SBA Loan

A KEY QUESTION:  Is your SBA Loan old or new?  Specifically, did the loan pre-date the Pandemic, or did you obtain the loan during the Pandemic?

WHY THIS IS SO IMPORTANT:  SBA loan terms loosened up a lot when Covid-19 hit.  As a general rule, SBA loans obtained before the pandemic had harsh terms.  Those offered during the Pandemic, were much “softer.”  And ultimately, if your business is struggling to repay this debt, your specific loan terms can how much of this debt you actually need to repay.

TO EXPLAIN:  An SBA loan obtained during the Pandemic, likely did not require nearly as much collateral (“collateral” is property which can sold by the lender to satisfy the delinquent debt).  Historically, SBA loans required collateral that included virtually everything the borrower owned – all business assets, plus the family home, plus a personal guarantee (making the individual completely liable for the business debt).  In essence the SBA lender had maximum leverage over the borrower.  An SBA loan in default could result in the business owner losing everything – the business and their home.

BUT ….  if an SBA loan was obtained since the start of the Pandemic, there is a good chance the borrower pledged only business assets as collateral (such as inventory, accounts receivable, and/or equipment), and no personal assets (such as their family home).  There is also the possibility no personal guarantee was required.  This can make a huge difference, because….

The New “Small Business” Chapter 11 Bankruptcy

….Congress passed a new law specifically to make a chapter 11 reorganizations more accessible to small business owners.

Ability to Discharge Unsecured Debts.  As chance would have it, just before the Pandemic hit, this new type of Chapter 11 Bankruptcy went into effect (this was a big deal in the industry).  It’s called a Sub-Chapter V, Chapter 11.  From this author’s perspective, the most significant aspect of this new law was that it allowed qualifying Small Businesses owners the opportunity to:

  1. Continue To Operate,
  2. Retain Ownership of the Business, and also…
  3. Discharging Some, or All Unsecured Debts.

It is important to realize how powerful of a tool this was for business owners, who wanted to keep operating their business, but couldn’t afford to pay all the business debts.

Why The Terms of the SBA Loan Matter

If a lender is unsecured (there is no “collateral”), or partially unsecured (the collateral is worth less than the debt), then this drastically increases the likelihood that some or all of that debt can be discharged in bankruptcy.  And in a Small Business Chapter 11, the borrower is permitted to continue operating the business and retain ownership.  How much the borrower must ultimately pay is usually determined by: 1) the liquidation value of the business assets, and 2) how much net income the business produces (typically looking at income over a 5-year period).  But if both asset value and income are relatively low, then the odds go up that the SBA debt can be either partially or fully discharged.

If This Describes Your Situation…

Contact a Bankruptcy Attorney with experience in Chapter 11 Bankruptcy.  Clearly this article is for general discussion purposes only.  If your business is struggling, and you’ve defaulted on SBA loans, you need a consultation with a knowledgeable bankruptcy attorney to assess the specific facts of your situation.  But there is cause for hope: the Small Business Chapter 11 may have been designed precisely to help individuals in your exact situation.

If You’d Like to Schedule a Consultation, And You’re Located in the Bay Area….



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