THE client is 66. He purchased a business about 10 years ago for $2 million. He put in $500,000 of his own money and borrowed a $1.5 million small business loan through the Small Business Administration.
The business owns real property worth $800,0000 in 2010. It derives revenue through rentals of the real estate that it owns. In the first year of operations, gross revenues were $1 million with net profit after tax of $100,000, which is good. In the second year of operations, gross revenue was slightly below $1 million, with net profit after tax still about $100,000. In the third year of operations, gross revenues dropped by 95%! How did this happen?
It appears that a recession happened in the city where the business was located and a lot of the people there lost their jobs, so the demand for the business of debtor dried up. Well, this is what happens to businesses. Even now with the trade war going on, a lot of businesses are having difficulty surviving. When times are good, businesses that are well run with good margins, make a lot of money. When times are bad, a lot of businesses go belly up.
For instance, many farmers are facing the prospect of bankruptcy because one of the biggest buyers of our farm products, China, has stopped buying our produce because of the trade war tariffs that Pres. Trump imposed on goods from China. To help farmers survive, the Feds have given them at least $16-B of aid. Of course, our farmers don’t want aid, what they want is to be able to sell their produce to China again, and make their profit. Our farmers have their hands tied as of now. There is nothing they can do except to continue to eat their losses and suffer in silence. How long will they last until they say, “enough is enough!” Who knows? Even the European Union is now drawing plans to retaliate against the U.S. because of the possibility that all those Mercedes Benzes, BMWs & Audis etc., that used to come into the U.S. tax-free may in the next few months be slapped with significant tariffs. If this happens, the Europeans may stop eating American beef and become vegetarian.
Even Tim Cook, the CEO of Apple, told the president a few days ago that the tariffs imposed on China will make Apple less competitive than Apple’s S. Korean rival, Samsung, because Apple’s main source of parts is China which faces tariffs, while Samsung’s sources in S. Korea do not have a tariff problem. So, global trade is not really as simple as raising the tariff wall. The last time a trade war happened, it was immediately followed by the great depression.
Back to the client: When your gross sales plunge by 95%, that can’t be good. There was nothing client could do to rescue his business. It was de facto bankrupt. The SBA foreclosed on the property and got $500,000 from the auction sale of the property. The client thought that he had nothing else to worry about since the SBA already took the property back. He was surprised to receive a statement from the SBA through the lending bank that he personally still owed the SBA $1 million post-foreclosure. I suspect that the foreclosure was done judicially, and or, that he signed a personal guarantee. Whatever it is, he still owes the SBA a cool $1 million after he lost his business.
Then the client turned 66 and started to receive social security. And here comes the SBA, through the U.S. Treasury Department, deducting an amount each month from his social security to repay the $1 million. Come on, that sounds absurd, doesn’t it? The client now depends on social security, which is really not a princely sum, but here comes the SBA garnishing a portion of his social security. It’s a nightmare come true. So what does client need now? He needs to wipe out the $1 million SBA balance and get a fresh start in life. Quite simply said. It’s true this is what he needs.
So the question is, can a Chapter 7 discharge wipe out the $1-M SBA balance? What do you think? The SBA loan is a federal loan and now it’s the U.S. Treasury Department that’s deducting repayment from client’s social security benefits. Take a guess. Well, I can tell you this. There’s a lot of things not going right with living in America nowadays but I still believe that there are many good people here that we can depend on to do what is right.
And the answer is: YES, YES, SBA loans are dischargeable!
Why are SBA loans dischargeable? The general rule is that any debt is dischargeable unless excepted from discharge by the bankruptcy code subsection 523. The exceptions cover debts incurred by fraud or deceit, intentional torts like wrongful death, breach of fiduciary relations. There is no SBA loan exception from discharge; therefore, the client’s SBA loan is dischargeable.
If the SBA wants to challenge the dischargeability of client’s debt, they would have to file an adversary proceeding alleging fraud, and they would have to prove by a preponderance of evidence that the client misrepresented facts with the intent to deceive the SBA into granting the loan.
If this happens, then I will certainly look forward to defend the dischargeability of this SBA loan before a federal judge. Frankly, I don’t think they can prove any fraud on the part of the client, because the truth is, there was no fraud.
So I look forward to helping the client obtain a discharge of his $1-M SBA loan so he can have his fresh start in life at the age of 66.
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Lawrence Bautista Yang specializes in bankruptcy, business, real estate and civil litigation and has successfully represented more than five thousand clients in California. Please call Angie, Barbara or Jess at (626) 284-1142 for an appointment at 1000 S. Fremont Ave, Mailstop 58, Building A-1 Suite 1125, Alhambra, CA 91803.