A loan from the Small Business Administration is actually a private loan with a guaranty, or insurance, from the SBA. When you default, the SBA repays the private lender. You end up in debt to the federal government, which is the most senior form of debt you can have. It is difficult to have government debts, such as judgments, tax liens and SBA loan defaults, forgiven in a bankruptcy.
Types of Bankruptcy
As a business, you may file for Chapter 7 or Chapter 11 bankruptcy, which are the two forms out of six that will help in your situation. In Chapter 7 bankruptcy, your company's assets will be sold to pay for debts, and your company will dissolve. In Chapter 11, a judge will restructure your debt so your business can stay open and continue to pay its debts. If you have filed for Chapter 11 bankruptcy, you will be able to restructure your SBA loan in court. This will not excuse you from payment, but it will provide you with options to pay according to your ability. If you file for Chapter 7, a different process ensues.
SBA Loans after Liquidation
A judge will determine how to liquidate your business's assets and repay your debts if you file for Chapter 7 bankruptcy. The judge will start by paying off your most senior debts, such as your SBA loan or tax liens. It would be rare for you to receive any discharge of the debt. Only if your business's assets are insufficient to cover even these debts would a judge consider a discharge. In this case, however, you may be held personally responsible.
All SBA loans require personal guarantees. Any individual with a 20 percent or greater share in the business must guarantee the loan, which means these owners are putting up their own assets as collateral on the debt. If you are a business owner with a personally guaranteed SBA loan, you will be on the hook for the debt even if your business files for bankruptcy. Your personal assets, such as a home, car or other items, may be liquidated in addition to your business assets to cover the debt.
SBA Loan Discharge
In rare cases, the debt you owe on an SBA loan may be discharged. In this case, both the business and your personal estate must be in bankruptcy. If a judge determines there is absolutely no way you can repay the debt without imposing unreasonable harm to you or your family, you may receive a discharge. The burden of proof in this case lies with you. You will have to present documents verifying your income and fixed costs, such as providing for your family, for a judge to determine you are incapable of repaying the debt.
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