Question: If I file for personal bankruptcy, can the bank still legally come after my business and shut me down?
Answer: Yes – Assuming the business assets are owned by an entity other than you (such as an S-Corp, C-Corp, LLC etc), the bank can still usually go after the business assets. This assumes that the bank required the aforementioned corporate entity to act as a borrower or guarantor, which is the case in 99.99% of cases. Having your personal guarantee discharged only relieves you of personal liability. In other words, they can’t go after your personal assets (unless they were pledged prior to the BK) such as your home, bank accounts, or paycheck.
Question: When I took this SBA loan, I was advised to form a corporation, who is listed as the borrower. Doesn’t this shield me from any personal liability?
Answer: Forming a corporation certainly has some benefits. If the corporation was the ONLY entity that was required to be named as a borrower/guarantor, you would be off the hook personally if the business became insolvent at some point in the future. Unfortunately, the bankers know this fact too, so in 99.99999% of cases they require the business owners to pledge their personal guaranty in connection with the SBA debt. By doing this, you are essentially saying “fine, if the business cannot afford to pay you, I will use my personal resources that I owned outside the business to repay this loan”.
Some people tell me that they would have never gone through with the loan had they realized what the personal guarantee meant. First of all, shame on your banker and attorney for not explaining it to you. Second of all, I can assure you that had you refused to offer your personal guarantee, the bank would not have agreed to lend you the money in the first place.
Question: When I signed the personal guarantee, I thought I was signing as an officer of the company. Was I wrong?
Answer: Yes, you were wrong. If the document that you signed says “Unlimited Personal Guarantee”, you are personally liable.
Question: Does my business need to file for bankruptcy in order to qualify for a settlement?
Answer: No, in most cases, just ceasing operations is sufficient. There may be other strategic reasons for filing a corporate BK, but doing it to qualify for an OIC is not one of them. Interestingly, the SBA has recently in certain begun considering reductions in loan balances on businesses that are still operating. It’s still not the norm, but it’s definitely a change from the past policy which absolutely required a business to be closed.
Question: Will the bank be able to foreclose on my home if I file for personal chapter 7 bankruptcy?
Answer: It depends. If there was a lien on your home prior to the bankruptcy, then the lien will not be extinguished. If there was not a lien prior to the bankruptcy, the having your personal guarantee discharged will protect your home due to the fact that the bank would not be able to liquidate your personal assets in order to repay the SBA loan.
Question: I met with a bankruptcy attorney, who recommended that I file for bankruptcy. Why should I try to try to settle the debt instead?
Answer: I tell all prospective clients the same thing: gather all the facts, then make an informed decision. Whichever approach you take will have it’s own unique pros and cons. The key is to fully understand the keys pros and cons of each approach so you don’t regret the decision later. There is no one right approach…your individual situation will often dictate which approach makes more sense.
Question: The person at the bank told me that since I owe them so much, I should file for bankruptcy because the SBA will never release my personal guarantee. Is she right?
Answer: Whenever I hear this, it shocks me. Your banker (who works for the bank, not you) should not being offering legal advice of any kind. When I was a Vice President is the Workout department, I’d always tell borrowers that if they had legal or bankruptcy questions, they should speak with their attorney. Only an attorney should be recommending whether or not you file for bankruptcy in order to avoid an SBA loan personal guarantee. It’s one thing to discuss the pros and cons of bankruptcy, it’s quite another to say “the only way to get out of this is to file for bk”.