Running a small business can be rewarding, especially if you like calling the shots. However, many small enterprises have thin margins, and more than half eventually fail. If you have a Small Business Administration loan and your company goes under, defaulting is a reasonable concern. You may save your enterprise through bankruptcy, but that reveals another issue: Can bankruptcy eliminate a Small Business Administration loan? The answer isn’t as simple as you may hope.
Can Bankruptcy Eliminate an SBA Loan?
Bankruptcy allows companies to restructure their debts or liquidate assets to cover them, depending on the chapter filed. Once the process concludes, lenders must consider the debts discharged.
Unfortunately, not every debt is eligible. You generally can’t include the following in bankruptcy filings:
- Federal income taxes owed
- Student loans and other federal financings
- Child support
- Compensation for property damage or personal injury as ordered by the courts
Since many federal loans aren’t eligible, there’s understandable confusion about Small Business Administration loans. However, bankruptcies can discharge most SBA loans due to a technicality.
The SBA Doesn’t Provide Loans Directly
Can bankruptcy eliminate an SBA loan? The answer is “yes” because the SBA, a federal agency, doesn’t actually provide financing. Instead, it works with chosen private lenders who put up the actual cash.
Generally, lenders design commercial financing with large corporations in mind. Smaller enterprises may not qualify for these loans since they don’t have the same resources, and lenders may not want to take a risk on companies with such a high failure rate. The SBA removes this roadblock by guaranteeing loans, allowing lenders to offer favorable terms and take on riskier clients. Though the SBA facilitates these loans and provides many other resources to small business owners, it isn’t the monetary source.
Paycheck Protection Program Loans Are Small Business Loans
Recent events hit small businesses hard. As a solution, Congress created the PPP. This emergency financing provided small businesses with thousands of dollars and promises of loan forgiveness if they met specific criteria:
- Payroll accounted for a minimum of 60% of spending
- Companies maintained pre-loan levels of compensation and workforce
- Businesses didn’t use funds for ineligible expenses
While this financing kept many small businesses afloat, it wasn’t enough for some to weather economic hardships. Fortunately, PPP loans and other emergency funding are eligible for discharge through bankruptcy.
Bankruptcy Doesn’t Eliminate Liens
Many banks require collateral for loans. As part of the lending process, banks place liens on assets; in the event of default, the banks then take possession of the assets in lieu of repayment. Unfortunately, bankruptcy doesn’t interfere with this process, even if the loan in question is an SBA. In other words, the lien can survive the bankruptcy. This can be a huge concern, especially if the lien is against your residence.
Should You Hire a Bankruptcy Attorney in Denver, Colorado?
A bankruptcy attorney is the best person to answer the question, “Can bankruptcy eliminate an SBA loan?” While the general answer is “yes,” the bankruptcy code is highly complex, with many exceptions. Bankruptcy lawyers know the minutiae of the law and can help you navigate the changing landscape. For example, attorneys in this field keep up with acts of Congress, new SBA regulations and other matters that affect their clients.
Additionally, a bankruptcy requires lots of legal paperwork. Missed deadlines or paperwork errors can mean a dismissed case, so having an attorney track this information is invaluable.
Deciding Which Chapter Works Best For Your Company And You
There are three bankruptcy options for commercial enterprises: Chapter 7, Chapter 11 and Chapter 13. For many, Chapter 13 is the most appealing choice because debtors don’t lose their assets, even if there are liens. Instead, the court restructures the debts, and the debtors must make monthly payments for a specific amount of time. If the debtors comply with the arrangement to the end, the court considers the debts discharged.
The court may decrease the debt amount. The assets’ current value usually plays a vital role, as the repayment amount may be more than the asset is actually worth.
On the other hand, Chapter 11 offers several benefits for businesses:
- Can still apply for loans with court approval
- Can still operate
- Has trustee duties and powers
In Chapter 13 and 7 cases, the court appoints a trustee who collects payments from the debtor and sends the appropriate amounts to creditors per the agreement. A Chapter 11 case is distinct because the debtor remains responsible for dispersing funds.
Small businesses filing for Chapter 11 bankruptcy must do so under a subchapter V or a small business case. In contrast to regular Chapter 11 bankruptcy cases, these two remove most of the debtors’ powers. Under a subchapter V case, a court-appointed trustee oversees reorganization and repayment. In a small business case, the debtor has these responsibilities, but a court-appointed trustee monitors the proceedings.
Finally, Chapter 7 bankruptcy discharges debts in return for selling the debtor’s assets. The court-appointed trustee oversees this process. A bankruptcy attorney in Denver, Colorado, can help you identify property that is exempt, allowing you to retain some assets.
Negotiating With Creditors
Can bankruptcy eliminate an SBA loan if the lender disagrees? While negotiating with debtors is in the interest of most creditors, some may fight the filing process. For example, if an enterprise obtained the SBA loan under false pretenses, the lender can dispute the bankruptcy by filing its own petition.
Additionally, Chapters 11 and 13 require a repayment plan. Creditors understandably want to recoup as much as possible, so negotiations take place between the involved parties:
- Debtors and their representation
- Creditors and their representation
- Court trustee
A skilled lawyer can help you retain assets, negotiate favorable terms and protect your rights as the debtor. For example, courts place an automatic stay in most bankruptcy cases. During this time, creditors can’t attempt to collect from debtors, as their repayment is part of the bankruptcy proceedings. However, not all lenders respect this order; an experienced attorney can help you stop the harassment.
Talk To A Top-Rated Bankruptcy Attorney In Denver, Colorado
Are you wondering, “Can bankruptcy eliminate an SBA loan?” If so, the attorneys at Colorado Bankruptcy Law Group, LLC, have the answer. We can help you apply the means test, complete the necessary paperwork and negotiate a reasonable repayment plan. To arrange a consultation, contact us online or call 303-331-3403.