Navigating the Maze of SBA Loan Collateral and Personal Bankruptcy: A Handy Guide

SBA loan collateral and personal bankruptcy can feel like traversing through a minefield, right? Well, imagine me as your trusty guide, helping you to keep your footing amid crossing such a tricky landscape.

Just to blow your mind with a statistic, did you know that statistically, half of small businesses hit the rocks by their fifth year? A closer look shows that about 82% of them stumble into the pitfall due to issues with cash flow.

Financial institutions often see these businesses as shaky ground to tread on – a risky investment, if you will. This means securing a loan can feel like trying to catch a snowflake in the Sahara. As such, most businesses turn to SBA loans, presenting less of a risk for lenders.

But what happens when you, a borrower, face the dreaded specter of bankruptcy? Your worry right now may be about your SBA loan collateral. Let’s delve into this, shall we?

An Overview of the SBA Loan

Almost like a safety net, an SBA loan is a small business loan where part of it has the protective umbrella of the US Small Business Administration’s guarantee. This lowers the stake of risk a private lender may face, facilitating loan acquisition for businesses where conventional options fall short.

The federal agency promise covers up to 85% of the loan, but, be warned, the application process can try the patience of a saint. In most instances, you will also be required to sign a personal guarantee. Default on your side, and the lender can ring your doorbell with a lawsuit or place a lien on your property.

Stepping Over the SBA Loan Default Tripwire

Before we sail into the stormy seas of a bankruptcy discussion, let’s first straighten out some terms. A delinquency occurs when your payments lag, but you’re not so far behind to earn the label of a defaulter. Defaulting happens when you’ve significantly missed payments according to your loan agreement terms.

So, you’re on the brink of an SBA loan default. What do you do? Considering using your best offense as your defense. Before you slip into the default zone, shoot the lender a message if you’ve been behind on payments for long.

Lenders would much rather you approach them first than have to chase the default process on their part, which can be as welcome as a skunk at a picnic. They may be open to discussing a mutually beneficial solution. Bear in mind though, any agreement will still require the green light from the SBA.

The Domino Effect of a Declared Loan Default

If negotiation balks, you might be headed for a loan default. This allows the lender to claim your business assets. Is there a shortfall? Then your personal assets become the next target, especially if you signed a personal guarantee.

At this stage, if your assets are insufficient for the loan amount, the lender turns towards the SBA’s guarantee. Then the gloves come off, and your problems switch from lender to government as they will look to reclaim the money they handed over to the lender.

But before you panic, know that the government would rather you settle the dues than dish out punishment. In most scenarios, you’ll likely find a way to work out a repayment plan. But then, what if you declare bankruptcy?

Can Bankruptcy Discharge Your Loan?

Many people mistakenly believe that an SBA loan is immune to bankruptcy because it involves a federal agency. However, a crucial bit to remember here is that the actual loan comes from the lender, not the SBA. The SBA merely acts as a partial guarantor. In fact, many government loans are still dischargeable through bankruptcy.

Sure enough, an SBA loan, like the others, is dischargeable through bankruptcy. There are, however, elements that you’ll still need to cover.

The Fate of your SBA Loan Collateral in case of bankruptcy?

Although bankruptcy can wipe out personal liability for debts, it doesn’t erase the lender’s lien or security interest on your property. So, a secured debt that involved collateral doesn’t extend protection of bankruptcy to the collateral itself.

The SBA views collateral as both personal and business assets, like your car or mortgage, or operational assets like buildings, equipment, accounts receivable or, in some cases, your inventory. If push comes to shove and you haven’t repaid your SBA loan, the lender can take these assets through repossession or foreclosure.

It’s also important to mention that banks can challenge your bankruptcy. In case a lender opposes your bankruptcy, they may investigate the filing for any breach of loan requirements. Say, for instance, they discover that you’ve disposed of your collateral then, it’s likely to open up a complaint process. This could squash the discharge on some of your debts, and you could face federal charges if fraud is involved.

Don’t Grapple with SBA Loans and Bankruptcy Alone

Navigating the SBA loan collateral, default, and bankruptcy maze can be about as clear as mud. Consult with a professional, such as the adept lawyers at Lawscape.

Why Lawscape and Lawscape?

With a sterling record of resolving millions of dollars in SBA debts through negotiated agreements and without clients having to resort to bankruptcy, you can trust in our experience. We’ve also successfully defended millions of dollars in Treasury Debts through various channels.

Besides, as attorneys authorized by the Agency Practice Act, the Lawscape team can legally represent federal debtors nationwide before pertinent bodies such as the SBA, The SBA Office of Hearings and Appeals, the Treasury Department, and the Bureau of Fiscal Service.

I’d be happy to discuss these issues with you. Reach out to us at Lawscape if you need any help with your SBA loan.