Navigating SBA Loans in Personal Bankruptcy: What to Know About SBA Loan Cramdowns

Filing for bankruptcy is often a complex and overwhelming process, especially for small business owners who may have taken out Small Business Administration (“SBA”) loans to finance their ventures. While SBA loans can provide critical support to entrepreneurs, they can also complicate the bankruptcy process because of personal guarantees and potential liens. Here we’ll explore how GAJP can help you effectively deal with SBA loans in personal bankruptcy cases, offering insights and strategies to help small business owners navigate this challenging terrain.

Understanding SBA Loans

The Small Business Administration offers various loan programs designed to support entrepreneurs and small business owners. These loans can be a lifeline for businesses in need of capital for expansion, operations, or recovery. During the COVID-19 Pandemic, the SBA also issued billions of dollars of Payroll Protection Program (“PPP”) and Economic Injury Disaster Loans (“EIDL”). Depending on how your business is structured, these loans may or may not have a forgiveness component or may have been secured against your business or personal collateral.

Chapter 7 vs. Chapter 13 Bankruptcy

Two common forms of personal bankruptcy are Chapter 7 and Chapter 13. The approach to handling SBA loans can differ depending on the type of bankruptcy being pursued:

1. Chapter 7 Bankruptcy: In a Chapter 7 bankruptcy, a debtor’s non-exempt assets are liquidated to repay creditors. If you have an SBA loan, it’s essential to determine whether the loan is secured or unsecured. If the SBA loan is secured by collateral, the bankruptcy discharge will not eliminate the lien and you may still be at risk of losing the underlying collateral. Depending on the value of the collateral, you may be able to “redeem” a secured SBA loan by paying the SBA an amount equivalent to the value of the property rather than the total amount due.
2. Chapter 13 Bankruptcy: Chapter 13 bankruptcy is a repayment plan spanning three to five years. In many cases you may only have to pay pennies on the dollar to unsecured creditors. SBA loans can be incorporated into this plan, allowing debtors to make manageable payments. You may be able to “cramdown” an SBA loan in a chapter 13 plan by simply paying the SBA an amount equivalent to the value of the property over the term of the plan. Hiring a knowledgeable bankruptcy attorney to devise a feasible repayment strategy that accounts for an SBA loan may be the key to your business’s survival.

How Cramdown Works

When cramming down an SBA loan in Chapter 13 bankruptcy, the loan is divided into two parts:

1. Secured Claim: The portion of the loan equal to the value of the collateral is considered a secured claim. This portion must be paid in full through your Chapter 13 repayment plan, generally with interest. For instance, if the collateral is worth $20,000 and the outstanding loan balance is $70,000, the $20,000 is the secured claim.
2. Unsecured Claim: The remaining balance of the loan that exceeds the collateral’s value becomes an unsecured claim and is treated like any other unsecured debt like a credit card or medical bill. In the example above, this would be the $50,000 difference between the collateral’s value and the outstanding loan balance.

Benefits of Cramdown

Cramming down your SBA loan in Chapter 13 bankruptcy can provide several benefits to you and your business:

1. Reduced Principal: You only need to pay back the current value of the collateral, potentially reducing the overall principal amount of the loan. For many businesses without substantial fixed assets, this could mean tens of thousands of dollars of savings.
2. Lower Monthly Payments: By reducing the principal, your monthly payments become more affordable and in line with your financial capacity. Additionally, since the loan would be paid through a chapter 13 plan, you will only have to make one monthly payment for most of your debts.
3. Retaining Your Property: Cramdown allows you to keep the collateral secured by the loan, so you won’t have to surrender the property to the SBA in order to pay off your SBA loan. This is particularly important for business assets like equipment or real estate.

Cramming down SBA loans in a Chapter 13 bankruptcy can be a powerful tool to help you manage your business’s debt and regain control of your finances. However, it’s a complex process that requires skill and experience to navigate.

Working with an experienced bankruptcy attorney who understands the intricacies of SBA loans and bankruptcy law can significantly improve your chances of successfully restructuring your SBA loan and achieving a fresh financial start. Remember, each case is unique, so contact us today at (916) 458-5190 to schedule a consultation with a legal expert to find the best path forward for your specific situation.