Tag Archives: small business bankruptcy

Bankruptcy May Help Save Your Small Business

By: Jeena Cho

Living in the Bay Area, I have many clients who are business owners. Oftentimes, these small businesses are heavily in debt and have little or no hope of survival unless it can shed its debts. What most small business owners do not realize is that bankruptcy may actually be a beginning rather then an end.

Let’s take two simple examples.

Example #1. You operate a business as a sole proprietorship. There is $20,000 of business assets and $150,000 of debts related to the business. In addition, the you have $50,000 of personal credit card debt.

Assuming the owner does not have significant amount of personal assets or other non-exempt assets, s/he can qualify for Chapter 7 bankruptcy regardless of his or her income. The business owner would qualify for Chapter 7 as a non-consumer case. The rule is that if more than 51% of your total debt was obtained for a non-consumer purpose (e.g., business purpose), you are not subject to the means test. This is particularly useful for those business owners who either has another high paying job or has a spouse with a high paying job.

As for the business assets, we would exempt those assets, hence being able to continue operation of the business after bankruptcy. Sometimes, it may be advantageous to incorporate the business as well.

Example #2. Let’s assume the same facts as above but that the business has a liquidation value of $60,000. In this situation, Chapter 13 may be an appropriate solution. In a Chapter 13, you would repay some of the debt. One of the common misconception about Chapter 13 is that you would have to repay all of your debt. Not true. The amount of your Chapter 13 is determined by the greater of the “liquidation analysis” or “disposable income.”

Liquidation analysis would be the portion of your assets that we could not exempt. In Example #2, the business owner would have to repay the unexempt portion of his business assets. The Wild Card exemption in California is approximately $23,000. Hence, leaving $37,000 of his business assets unprotected. That’s the amount which would have to be repaid in a Chapter 13 ($37,000/60 = $617/mo). (This is a very simplistic explanation because certain deductions are also made such as hypothetical trustee commission, cost of sale, taxes, etc.)

Disposable income test is a long calculation based on the Means Test where we take your gross income and make certain adjustments (e.g., taxes, medical expenses, health insurance, term life insurance, mortgage payments, etc.) At the end of the equation, whatever amount is left over would be paid to the Trustee for either 3 or 5 years.

In either Chapter 7 or a Chapter 13, at the conclusion of the case most of the debts (including credit card debts, SBA loans, and other business related debts) would be discharged, leaving you and the business free to continue to operate the business.

In the next article, I will address special consideration for businesses that are incorporated.

If you have a struggling small business, please call us for a consultation at (415) 963-4004.

Disclaimer: Unfortunately, it is impossible to give legal advice over the internet, no matter how well researched or written. Before relying on any information I give, contact a lawyer to discuss your particular situation. I am a San Francisco bankruptcy attorney. The information given is based on California law.


Can I Discharge my SBA Loan?

Can I discharge my SBA loan
By Jeff Curl

“Can I discharge my SBA loan?” I get asked this question a lot from small business owners exploring bankruptcy. The short answer is “yes.”

But you must be aware of the terms of the loan. The Small Business Administration (SBA) typically does not give a loan without obtaining some type of personal guarantee in exchange. At the very least, this means that the loan – and the liability for that loan – extends beyond the business to you personally. If you own property at the time of the loan, it is common for the SBA to require as a term of lending the money, that you permit the SBA to take an interest in your property such as placing a lien on your home.

This goes to the heart of whether it is the business and/or the person behind the business that files bankruptcy. When a small business owner operates as a corporation or LLC, he or she often believes that the liability all rests with the business. The personal guarantees and liens of the SBA loan, however, make the business owner personally liable.

This naturally leads to the question of whether the business can continue to operate, should dissolve or should file bankruptcy depends on several factors. This includes the type of business entity, future viability of the business, chapter of bankruptcy, assets and debts. That is just the beginning; no one can create an exhaustive list of every factor to consider because it depends on all the facts surrounding your circumstances. And many of these factors apply to whether a personal should file personally. The amount of an SBA loan itself can often be the determinative factor of whether to file.

So, yes, a loan from the SBA is dischargeable in bankruptcy. Work with your attorney to understand how far the SBA loan extends to you personally, and what you and your business need to do to protect your assets and discharge your debts.