Bankruptcy ✦ SBA & Business Debt
The Business Closed. The Loan Didn’t.
COVID EIDL loans, SBA 7(a) loans, equipment leases, commercial lease guaranties, merchant cash advances, and the personal guaranties behind all of them have become the most common reason California owners call us. Some of that debt belongs in a bankruptcy. Some of it settles for a fraction outside one. North Star Law Firm runs the numbers on both paths before you choose either, and handles whichever one wins.
Overview
What happens to business debt when the business fails?
A corporation or LLC that closes does not need a bankruptcy to stop existing; it can simply wind down. The problem is everything the owner signed personally: the SBA guaranty, the landlord’s guaranty, the equipment lease, the line of credit, the merchant cash advance with a confession of judgment buried in it. Those follow the owner. The analysis is which of them are collectible, which can be settled, which are discharged in a personal bankruptcy, and whether the entity itself needs a case at all. That analysis is a spreadsheet before it is a legal strategy, and we build it first.
- EIDL and PPP: guaranties, Treasury offset, and the SBA offer in compromise
- SBA 7(a) and 504 loans: lender liquidation, the SBA guaranty purchase, and the OIC that follows
- Commercial lease guaranties and California’s mitigation rule (Civ. Code § 1951.2)
- Merchant cash advances and confessions of judgment
- Personal guaranties discharged in a Chapter 7 or 13 for the owner
- Business wind-down done correctly: final returns, EDD and CDTFA closure, dissolution
EIDL
Where is your EIDL, and what does that mean?
COVID Economic Injury Disaster Loans move through a predictable sequence once payments stop. Where yours sits determines the options and the urgency.
| Stage | What is happening | Your options |
|---|---|---|
| Delinquent, still with SBA | Payments missed; SBA sends demand letters and reports to credit bureaus | Hardship accommodation plan; catch-up; begin evaluating the OIC and bankruptcy paths |
| Charged off by SBA | SBA has written the loan off internally, but the debt and the guaranty remain | Offer in compromise with SBA on a closed business; requires the business to be dissolved and its assets liquidated |
| Referred to Treasury | Treasury cross-servicing adds a fee of roughly 30 percent, offsets federal tax refunds and federal payments, and can garnish wages administratively without a court order | Treasury will negotiate but on worse terms; bankruptcy stops the offset and garnishment; the guaranty is discharged in Chapter 7 |
| Loan over $200,000 | A personal guaranty was signed; SBA can pursue the guarantor for years | Guaranty is unsecured debt in a personal bankruptcy; or negotiated in the OIC |
| Loan under $200,000 | No personal guaranty; the borrower is the entity | Wind the entity down properly and the owner generally has no personal exposure, but Treasury may still offset the entity’s federal payments |
SBA 7(a) loans and the lender’s playbook
A 7(a) loan is made by a bank and guaranteed by the SBA. When it defaults, the lender liquidates the collateral, which in California usually means a UCC lien on the business assets and often a deed of trust on the owner’s home, then asks the SBA to honor its guaranty for the shortfall. Once the SBA pays, the SBA owns the deficiency and pursues the guarantor. At that point an SBA offer in compromise is available, and it is evaluated on the guarantor’s ability to pay, documented on SBA Form 770, a personal financial statement the SBA will scrutinize line by line.
Whether an OIC or a bankruptcy is the better path depends on what the guarantor owns and earns. An owner with an exempt home and modest income often does better in Chapter 7, where the guaranty is discharged outright. An owner with real equity or a high income often does better with an OIC, which the SBA typically accepts at a percentage of the balance if the financial statement supports it. We prepare the Form 770 the way we prepare a bankruptcy schedule: accurately, because the SBA compares it to your tax returns.
Commercial leases, equipment, and merchant cash advances
A commercial landlord in California can sue the guarantor for the rent due through the end of the lease term, but Civ. Code § 1951.2 limits the recovery to what the landlord could not reasonably have mitigated by re-letting the space, which in a strong Inland Empire industrial market can be very little. That is leverage in a settlement. Equipment leases are usually disguised financing; the lessor repossesses, sells, and sues for the deficiency, and the deficiency is unsecured debt in a bankruptcy. Merchant cash advances are the most aggressive: sold as purchases of future receivables, many carry a confession of judgment or a UCC lien on all receivables, and the funder will freeze bank accounts fast. Those are discharged in bankruptcy like any other unsecured debt, and the automatic stay ends the account freezes.
Winding down the entity the right way
A closing business still has obligations that outlast it: final payroll returns and W-2s, the final EDD and CDTFA returns and account closures, the final federal and California income tax returns with the correct final-year elections, a Statement of Information and Certificate of Dissolution with the Secretary of State, and the FTB’s final return and tax clearance. Skipping those steps leaves the entity suspended with the $800 franchise tax accruing and leaves the owner exposed to personal liability for trust fund taxes. We handle the wind-down alongside the debt resolution, so the business is actually closed rather than merely abandoned, and we prepare the insolvency analysis that SBA requires for an OIC on a closed business.
The Attorney-CPA Difference
Business debt is a balance sheet problem. Bring the balance sheet to someone who reads them.
- Guaranty exposure, exemptions, and OIC prospects modeled side by side before any filing
- SBA Form 770 and insolvency analyses prepared to CPA standards, because the SBA checks them against your returns
- Business wind-down completed: final returns, agency closures, dissolution
- Chapter 7, Chapter 13, or Subchapter V handled in the Central District of California when bankruptcy wins the comparison
Questions & Answers
SBA and business debt questions, answered
Will the SBA take my house over an EIDL guaranty?
Not without a judgment and a sale, and for most owners that never happens. COVID EIDLs under $500,000 are unsecured as to real estate (the lien is on business assets only), and the SBA rarely sues guarantors. The real risk is Treasury offset and administrative wage garnishment, both of which a bankruptcy filing stops.
Can I settle an EIDL with the SBA?
Yes, through an offer in compromise once the business has closed and its assets have been liquidated. The SBA evaluates the guarantor’s financial statement and generally accepts a percentage of the balance. Acceptance rates are highest when the financial package is complete and accurate the first time.
Is a merchant cash advance dischargeable?
Yes. Despite the language about purchasing receivables, MCA balances are treated as unsecured debt in bankruptcy and discharged. If the funder has already frozen accounts or recorded a UCC lien, the automatic stay and the discharge address both.
Do I need to file bankruptcy for the business and for myself?
Often only one. A closed corporation or LLC with no assets usually does not need its own case; the owner’s Chapter 7 discharges the guaranties. An operating business with a future uses Subchapter V. We recommend the combination that costs the least and ends the exposure.
The loan outlived the business. It does not have to outlive you.
A free business debt review with an attorney-CPA: OIC vs. bankruptcy, in writing, before you spend a dollar.