White Paper_SBA Personal Guarantees and Bankruptcy
1. 1
AlexZ@protectlawgroup. com
MarcF@protectlawgroup.com
www.sba-attorneys. com
1-888-756-9969
SBA Loan Guarantees And Bankruptcy –
When An Offer In Compromise May Be The
Better Option
Protect Law Group | www.sba-attorneys.com 2016
Bankruptcy may seem like the obvious choice when a potential client comes to you
with a large debt owed to the SBA from a failed business. However, an offer in
compromise (OIC) may provide a better option than bankruptcy.
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SBA LOANS AND
THE SBA GUARANTEE
Generally speaking, the SBA does not make direct loans to small businesses. Rather,
SBA sets the guidelines for loans, which are then made by its partners (lenders,
community development organizations, and micro-lending institutions, which are often
referred to as “third party lenders”).
The SBA guarantees that these loans will be repaid, thus eliminating some of the risk to
the lending partners. So when a business applies for an SBA loan, it is actually applying
for a commercial loan, structured according to SBA requirements with an SBA guaranty.
Common SBA loan programs are known as 7a loans, 504 loans, Express loans and
Disaster
Relief Loans (Disaster Relief Loans are direct loans from the SBA).
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THE SBA PERSONAL
GUARANTEE
Pursuant to an SBA loan the principals of the business and often their spouses are
required to sign a personal guarantee (SBA Form 148 attached for reference). Section
9(D) states “JOINT AND SEVERAL LIABILITY. All individuals and entities signing as
Guarantor are jointly and severally liable.”
In its simplest terms, if two or more business partners sign a personal guarantee, the SBA
does not care from whom it collects any deficiency or what percentage. If the potential
client receives a notice from the SBA or the Department of Treasury, those government
entities are looking for 100% contribution from the potential client.
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GOVERNMENTAL COLLECTION
Once the SBA loan is in default, the SBA and the Department of Treasury have several
options concerning collection of the debt.1
1 Chart from Managing Federal Receivables from the Department of Treasury.
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WHY AN OIC MAY PROVIDE
A BETTER OPTION FOR THE
CLIENT
Disadvantages Of Chapter 7
• Bankruptcy can weaken the ability to obtain credit, especially at a low interest rate.
• The trustee takes over complete control of the bankruptcy estate.
• One may lose a large amount of wealth if there is a large amount of equity in real
or personal property.
• Liens on real property run with the property and are not discharged.
Disadvantages Of Chapter 13
• The process is long and court approval is needed for many financial decisions.
• For three or five years a trustee lords over the client’s financial life.
• If payments are missed under the plan, the client is back at square one.
Disadvantages Of Chapter 11
• It is usually a long process and an expensive process.
• Estimates place the percentage of Chapter 11 cases that result in a confirmed
plan at 25%-30%.
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Other Disadvantages
Adverse Actions
The SBA debt arises from a business loan and as such financial disclosures and ongoing
financial disclosures comprise the focus of the lending and the debt. Discrepancies and
misrepresentations can lead to costly, time consuming and ultimately detrimental 523
and/or 727 adverse proceedings. The offer in compromise process can achieve a
settlement of the debt if you think there is a risk that an adverse proceeding will be filed.
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Barred From Future Government
Supported Loans
Once the government suffers a “loss” on an SBA loan, the potential client is barred from
every receiving federal backed loans. This may include SBA loans, student loans, VA
loans, etc.
As part of the offer in compromise process, we can work to ensure a compromised loan
does not prevent future lending.
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The SBA Provides A “Buy Out” Of A Lien On Primary Residence
Often times the potential client’s main asset in the primary residence.
Depending on your state’s exemption scheme, the house may be at risk in a bankruptcy.
Moreover, the SBA debt may be the only debt the potential client has and is the catalyst
for the bankruptcy consultation.
If the SBA or third party lender obtained a lien against the real property as collateral for
the loan, the SBA standard operating procedures allow a debtor to keep their primary
residence and “buy out” the equity. Therefore, through an offer in compromise, the
potential client can settle the debt and remove the lien on their real estate, which may not
be possible in bankruptcy.
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CONCLUSION
For potential clients with an SBA debt, bankruptcy may be the right course.
However, pitfalls exist to dealing with an SBA through the bankruptcy process.
This paper specified situations where the offer in compromise provides the better option
to relieve the debt.
