Due to the economy, I am considering bankruptcy. I have an Small Business Administration line of credit with a balance of $32,000. I also have a $170,000 SBA-backed loan for my equipment. If I file, can the SBA call my equipment loan due? —T., submitted online
It depends on what kind of bankruptcy you choose to file and what kind of legal entity your business operates under. If you still have income, you can file to adjust your debt under Chapter 13 of the U.S. Bankruptcy Code and come up with a three- to five-year repayment plan that must be approved by the court.
If the equipment loan is not in default before the bankruptcy filing and your payments are current, it's likely your lender will work out a payment plan with you rather than demanding that you pay off your loan, says M. Jonathan Hayes, an attorney and certified bankruptcy specialist in Northridge, Calif.
Donald F. King, a bankruptcy attorney at Odin Feldman Pittleman in Fairfax, Va., agrees. "If the loan is not otherwise in default, the lender may not declare a default simply based upon the bankruptcy filing, even if the loan documents suggest otherwise," he says.
Advantages of Chapter 13
Talk to an attorney about what type of bankruptcy will give you the best chance of continuing your business and keeping your equipment. If you file under Chapter 13, you'll have to persuade the court that the equipment is necessary for you to keep earning income and that you have the ability to continue making the payments, says Steve Berman, a lawyer who heads the bankruptcy practice in the Tampa (Fla.) office of Shumaker Loop & Kendrick.
If you can do that, your chances are fairly good. "Financing companies don't want equipment back; they'd rather get the payments. So if there's a way for you to continue making payments, they prefer that," he says.
However, if you file under Chapter 7, which liquidates your debt, your equipment will likely be sold by the bankruptcy trustee appointed to your case and used to repay your creditors. ""A Chapter 7 is a funeral. The trustee will close the business usually and sell everything if there is equity and the stuff is not exempt" under bankruptcy law, Hayes says.
Of course, if you're filing personal bankruptcy and your company operates as a separate legal entity, such as an LLC, partnership, or corporation, your business loans won't even become part of your personal bankruptcy filing. But if your company is a sole proprietorship, or you have personally guaranteed the loans, all your obligations will be part of your personal bankruptcy, including the SBA-guaranteed debt.
A good primer on bankruptcy is available here.