Bankruptcy and SBA Loans

Many budding entrepreneurs require some assistance corralling the capital needed to get a new venture off the ground. No matter how promising the concept, financial institutions are often wary about lending funds based on projected commercial revenues. Frequently, a loan backed by the Small Business Administration (SBA) is the answer. These loans, partially backed by the federal government, exist to help business owners take advantage of opportunities while reducing the risk to private lenders.

Generally, SBA loans are backed by collateral or the personal guarantee of each owner with a stake of at least 20 percent in the company. For personally guaranteed SBA loans, the financial institution can pursue the owner’s individual assets if the business cannot repay the debt. Accordingly, someone who receives an SBA loan might be on the hook for it long after they’ve shut the doors on their business.

If you’re personally responsible for an SBA loan, but are facing severe debt problems, the personal obligation may be discharged in a Chapter 7 filing, provided there was no fraud or misuse of funds. You might find yourself responding to inquiries about your business and the accuracy of previously provided financial information. Any collateral securing the loan—such as real estate or equipment—can still be seized by the lender.  

Chapter 13 bankruptcy allows individuals with a steady income to repay all or part of their debts pursuant to a schedule lasting three to five years. An SBA loan backed by a personal guarantee can be included in the repayment plan. This may reduce monthly payments, stop collection efforts, and allow the borrower time to regain financial stability. Any remaining eligible balance may be discharged at the end of the plan.

For larger businesses or more complex financial situations, Chapter 11 bankruptcy may be an option. Chapter 11 allows a business or individual to restructure debt while continuing operations. SBA loans can be renegotiated through a court-approved plan, potentially modifying repayment terms, interest rates, or timelines. Personal guarantees, however, often remain a critical issue, especially when the business and owner file separately.

Because SBA loans involve federal programs, strict documentation, and multiple layers of liability, bankruptcy decisions involving these loans should not be made lightly. Consulting with an experienced bankruptcy attorney can help determine the best strategy for protecting assets while addressing overwhelming debt.

Jeff Field & Associates provides comprehensive counsel to small business owners throughout Georgia on bankruptcy filings and other debt relief matters. Please call 404-381-1278 or contact us online to schedule a consultation. Our offices are in Douglasville, Gainesville, Bogart, Lawrenceville, Marietta and Decatur.