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Are Small Business Administration Loans Dischargeable in Massachusetts Bankruptcy?

As our readers know, the 2005 amendments to the Bankruptcy law made it more difficult to file for personal bankruptcy.   A “means test” was added to make it more difficult for moderate-income folks to file.   Young people with federally subsidized student loans were not given any relief.   Federal taxes are dischargeable in many instances.  There are many instances in which SBA loans can be discharged too.  So what is the logic?

The logic may be better addressed in an article about how Congress is influenced by the big banks.  But if we focus simply on Small Business Administration loans we can see what is dischargeable under the new law.  SBA loans are loans to small businesses that would not get financing absent this federal program; that is, the folks that the big banks don’t want to lend to.

Loans to large businesses, and all publicly traded companies, are all guaranteed by the business.   Perhaps they are securitized by a mortgage on real estate or other property.  SBA loans, on the other hand, generally require a personal guarantee.  That means, if the business fails the individual borrower is on the hook for the monies.

What Happens After A SBA Loan Default?

So what happens if your small business fails and you can’t repay the loan?  The lender will pursue you, perhaps taking you to court and securing a judgment against you.  They can attach your house and even some of your paycheck.  If you can’t pay, or file bankruptcy, they submit a claim through the SBA and are reimbursed through the Department of Treasury.

What should you do?  If you believe a payment plan would work, the SBA will work with you.  They have a program.   And if there are assets in your business, they can be sold off and perhaps satisfy the whole loan.  They can also do an “offer in compromise.”  Be aware, however, any forgiven debt will result in a 1099 form which will give you “income” to be reported on your federal and state income taxes for that year; you will need to talk to your accountant about that income.  Also, any time the SBA suffers a loss, you are not permitted to secure any new loans with the SBS, ever.

What About Bankruptcy?

Small Business Association loans are dischargeable in bankruptcy.  You would have the same penalties that you would if you did a work out, in that you would not be allowed to secure any new SBA loans.  But the debt would be discharged.  And there would be no 1099 so you would not owe any taxes.

Should we File Personal Bankruptcy over an SBA Loan?

Ok, the answer to this question would involve an analysis by an experienced bankruptcy attorney.  We would look at the totality of the circumstances, including, but not limited to, your family income, your assets (and in particular how we can protect your assets), your other debt, and your expenses.

If we recommended bankruptcy, the Bankruptcy Court would discharge your SBA debt, and all your consumer debt, 90 days from filing.  It makes sense to talk to a bankruptcy attorney for an analysis.  We offer a free initial consultation, so call 617-227-7423.

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