If you own a small business in California, chances are you have a small business loan. Initially, you probably took the Loan out to start your business, or maybe you used it to expand, and with good intentions. But if your business didn’t take off as expected, your loan payments would likely become overwhelmingly overdue. If you’re looking for legal pathways for restructuring or discharging SBA-guaranteed loans in California, continue reading below.
SBA loans can be a great way to launch a start-up company and are an important part of California’s thriving economy, and that of the nation’s as well.
SBA Loans Background
The U.S. Small Business Administration, also referred to as the SBA, motivates private lenders by guaranteeing a portion of these loans. The SBA’s largest program is the 7-A program involving over 1,400 financial institutions, 70,242 loans, and over $31 billion in funds at the end of fiscal year 2024. The large and diverse economic landscape of California leaves no surprise that California is a staple in the top states with the most 7-a loan volume.
While the program has helped launch an unheard number of small businesses across the nation, not all borrowers’ business models show immediate profits. When a loan contains a personal guarantee and payments become unmanageable, it leaves the borrower vulnerable to liability. When an SBA borrower is over their head, talking with a bankruptcy attorney can help lead them to the right legal pathway for restructuring or discharging SBA-guaranteed loans in California.
Using Chapter 7 Bankruptcy to Discharge SBA-Guaranteed Loans in California
SBA loans are equivalent to any other secured or unsecured debt in bankruptcy. Chapter 7 bankruptcy laws afford a borrower the opportunity to discharge qualifying debt. However, under Chapter 7 bankruptcy, businesses do not receive a discharge. Rather, they can liquidate. Personal guarantors may discharge SBA loans, but not if there is fraud involved. Secured SBA loans can result in collateral liquidation.
Chapter 13 Bankruptcy to Discharge SBA-Guaranteed Loans in California
Chapter 13 bankruptcy allows individuals and sole proprietors the opportunity to reorganize both personal and business-related debts. Chapter 13 bankruptcy also allows for the restructuring of SBA loan arrears. In addition, there is a potential for the discharge of a portion of unsecured SBA debt.
California bankruptcy laws established in the California Code of Civil Procedure §703.140 or §704 require bankruptcy participants to use one of two exemption options. Exemption protects home equity, tools of the trade, retirement accounts, vehicles, and personal property. To determine if bankruptcy is a viable option to help you recover from an SBA default, you should contact a trustworthy, local bankruptcy attorney.
Hire a Bankruptcy Lawyer
The thought of bankruptcy can bring a wave of emotions, but defaulting on an SBA loan doesn’t have to come to that. With the right lawyer on your side, you can successfully navigate the default without filing for bankruptcy.
The team at Evan L. Smith, Attorney at Law, has been consistently serving clients in Southern California for more than 40 years. We have a rooted understanding of California bankruptcy laws and a personal connection with the communities we serve. Led by Attorney Evan Smith, our team meets the needs of our clients first. We listen to each of our clients and build a strategy that works for their needs. We don’t rely on a one-size-fits-all approach.
FAQs About Legal Pathways for Restructuring or Discharging
What Legal Options Are Available in California for Restructuring an SBA-Guaranteed Loan Without Filing for Bankruptcy?
Legal options available in California for restructuring an SBA-guaranteed loan without filing for bankruptcy include loan modification, forbearance, or a treasury settlement. Other options include an SBA offer in compromise or some other out-of-court payment plan that the borrower negotiates and works out with the lender. If you were previously deemed ineligible for bankruptcy, it might be worth revisiting your options with an experienced bankruptcy attorney.
How Does Filing for Chapter 7, Chapter 11, or Chapter 13 Bankruptcy Affect SBA-Guaranteed Loan Obligations for Business Owners and Personal Guarantors?
Filing for Chapter 7, Chapter 11, or Chapter 13 bankruptcy affects SBA-guaranteed loan obligations for business owners and personal guarantors differently. For Chapter 7, SBA personal guarantees may be discharged. For Chapter 11, business debt can be restructured and unsecured portions of your SBA may be reduced. However, if the Loan is secured, collateral may still be liquidated. Chapter 13 allows for a repayment plan of SBA arrearages and partial discharge of SBA principal.
Can SBA Offer in Compromise Programs Be Used to Settle an SBA-Guaranteed Loan Outside of Bankruptcy in California?
The SBA Offer in Compromise program can be used to settle an SBA-guaranteed loan outside of bankruptcy in California. The SBA Offer in Compromise program lets borrowers pay a reduced balance settlement amount on the condition that they show their inability to pay the full balance. Complete financial documentation must be submitted to prove economic hardship. Approval, though, is not guaranteed and is at the discretion of SBA reviewers as well as the lender.
What Are the Risks and Consequences of Defaulting on an SBA-Guaranteed Loan Before Pursuing Restructuring or Discharge Options?
The risks and consequences of defaulting on an SBA-guaranteed loan before pursuing restructuring or discharge options include wage garnishment, damage to credit, tax refund seizure, and asset seizure. Other consequences might result in treasury collection, increased interest and penalties, and damage to your credit. To avoid these actions, connect with an attorney as early as possible to prevent these consequences from snowballing.
California Bankruptcy Lawyer
If you’re struggling with your SBA payments in any capacity, you can hire a bankruptcy lawyer to help you determine the ideal strategy for your situation. Every bankruptcy case is unique, and you need an experienced and knowledgeable bankruptcy lawyer like the team at Evan L. Smith, Attorney at Law. Their guidance through this difficult but temporary time is built on the understanding and compassion for each client’s unique needs.
Debt can feel like a weight on your shoulders, but we’re here to help lift that burden. Contact our office and take the first step towards being debt-free.
