy Does Not Eliminate Security Interests

When you file for bankruptcy, your liabilities are classified as secured or unsecured debts. Unsecured debts include credit card debt, medical bills, and personal loans, while secured debts include any loans where the lender has a lien on your property and can foreclose or repossess it if you default.

Your bankruptcy discharge only wipes out your personal liability for your debts, but it does not eliminate a lender’s lien or security interest in your property. This means that if you default on a secured loan and file for bankruptcy, the lender retains the right to take back any property securing the loan through foreclosure or repossession.

Discharging SBA Loans in Bankruptcy

SBA loans can be discharged through bankruptcy, but if you used any assets as collateral, the lender can still enforce its lien. If you’re struggling to keep up with your SBA loan payments, filing for bankruptcy can help you eliminate the debt. However, the lender is legally entitled to enforce a lien against your property to recover some of its losses.

Conclusion

Filing for bankruptcy can be a viable option if you’re unable to pay back your SBA loan. Bankruptcy can eliminate your liability for the debt, except for the lender’s security interest in any assets used as collateral. If you’re considering bankruptcy, it’s essential to consult with a bankruptcy attorney to understand your options and make informed decisions.

Can SBA EIDL Loans Be Discharged in Bankruptcy? Exploring Your Options

As the COVID-19 pandemic continues to take its toll on businesses, many companies that took out low-interest loans from the US Small Business Administration (SBA) are facing the reality that they may not be able to repay their debts. If you’re one of these companies, you may be wondering whether you can discharge your SBA Economic Injury Disaster Loan (EIDL) in bankruptcy. The answer is yes, with some exceptions.

Understanding SBA EIDL Loans and Bankruptcy

Under the terms of the EIDL program, loans under $25,000 were unsecured, while loans over $25,000 required a security interest in the collateral of the business. Loans over $200,000 also required a personal guarantee, meaning that the guarantor, as well as the corporation/LLC/LLP, is liable for the debt.

When it comes to bankruptcy, SBA loans are treated no differently than other types of debts. The same criteria for discharge apply to them as would apply to credit card or medical debt. If a loan is taken out with no intention of repayment, that is considered fraud and may be an exception to discharge.

For most businesses, however, the intention was to save their company and repay the loan. But given the continued economic downturn and hyperinflation, many businesses will be unable to repay their loans, even at the low-interest rates. Discharging such debts in bankruptcy should not be a problem.

One caveat, however, is that EIDL loans were specifically earmarked to be used for the business. If the SBA can prove that you took out the loan and did not use it for proper business-related purposes, that could be grounds for objecting to the discharge of the debt in bankruptcy.

Corporate Versus Individual Bankruptcy Options for SBA Loans in California

If there is a personal guarantee on an SBA loan, discharging the debt in a corporate bankruptcy case will not eliminate the debt. The guarantor, usually an officer or owner of the business, will still owe the debt. In such cases, a personal bankruptcy filing should be considered.

For corporations, including LLCs, S-Corporations, and C-Corporations, the only way to get a discharge of debts is through a Chapter 11 reorganization case. How much needs to be repaid in a Chapter 11 case depends on several factors, including cash flow, asset value, and projected income. In a standard Chapter 11 case, the repayment plan requires a sufficient number of creditor votes for approval. However, under the new Subchapter V of Chapter 11, creditor approval is not necessary, as long as other criteria are met.

If there are personal guarantees on the loans, or if there is no corporation, such as when the business is a DBA of an individual, then personal bankruptcy options under Chapter 7, Chapter 13, or Chapter 11 may need to be explored. Since the business is also liable for the debt, your corporation may also need to pursue its own bankruptcy, depending on whether it will remain in business.

What if the SBA Loan is Secured by Business Collateral?

If an SBA loan is secured by business collateral, any lien created by the security interest will remain after the bankruptcy case. The lien will remain against assets in existence on the date the bankruptcy case is filed. This means that the value of that collateral must be paid out over time through any proposed payment plan.