Starting your own business isn’t easy, but that doesn’t deter tens of thousands of eager entrepreneurs from doing just that every single year. But these same business owners rarely have the financial management skills to match their enthusiasm for becoming the next Tesla or Uber.30% of small businesses fail in their first year, and another 50 – 60% have closed their doors within five years. This means the majority of small business owners consider bankruptcy.
Discharging Your Debts
Most entrepreneurs have to take out several lines of credit to get their business off the ground. Banks, credit unions and the SBA (Small Business Association) all provide loan and credit facilities for these new enterprises. But what happens if your business isn’t the success you hoped it would be, and you have to declare bankruptcy? Can you discharge the bank loan you used to start your business? This will initially depend whether or not your business is incorporated. If it is, then your status as an LLC will only protect you if it was a business loan taken out to fund the business itself. But what happens in many cases is the loans weren’t borrowed by the business, but by the individual. This means that the business owner is liable for these debts.
Chapter 13 vs. Chapter 7
If you’ve hit a few financial hurdles, but still want to stay in business, then filing for Chapter 13 bankruptcy will allow you to reorganize your finances in such a way as to make that possible.
But the vast majority of small businesses do not survive these types of financial hurdles, so your next best option is to file for Chapter 7. This will allow a discharge of most, if not all, of your personal debts, including your business loans.
A Chapter 7 bankruptcy is also more suited to small businesses because these operations tend to be sole proprietorships.
The only exception to this rule is if you lied on your loan application form e.g. you had no intention of ever repaying the loan in the first place. This counts as fraud, and could see your petition for having your debts discharge refused.
Can I Discharge An SBA Loan?
These loans are treated like any other debt in a Chapter 7 filing in that they can be discharged. People often assume these loans can’t be discharged because they’re government funded, in the same way you can’t discharge student loans, for example.
Your Small Business Association loan was probably only approved because you personally guaranteed it, in the same way that you would provide a personal guarantee for any loan you take out from a bank.
The guarantee usually comes in the form of personal property i.e. your home. If there are no existing liens on your home, then a bankruptcy filing can be used to discharge your SBA loan.
If, however, you have an existing lien, then filing for bankruptcy won’t allow you to discharge the SBA loan – it will instead become a second lien on your home.
The same stipulation applies to other types of loans in that the debt might be discharged by the court, but your creditor might be able to place a lien on whatever property you used to guarantee your loan, preventing you from selling it.
So, the good news is that, all things being equal, you can discharge a loan you used to start your New Jersey-based business. It’s always prudent though to consult with an experienced bankruptcy attorney in such matters.