SBA Loan Workout: What Happens to an SBA Loan when You File for Bankruptcy?

This is not intended to be legal advice, see an attorney for that, but as businessmen we must always consider the implications of many legal acts before we see the attorney, and thus must be free to discuss general concepts. The following is a general concept opinion; see your lawyer for legal advice.

Nothing usually good occurs when you have an SBA loan and file for bankruptcy.

A few assumptions: You and your spouse signed the personal guaranty for the SBA guaranteed loan.

Typically, the SBA can gain a position on your home by means of a mortgage, subordinate to the original mortgage and perhaps a second already on and despite no available equity, they attach in a second or third position. This usually is done only to prevent you from filing bankruptcy as once attached to your home, you cannot shake it off, even with a filing, unless you choose to lose your home altogether, which is seldom the choice of preference.

Just as unfortunately, even if the SBA did not take a mortgage position on your home, once in default and because of the two guaranties, one from each spouse, they can get a judgment quite easily in the due course of their foreclosure process. Thus they will eventually get a lien on your house, also subordinate to prior mortgages but none the less it attached and cannot then be eliminated without losing the home and will not be discharged by bankruptcy.

Even if one's spouse did not sign the guaranty, the above can occur, anyway, the only difference is that if any cash does evolve out of foreclosure the non signed spouse will receive his/her 50% share of the proceeds.

Thus, while most of your credit card debt may be discharged, and other unsecured debt certainly can be discharged, your major issue the SBA loan will not be discharged for the above reasons. So since bankruptcy will cost you your business, and will not remove the SBA debt, what could possibly be the benefit of filing for bankruptcy if you have an SBA guaranteed loan? There's nothing at all. This forces or intimidates borrowers into making payments and payment agreements they would otherwise not make. Unfortunately bankruptcy does not work on your behalf. The deal is fixed.

There is a possibility that if you qualify for a chapter thirteen and he attached SBA lien has no equity at all to support it, then it could be discharged as against the house and then discharged from you personally depending upon all the details. Clearly you would have to seek competent bankruptcy legal advice to determine any of this.

From our experience, the SBA and its banks are not taking an aggressive position with borrowers homes and are allowing them to remain without pursuing a lift of stay from bankruptcy protection and getting permission to foreclose, unless there is more than 20% equity in the home so that after expenses something positive is realized by the bank, otherwise they are allowing the borrowers to remain in the house.

Most homes in the country are currently devoid of equity so there are few foreclosures but one will live forever under the cloak of the additional mortgage never being able to sell or refinance without confronting the SBA lien or mortgage. You are never going to get a return on your investment, so what is the point in paying the debt service? One would wonder.

One alternative: our debt forgiveness strategy, which removes debt and preserves assets. Call us for debt forgiveness, debt workout review and we will arrange a no obligation teleconference for us to discuss your options.