white paper_sba personal guarantees and bankruptcy

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SBA Loan Guarantees And Bankruptcy – When An Offer In Compromise May Be The Better Option Protect Law Group | www.sba-attorneys.com 2016

Bankruptcy may seem like the obvious choice when a potential client comes to you with a large debt owed to the SBA from a failed business. However, an offer in compromise (OIC) may provide a better option than bankruptcy.

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SBA LOANS AND THE SBA GUARANTEE

Generally speaking, the SBA does not make direct loans to small businesses. Rather, SBA sets the guidelines for loans, which are then made by its partners (lenders, community development organizations, and micro-lending institutions, which are often referred to as “third party lenders”).

The SBA guarantees that these loans will be repaid, thus eliminating some of the risk to the lending partners. So when a business applies for an SBA loan, it is actually applying for a commercial loan, structured according to SBA requirements with an SBA guaranty.

Common SBA loan programs are known as 7a loans, 504 loans, Express loans and Disaster

Relief Loans (Disaster Relief Loans are direct loans from the SBA).

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THE SBA PERSONAL GUARANTEE

Pursuant to an SBA loan the principals of the business and often their spouses are required to sign a personal guarantee (SBA Form 148 attached for reference). Section 9(D) states “JOINT AND SEVERAL LIABILITY. All individuals and entities signing as Guarantor are jointly and severally liable.”

In its simplest terms, if two or more business partners sign a personal guarantee, the SBA does not care from whom it collects any deficiency or what percentage. If the potential client receives a notice from the SBA or the Department of Treasury, those government entities are looking for 100% contribution from the potential client.

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GOVERNMENTAL COLLECTION

Once the SBA loan is in default, the SBA and the Department of Treasury have several options concerning collection of the debt.1

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WHY AN OIC MAY PROVIDE A BETTER OPTION FOR THE CLIENT

Disadvantages Of Chapter 7

• Bankruptcy can weaken the ability to obtain credit, especially at a low interest rate. • The trustee takes over complete control of the bankruptcy estate. • One may lose a large amount of wealth if there is a large amount of equity in real

or personal property. • Liens on real property run with the property and are not discharged.


• The process is long and court approval is needed for many financial decisions. • For three or five years a trustee lords over the client’s financial life. • If payments are missed under the plan, the client is back at square one.


• It is usually a long process and an expensive process. • Estimates place the percentage of Chapter 11 cases that result in a confirmed

plan at 25%-30%.

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Other Disadvantages

Adverse Actions

The SBA debt arises from a business loan and as such financial disclosures and ongoing financial disclosures comprise the focus of the lending and the debt. Discrepancies and misrepresentations can lead to costly, time consuming and ultimately detrimental 523 and/or 727 adverse proceedings. The offer in compromise process can achieve a settlement of the debt if you think there is a risk that an adverse proceeding will be filed.

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Barred From Future Government Supported Loans Once the government suffers a “loss” on an SBA loan, the potential client is barred from every receiving federal backed loans. This may include SBA loans, student loans, VA loans, etc.

As part of the offer in compromise process, we can work to ensure a compromised loan does not prevent future lending.

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The SBA Provides A “Buy Out” Of A Lien On Primary Residence

Often times the potential client’s main asset in the primary residence.

Depending on your state’s exemption scheme, the house may be at risk in a bankruptcy. Moreover, the SBA debt may be the only debt the potential client has and is the catalyst for the bankruptcy consultation.

If the SBA or third party lender obtained a lien against the real property as collateral for the loan, the SBA standard operating procedures allow a debtor to keep their primary residence and “buy out” the equity. Therefore, through an offer in compromise, the potential client can settle the debt and remove the lien on their real estate, which may not be possible in bankruptcy.

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CONCLUSION

For potential clients with an SBA debt, bankruptcy may be the right course.

However, pitfalls exist to dealing with an SBA through the bankruptcy process.

This paper specified situations where the offer in compromise provides the better option to relieve the debt.

white paper_sba personal guarantees and bankruptcy

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