How Does Chapter 11 Bankruptcy Affect the SBA’s Lien on My Business’s EIDL Loan Collateral?
If your business received an Economic Injury Disaster Loan (EIDL) of more than $25,000, the SBA almost certainly took a security interest in your business assets as a condition of the loan, filing a UCC-1 financing statement covering equipment, inventory, accounts receivable, and other business property. If your business is now considering a Chapter 11 reorganization, it is important to understand that filing for bankruptcy does not simply erase that lien. Our South Florida business bankruptcy lawyers can walk you through what actually happens to SBA collateral once a Chapter 11 case begins.
How EIDL Loans Are Typically Secured
For loans above $25,000, the SBA generally required a general security agreement covering substantially all of a business’s tangible and intangible personal property, perfected through a UCC filing. This means the SBA is treated as a secured creditor, with rights that differ significantly from those of the business’s unsecured creditors, such as vendors or credit card companies.
The Automatic Stay Halts Collection, But the Lien Survives
Once a Chapter 11 petition is filed, the automatic stay immediately stops the SBA (or, if the debt has already been referred out, the Treasury Department) from seizing collateral, filing new liens, or continuing collection efforts. However, the stay does not extinguish the SBA’s existing lien. The lien remains attached to the collateral throughout the case.
If your business needs to use, sell, or spend collateral, such as cash sitting in accounts receivable, during the case, the Bankruptcy Code requires either the SBA’s consent or a court order, along with what is called adequate protection to ensure the secured creditor’s interest does not lose value while the case proceeds.
What Happens to the Lien Under a Reorganization Plan
A Chapter 11 plan must address how the SBA’s secured claim will be treated. In general, a debtor has a few paths: pay the SBA in full over time while retaining the lien, surrender the collateral, or, in some circumstances, seek to modify the terms of the debt through the plan confirmation process, sometimes referred to as a cramdown, so long as the plan satisfies specific statutory requirements protecting the value of the secured creditor’s interest. The lien is not simply wiped out because a case is filed. It typically remains in place, in some form, unless the SBA is paid the value of its secured claim or otherwise agrees to different treatment.
Because SBA loans carry federal collection tools that private lenders do not have, and because a defaulted EIDL loan may already have been referred to the Treasury Department before a bankruptcy is filed, the timing and details of a Chapter 11 filing can matter a great deal to how the collateral question plays out.
Contact Our West Palm Beach Business Bankruptcy Attorneys to Discuss Your Company’s SBA Debt
Business owners frequently assume that a bankruptcy filing will automatically clear away an SBA lien on company assets, but the reality is more nuanced. The lien generally survives the filing, and how it gets treated depends heavily on the structure of your reorganization plan and the value of your collateral. If your company is carrying a defaulted or struggling EIDL loan secured by business assets, one of the experienced West Palm Beach Chapter 11 bankruptcy attorneys at Kelley Kaplan Delaney & Eller, PLLC can review your loan documents and help you understand your options before you decide how to proceed.
Source:
law.cornell.edu/uscode/text/11/363
