If you are the owner of a catering, local courier or other small service business, you probably already understand that you have a better chance of success than your counterparts in sales-based enterprises.
Not to slam online sellers, but if you have a niche trade in books, cosmetics or just about any other product, you know that competition from mega-companies such as Amazon has made success more challenging than ever.
It’s very possible that, when you started out or expanded, you received financial assistance from the federal Small Business Administration (SBA). If you are one of the tens of thousands of businesses that obtain SBA-guaranteed loans every year, you know that the interest rate of 10 percent or lower is hard to beat.
This is because the lender that made your loan knows it will be able to collect from the SBA if you fail to pay.
Whatever your stock in trade or service, however, you may also know that the failure rate for small business startups is high. The SBA statistics are sobering – about 20 percent of new businesses fail in the first year. By the fifth year, the rate is roughly half. By year ten, only about 30 percent are still around.
Discharging Your SBA Loan Through Bankruptcy
You may be trying to weather a rough period due to an economic downturn or other temporary cause. Or perhaps you’ve decided it’s time to close up shop for good. Either way, you will want to consider filing a bankruptcy petition in order to eliminate some or all of your business debts.
We’ve written previously about how bankruptcy of your sole proprietorship or corporation/limited liability company (LLC) lets you choose between continuing to operate your business or closing it down.
Thanks to Bankruptcy Code amendments in 2005, eliminating student loan debt in bankruptcy is difficult. In general, these loans can only be discharged if the borrower can show undue hardship.
Because the SBA and the agencies that guarantee student loans are all federally chartered, many people mistakenly believe that SBA loans are treated the same as student loans. In reality, SBA-guaranteed loans can generally be discharged just like any other debt.
Bankruptcy Does Not Eliminate Small Business Administration Liens On Your Home
That said, often SBA-guaranteed loans are secured by a mortgage or other lien on your business property. You may have also given the lender a mortgage or other lien on other property. As you may know, secured creditors don’t lose their liens in bankruptcy. Therefore, it’s critical to remember that if (assuming you qualify) you wish to file a Chapter 7 liquidation petition, the lender can and very possibly will seek to enforce these liens and sell the related property. If this is a concern, you should consider filing a Chapter 13 “wage earner” plan instead.
Our experienced Colorado bankruptcy attorneys can advise you concerning each option and how to deal with SBA loans. Give us a call today at 303.331.3403. You can also schedule a consultation by clicking here.