Understanding how to manage an sba loan in bankruptcy is crucial for business owners facing financial difficulties.

Many people are unsure if they can discharge an sba loan in bankruptcy, and it’s important to know your options.

The implications of an sba loan in bankruptcy can vary based on the type of loan and the circumstances surrounding it.

Here’s the short answer: yes, SBA loans can be discharged in bankruptcy. But there’s a longer answer you need to hear before you decide what to do because personal guarantees, non-dischargeability exceptions, and what happens to your business make this more complicated than a simple YES or NO.

Understanding the terms of your sba loan in bankruptcy is vital to making informed decisions.

I’ve helped a lot of people work through exactly this situation. Let me break it down.

What Kind of SBA Loan Do You Have?

Not all SBA loans are the same, and the type matters.

Standard SBA 7(a) loans are the most common and are used for working capital, equipment, or business acquisition. These are made through private lenders and guaranteed by the SBA up to 85%.

SBA 504 loans fund major fixed assets like commercial real estate. They involve a private lender plus a Certified Development Company.

EIDL loans (Economic Injury Disaster Loans) are direct loans from the SBA, not through a bank. A lot of small business owners took these out during COVID. The rules for personal guarantees on EIDL are different depending on the loan amount.

When considering how to handle an sba loan in bankruptcy, it’s essential to evaluate your financial situation thoroughly.

Many borrowers find themselves asking, can I discharge my sba loan in bankruptcy, and the answer may depend on various factors.

It’s crucial to know the risks associated with your sba loan in bankruptcy, especially regarding potential fraud claims.

For those facing difficulties, understanding the process of discharging an sba loan in bankruptcy can relieve some stress.

Why does it matter? Because the structure of the loan (who you borrowed from, what collateral you pledged, whether you signed a personal guarantee) shapes what happens in bankruptcy.

In cases of willful misconduct, the outcome of an sba loan in bankruptcy can be significantly affected.

Considerations for Discharging an SBA Loan in Bankruptcy

Understanding fiduciary misconduct related to an sba loan in bankruptcy can help avoid complications.

The general rule: SBA loans are unsecured or partially secured debt. In a Chapter 7 bankruptcy, dischargeable unsecured debt gets wiped out. Your personal obligation to repay it disappears.

But there are exceptions. Section 523 of the Bankruptcy Code lists debts that survive bankruptcy regardless of what chapter you file. Here are the dischargeability exceptions most relevant to SBA borrowers:

The personal guarantee on an sba loan in bankruptcy can complicate your ability to discharge the debt.

When you file for bankruptcy, the personal guarantee associated with an sba loan in bankruptcy may become a pivotal issue.

Fraud and Misrepresentation

If you obtained the loan through false pretenses (overstating revenue, falsifying financial records, misrepresenting how you’d use the funds) then the SBA or lender can file an adversary proceeding to have the debt declared non-dischargeable. The risk here isn’t trivial. The SBA reviews loan applications carefully when borrowers file for bankruptcy, and discrepancies get flagged.

That said, most SBA borrowers didn’t commit fraud. They just ran businesses that failed. Honest business failure is not fraud.

Willful and Malicious Injury

This one is less common in the SBA context, but it can come up if you dissipated collateral or sold off business assets that secured the loan, for example, without the lender’s consent.

Filing for bankruptcy can offer relief from the obligations of an sba loan in bankruptcy, depending on your situation.

Fiduciary Misconduct

Understanding what happens when facing an sba loan in bankruptcy can help you better prepare for the process.

The implications of an sba loan in bankruptcy extend beyond just the debt itself; they can affect your entire financial future.

If you were operating in a fiduciary capacity and misapplied funds, that debt can be non-dischargeable. Again, this is uncommon for typical SBA borrowers, but worth knowing.

The takeaway: for most people who took out SBA loans in good faith, ran into trouble, and are now looking at bankruptcy, non-dischargeability is not the biggest concern. The personal guarantee usually is.

If you’re facing litigation regarding an sba loan in bankruptcy, understanding your rights is crucial.

The Personal Guarantee Problem

Timing plays a significant role when dealing with an sba loan in bankruptcy and its related legal procedures.

Almost every SBA loan over $25,000 requires a personal guarantee. For EIDL loans, the threshold was $200,000 during COVID. If you’re above those numbers, you signed a guarantee. That means you’re on the hook personally, not just your business.

Here’s what the personal guarantee means in practice:

Bankruptcy can provide a reset for your financial obligations, including your sba loan in bankruptcy.

Exploring your options when dealing with an sba loan in bankruptcy is important to avoid unnecessary complications.

• The SBA or lender can sue you personally if the business defaults.
• They can get a judgment against you individually.
• They can garnish your wages, levy your bank accounts, or place liens on your home.

Bankruptcy changes this. When you file for personal bankruptcy, either Chapter 7 or Chapter 13, the automatic stay kicks in immediately and all collection activity stops. If you receive a discharge, your personal liability under the guarantee is eliminated.

The business’s debt to the lender doesn’t go away. The lender can still pursue the business. But your personal exposure will be discharged in your personal bankruptcy.

SBA loan in bankruptcy situations often require careful navigation to ensure your rights are protected.

What Happens When the SBA Sues You

You got the default notice. Maybe you’ve been ignoring calls. Now you may be facing a lawsuit, either from the SBA directly, or from the lender, or both. A few things to know:

The SBA Refers Cases to the Department of Justice

When an SBA direct loan defaults (like an EIDL), the SBA can refer the account to the U.S. Department of Justice for collection. The DOJ can sue you in federal court and has broader and more powerful collection tools than a typical private creditor.

Private Lender Lawsuits

For SBA 7(a) loans, the private lender typically pursues you. After paying their claim to the SBA (using the SBA guarantee), the lender is entitled to collect the unguaranteed portion from you. The SBA may separately seek recovery on the guaranteed portion.

Timing and the Bankruptcy Filing

Understanding the implications of an sba loan in bankruptcy can help you make informed decisions about your financial future.

When filing for personal bankruptcy, knowing how an sba loan in bankruptcy affects your assets is crucial.

Filing for bankruptcy once you’re already being sued stops the lawsuit cold. The automatic stay halts pending litigation against you personally. If a judgment has already been entered, bankruptcy can still discharge the underlying debt, however judgment liens on real property require additional steps to address.

Don’t wait until a judgment is entered to call an attorney. Once a lien attaches to your home, your options narrow.

In a Chapter 7 case, your sba loan in bankruptcy may lead to liquidation of assets if not carefully managed.

Do You Need to File Business Bankruptcy, Too?

This is one of the most common questions I get: do I need to file for my business at the same time I file personally?

Reorganizing your debts, including an sba loan in bankruptcy, can lead to more favorable outcomes for business owners.

The short answer: usually no. Here’s why.

Understanding the consequences of an sba loan in bankruptcy will prepare you for what lies ahead.

If your business is a sole proprietorship, there’s no legal distinction between you and the business. A personal bankruptcy covers both.

If your business is an LLC or corporation, it’s a separate legal entity. Your personal bankruptcy discharge eliminates your personal liability, but it does not discharge the business’s debts. The lender can still pursue the business entity.

But here’s the practical reality: if the business has failed or is failing, there often isn’t much left for the lender to pursue. A lender suing a defunct LLC with no assets gets nothing. The personal bankruptcy is what actually protects you from collection efforts.

A simultaneous business bankruptcy might make sense if:

• The business has significant assets that need to be administered in an orderly way.
• The business has ongoing operations you want to restructure (Chapter 11 territory).
• There are other creditors beyond the SBA (employees, vendors, commercial landlords) with claims that need to be addressed in a coordinated way.
• You’re trying to sell the business as a going concern and want the protection of the automatic stay while you finalize the sale.

For most small business owners in default on an SBA loan with a failed or failing business, a personal bankruptcy without a simultaneous business filing is the right approach. We can talk through your specific situation.

What Happens to Your Business When You File for Personal Bankruptcy?

This depends on the structure of your business and what chapter you file.

Chapter 7 Liquidation

In a Chapter 7, the bankruptcy trustee takes control of your non-exempt assets and liquidates them to pay creditors. Your ownership interest in a business is an asset. If the business has value, the trustee can sell your interest or sell the entire business.

If the business is a defunct LLC with no assets, the trustee typically abandons the interest as valueless. If the business is an operating business with equity, then the trustee could sell your ownership stake or liquidate the entire business.

There are ways to address this. Exemptions in DC, Maryland, and Virginia vary. And if the business’s value is modest, the trustee may not bother. But this is a real consideration, and one we work through carefully before recommending Chapter 7 for a business owner.

Chapter 13 Reorganization

Your experience with an sba loan in bankruptcy should guide your decisions and actions moving forward.

In Chapter 13, you keep your assets and pay back a portion of your debts over three to five years. Your business interest is protected. The SBA loan (or the unsecured portion of it) gets lumped in with other unsecured debt and paid a fraction on the dollar through the plan. In many cases, creditors receive nothing.

Chapter 13 is often the better fit for business owners who want to keep an operating business, have non-exempt assets they want to protect, or have income above the Chapter 7 means test threshold.

When Bankruptcy Won’t Help: What Happens When the SBA Objects to Discharge

Not every SBA bankruptcy story ends with a clean discharge. And if you made misstatements on your application — intentionally or not — the SBA or lender can file an adversary proceeding to prevent the debt from being discharged.

This is where the stakes get real.

A Real Case: Undisclosed Litigation

A business owner with decades of experience applied for an EIDL during the pandemic. She was also involved in ongoing probate litigation at the time. She did not disclose the litigation on the loan application.

Years later, she filed for bankruptcy and sought to discharge the EIDL.

The SBA filed an adversary proceeding under Section 523(a)(2)(B), alleging fraud. They argued she had made a materially false statement about her financial condition by omitting the probate case.

In a July 3, 2025 Memorandum Decision (Case No. 23-03043, Bankr. N.D. Cal.), the bankruptcy court found against her. The pending litigation was a contingent liability that should have been disclosed. The fact that she personally believed the probate case was unwinnable didn’t matter. The loan application didn’t ask her opinion. It asked for facts.

The court called her testimony on the subject “beyond credulity.” Someone with her business experience should have known better. The court’s language was brutal: a businesswoman with decades of experience should have known better.

The EIDL debt was declared non-dischargeable. She still owes it.

If you’ve been running a business for years, the court won’t let ignorance be your defense.

What This Teaches

This debtor didn’t intentionally commit fraud. She just thought the litigation was immaterial. She made a judgment call and got it wrong. Unfortunately, Section 523(a)(2)(B) doesn’t care about intent. It cares about whether the statement was materially false and whether the lender relied on it.

Missing a line item on a loan application. A liability you thought was worthless. A detail you didn’t think mattered. Any of these can be enough for the DOJ to sue you.

Why This Matters to You

Understanding how to handle an sba loan in bankruptcy can empower you to take control of your finances.

The horror story above isn’t about a criminal prosecution (though that can happen too). It’s about an adversary proceeding, or a mini-lawsuit within your bankruptcy case filed by the SBA or lender seeking to make that specific debt non-dischargeable.

Here’s what the law requires them to prove under 11 U.S.C. § 523(a)(2)(B):

1. You made a written statement (your loan application) concerning your financial condition.
2. That statement was materially false, meaning it made a real difference to the lender’s decision.
3. The lender reasonably relied on it.
4. You caused the statement to be made with intent to deceive.

You might think that intent to deceive is the hard part to prove, but it’s actually not. Court focus instead on the falsity of the statement and the lender’s reliance. If the numbers don’t line up, that’s often enough.

This is why you should hire an experienced bankruptcy attorney before you file. Not after you’ve filed and the SBA has objected. Before. Lee Legal can review your application against your actual records, spot problems, and help you decide whether bankruptcy is the right move, or whether negotiating an Offer in Compromise with the SBA makes more sense.

Other Questions Clients Usually Ask

Will bankruptcy affect my ability to get SBA loans in the future?

Yes, for a period of time. The SBA has restrictions on extending credit to people who have previously defaulted on government-backed debt. A discharge in bankruptcy doesn’t automatically restore your eligibility. How long the bar lasts depends on the program. If future SBA borrowing matters to you, that’s a factor worth discussing.

What about collateral: my home, equipment, accounts receivable?

If the SBA loan was secured by specific collateral, the lien survives bankruptcy unless it’s stripped or surrendered. A Chapter 7 discharge eliminates your personal obligation to pay, but a secured creditor can still foreclose on the collateral. If your home is collateral on the SBA loan, that’s a significant issue we need to work through before you file.

My business partner also signed. What happens to them?

Your bankruptcy only covers you. Your business partner’s personal liability is unaffected by your filing. If they also signed a personal guarantee, your partner will remain fully exposed. This is a real tension point in partnerships, and it’s worth thinking through how a filing by one partner affects the other. In some cases, coordinated filings make sense.

Can I negotiate with the SBA instead of filing?

Yes. The SBA has an Offer in Compromise (OIC) program that allows borrowers to settle defaulted loans for less than the full balance. The SBA doesn’t make it easy, and they have strict eligibility requirements. The process is also slooow. But an OIC is a viable alternative to bankruptcy for some people. Whether it makes more sense than bankruptcy depends on your overall debt picture, your income, and your assets.

I already have a judgment against me. Is it too late?

Not necessarily. Bankruptcy can still discharge the underlying debt even after a judgment. But if the judgment creditor has recorded a lien against your real property, that lien doesn’t automatically go away. You may need a motion to avoid the lien as part of the bankruptcy process. The sooner you act, the more options you have.

The Bottom Line

SBA loans are dischargeable. Personal guarantees on SBA loans are dischargeable. If you’ve been living in fear of what the SBA or your lender can do to you, bankruptcy may be the exit ramp you’ve been looking for.

What it takes to get there, that’s what we figure out together. I’ve been doing this a long time. Give me a call and let’s talk through your situation.

Now a trustee will be assigned to each case

Now a standing trustee will oversee each case, assisting in the reorganization process and monitoring the business’s compliance with the Bankruptcy Code. The assignment of a trustee will greatly improve the chances of the successful completion of the plan of reorganization.

Only the debtor can propose a plan of reorganization

Previously, there was an exclusive period for a small business to propose a plan of reorganization, then any interested party could propose a plan for the business. Now, only the debtor can propose a reorganization plan. In addition, small business debtors no longer need obtain independent approval of a disclosure statement. Nor do small businesses in bankruptcy need to solicit votes for plan confirmation. These changes dramatically reduce the burden on small businesses in bankruptcy.

Small business bankruptcy is now more like Chapter 13

No longer must small business owners provide “new value” to retain control of their companies. Instead, the new law requires only that business owners commit all projected disposable income to the plan of reorganization, similar to a Chapter 13 bankruptcy. The plan’s term will span from three to five years, just like Chapter 13.

Small business bankruptcy just got easier

The Small Business Reorganization Act of 2019 greatly simplifies the bankruptcy process for small business owners. Business owners are no longer required to pay all debts in full in order to retain ownership of the business. The law provides more flexibility for business owners to reorganize, while cutting down the red tape.

If you are considering bankruptcy for your small business in the Washington, D.C. area, call Lee Legal for a free consultation.

When you must file quickly

You must file your bankruptcy prior to a foreclosure auction or you will not be able to save the property. Filing bankruptcy after a foreclosure auction has already been held will not save your home. If you file a Chapter 13 prior to the auction, then the automatic stay takes effect. That stops the auction. Then can make up missed mortgage payments over an extended period of time. But filing bankruptcy after a foreclosure auction is too late.

Likewise, if you file Chapter 13 after your landlord has obtained an eviction judgment, then the bankruptcy will not prevent eviction. You must file the bankruptcy prior to your landlord’s obtaining an eviction judgment.

Filing bankruptcy after a repossession, in some cases, will allow you to get your vehicle back. But the creditor will charge you handsomely for the repo costs and fees. It is usually preferable to file Chapter 13 prior to repossession.

When waiting to file makes more sense

Filing a Chapter 13 bankruptcy during a civil litigation case will not result in the case’s being dismissed. Instead, the case will only be “stayed” temporarily. Usually, bankruptcy courts will allow the plaintiff relief from the automatic stay to allow the litigation to go forward. This allows the claim to be litigated — and liquidated — in the proper venue. Often it makes sense to allow the litigation to run its course prior to filing a Chapter 13 bankruptcy.

Waiting to file until the first of the month might make sense, too. Filing a Chapter 13 bankruptcy after your latest mortgage payment comes due allows you to include that payment in your Chapter 13 plan. On the other hand, if you file near the end of the month, then your first mortgage payment will come due within a few days after your filing. Sometimes this can strain your budget and even cause missed payments.

Especially at the beginning of a Chapter 13 case, you don’t want timing issues to trip you up. The Chapter 13 trustee will scrutinize your case for feasibility to determine whether you have the ability to repay. If you miss mortgage or vehicle payments or fail to make your Chapter 13 Plan payment, your case may be in peril.

Don’t let timing throw you off

Call Lee Legal to schedule a free, comprehensive financial analysis. When to file a case is often just as important as whether to file at all. We will help you identify the issues and develop a plan to allow you to move on with your life.

Get an overview with the Case Summary

At a glance, you can get a quick snapshot of the status of your Chapter 13 bankruptcy on the Case Summary tab. You can see your latest payments, the total amount you have paid into your Chapter 13 Plan, and the amount of any unpaid funds that the trustee has on hand.

Track your creditors with Claim Summary

See who the trustee pays (and how much) on the Claim Summary tab. You can see the creditor, type of claim, claim amount, principal and interest paid, and how much you have left on each creditor claim.

Get a visual view through the Account Ledger

On the Account Ledger tab, you can view your receipts and disbursements. The “receipts” are the amounts that you have paid into your Chapter 13 Plan. And “disbursements” are the amounts the Chapter 13 trustee has paid to creditors. The Account Ledger can be sorted at the top through the “Filter By” parameters. The Account Ledger provides a chronological view of your entire Chapter 13 case.

Track your Chapter 13 Bankruptcy with the NDC

Since 2006, nearly all Chapter 13 trustees have provided case data on a nightly basis. Every Chapter 13 debtor thinks from time to time, “How long do I have to go with my Chapter 13?” Use the NDC to track your Chapter 13 bankruptcy.

According to a recent Pew Research study, less than half of Americans (46 percent) make more than they spend. Many people don’t even know the actual amount of their debt. Debt can be intimidating, which in turn causes some to simply ignore it.

Face your debt and assess your options

At times, life can present a situation that forces one to confront their finances, upfront and head-on. Regardless of the type of debt you have and the amount, paying it off can take years, if not decades. Of course, there are measures you can take in effort to achieve this goal, but bankruptcy is the quickest and least expensive way to alleviate your debt. Period.

Bankruptcy eliminates most types of debt, stops collections, and allows you to reorganize and catch up on missed car or mortgage payments. Chapter 7 bankruptcy is a good option for those that do not have the ability to pay all their debts, while a Chapter 13 is a reorganization bankruptcy for those that have the income to catch up over time. Bankruptcy is much less expensive than debt settlement.

A bankruptcy filing will be on your credit report and may initially lower your score, and that is a cost, too. But you can immediately begin to rebuild your credit following bankruptcy. This is the time to add new credit, like a secured credit card or small installment loan. Go forward making on-time payments ALWAYS for all debt, the old and the new. Not exceeding 30 percent utilization of your credit cards is also a good habit to practice.

Get rid of debt — and keep it that way!

If you continue moving forward with good financial habits, you can get rid of debt, rebuild your credit — and keep it that way! Consult a bankruptcy attorney to learn your options. Each bankruptcy case is different, relative to the person filing, so what may be true for one person may not be the case for another. But between allowing debt to continuously accumulate with no resolution versus allowing bankruptcy to give you a fresh start, the latter is the better option every time.

Student lenders religiously report unpaid student loans to credit bureaus

Most student lenders report monthly — every month — to credit bureaus. Your personal payment history accounts for 35 percent of your credit score. Federal student lenders report payment history to credit bureaus monthly and without fail. Most private lenders also report to credit bureaus monthly, while others report every three or four months.

While on-time monthly payments to your student loans will improve your credit, missed or late payments will ding your credit. Student loan default invariably results in a lower credit score. In the eyes of the credit bureaus, unpaid student loans negatively reflect on your creditworthiness.

What if I can’t pay my student loans?

If you make income insufficient to pay your scheduled monthly student loan payments, you likely have options. Contact your lender and see what possible programs you may be qualified for, including deferment or forbearance.

Federal loans also have income-driven repayment programs available, including income-based repayment, PAYE, REPAYE, and income-contingent repayment.

Chapter 13 bankruptcy can help you get your student loans back on track

If no lender repayment program works for you, consider Chapter 13 bankruptcy to get your student loans back on track. You generally cannot discharge student loans in bankruptcy. You can, however, repay your student loans in Chapter 13 bankruptcy, often at a greater percentage than what other unsecured creditors receive.

Once you have a repayment plan in place, your creditors will be paid monthly and your balances will begin to decrease. Consequently, your credit score will improve. Addressing your debts, instead of ignoring them, will always have a more positive effect on your credit score.

Make becoming debt-free your New Year resolution

This year can be different. Instead of giving away your whole paycheck to pay debts, you could invest in yourself and your future. Instead of avoiding your creditors or making excuses, you could get rid of your debt and tell your creditors to take a hike.

Now is the time to reassess your goals and reevaluate your present ability to reach those goals. If hard work and perseverance can get you to your goals, then work hard and persevere. But if you need to take another route, keep an open mind and seek an honest appraisal of your circumstances.

Get rid of your debt with bankruptcy

You may qualify for a Chapter 7 bankruptcy, which allows you to quickly and easily discharge your creditors. That means within three months, you could be completely debt-free.

If you make too much income for Chapter 7, consider instead Chapter 13 bankruptcy. Oftentimes, we will be able to propose a repayment plan that discharges a majority of your debt.

The holidays are over. A new year has begun. Make this the year you get rid of your debt.

Chapter 13 is complicated

Obtaining trustee and creditor consensus on a court-approved repayment plan takes hard work, finesse, and expertise. Chapter 13 allows a debtor to propose several plans in an attempt to reorganize. But unnecessary delay will lead to dismissal. Failure to comply with local rules and procedure will lead to dismissal. And a single missed deadline in your case will lead to dismissal. Unfortunately, Chapter 13 bankruptcy administration is extremely complicated.

Pro se cases have very low success rates

A recent American Bankruptcy Institute study found that the pro se Chapter 13 success rate is no more than 14.8 percent. In contrast, filing with an attorney jumps the success rate up to 52.7 percent. Courts dismiss most pro se Chapter 13 cases within a few months. Even for those cases that somehow survive, the debtor likely leaves a lot of money on the table. The job of your Chapter 13 lawyer is to assist you in fashioning an effective reorganization. That includes making your monthly payment as affordable as possible based on your personal circumstances.

Chapter 13 requires tons of documentation

Not providing documents to the trustee can lead to dismissal very early in a case. You must present your Social Security card and government-issued photo ID at your meeting of creditors. The trustee will move to dismiss your case if you show up without these.

You must also have filed your state and federal tax returns for all years prior to your Chapter 13 filing. In addition to your petition and schedules, you must provide the trustee your tax returns for every year, going forward, that you remain in Chapter 13. To avoid a motion to dismiss from the trustee, you must send these returns directly to the trustee every year. Via your attorney, you must also provide the trustee with deeds of trust, leases, proof of income, bank statements, loan documents, in addition to other documents.

You must stay current on your Plan payments

You must begin to fund your Chapter 13 Plan immediately upon the filing of your case. Payroll deductions do not commence until confirmation, which can take months from the filing. You must send your plan payment directly to the trustee until automatic deductions start. After two months of nonpayment, the trustee will file a motion to dismiss your case for failure to make Chapter 13 plan payments.

Sometimes, voluntary dismissal is appropriate

Chapter 13 debtors have the absolute right to voluntarily dismiss their cases. Voluntary dismissal takes place for several reasons, but most often this takes place because the debtor obtains a mortgage modification. If you file a Chapter 13 solely to cure mortgage arrearage and subsequently obtain a loan modification, then you may no longer need the bankruptcy. At that point, voluntary dismissal may be appropriate.

Chapter 13 bankruptcy cases get dismissed — a lot

Over the course of three to five years, many different types of financial setbacks can occur. And while any serious setback can lead to dismissal, oftentimes dismissal can be avoided. If your circumstances change during the course of your Chapter 13 bankruptcy, notify your attorney as soon as possible. In many cases, your bankruptcy lawyer can do something to mitigate the problem.

What is a Notice of Intent to Accelerate?

Sometimes called a Default Letter, the Notice of Intent to Accelerate usually states that a mortgage loan is in default. The letter will also state how much time you have to cure the default. For most mortgages, this time period is 30 days. In addition, the notice may tell you the exact amount needed to reinstate the loan. Many mortgages, however, require the borrower to request a reinstatement figure.

What does the Notice of Intent to Accelerate mean?

In short, the Notice means you are running out of time before your mortgage lender forecloses. Most mortgages contain acceleration clauses. “Acceleration” means that your mortgage company can demand the entire balance of the mortgage, not just the amount past due.

In Virginia and in Maryland, mortgage companies can immediately commence foreclosure proceedings and set an auction date if you do not cure the arrearage. In Washington DC, the mortgage company must file a lawsuit to obtain judicial approval to foreclose.

What to do if you receive a Notice of Intent to Accelerate

If you believe the notice was sent to you in error, contact your mortgage lender or servicer immediately. Request a full accounting and verify that your payments have been correctly applied.

If you are in default but have the means by which to reinstate the loan, do so quickly. Request a formal reinstatement figure in writing from your mortgage company so you have documentation. Pay by check so you can document the payment.

Your lender may have other options available to you, depending on your mortgage type, loan history, and overall credit profile. Call your mortgage servicer and see if you have options other than reinstatement, such as modification or forbearance.

Bankruptcy stops foreclosure

If none of these options are available to you, then foreclosure is imminent. Once you receive a Notice of Intent to Accelerate, act quickly. Whether your goal is to keep the property or simply to delay foreclosure in order to effectuate the orderly transfer of the property, consider filing a Chapter 13 bankruptcy before your lender commences formal foreclosure proceedings.

Assess your foreclosure defense options

Homeowners in the Washington, D.C. area who are facing foreclosure should very carefully examine all of their options. Your personal financial and investment goals will determine your foreclosure defense options.

If you cannot afford your mortgage payment then your options are more limited. Having a steady income, however, opens up more foreclosure defense options to you. If you have disposable income sufficient to sustain a monthly mortgage, then you have even more defenses available to you. Likewise, if your home has equity, your options expand even further.

Set your foreclosure defense strategy early on

Your foreclosure defense strategy depends upon whether you want to retain your property, surrender the property, or simply delay the foreclosure.

Retain the property. If you want to keep the property, you should consider mortgage modification first. If you have not yet defaulted, you may also want to consider refinancing or renting rooms to supplement your income. But f you have equity, then first and foremost you should consider selling the property prior to foreclosure. Pulling equity out of the property before your mortgage company can charge you for the costs of foreclosure often makes more sense than simply waiting. If you are 62 or older, you may qualify for a reverse mortgage.

File bankruptcy. If you want to keep your property but your mortgage company isn’t cooperating, consider filing Chapter 13 bankruptcy to force your mortgage company to accept repayment terms. Chapter 13 not only immediately stops foreclosure. Many mortgage companies also approve homeowners for modification after a successfully confirmed Chapter 13 Plan.

Surrender the property. If you want to surrender the property, then explore your options for short sale or deed-in-lieu of foreclosure. In some cases, consenting to foreclosure can save you money. Be sure to consult with an attorney to negotiate an antideficiency agreement with your lender prior to consenting to foreclosure.

Delay foreclosure. We rarely advise clients simply to allow a property to go to foreclosure auction. Try to keep all options open until you decide on the best option for your situation. When based on a good faith foreclosure defense, delaying the foreclosure provides you the time you need to figure out what to do. Failure to provide proper notice, reinstatement figures, or improper advertisement can all give rise to bona fide foreclosure defenses. Bankruptcy, too, can delay foreclosure while you attempt a workout with your lender.

You may have multiple foreclosure defense objectives

In many cases, starting with one strategy doesn’t mean that’s where you will end up. Sometimes, for instance, strategically surrendering the property may be your ultimate goal. Yet signaling surrender to your lender early in the process may be a big mistake. The further along that you get into foreclosure, the harder it will be to control the process. If you are facing foreclosure, retain a lawyer at the beginning of the process, not at the end.

If you are facing foreclosure in Virginia, Maryland, or the District of Columbia, Lee Legal will vigorously defend your rights during the mortgage foreclosure process. Setting realistic foreclosure defense objectives doesn’t mean exploring creative solutions. We will remain flexible in dealing with your mortgage company or servicer.

Chapter 7 bankruptcy

How long your Chapter 7 bankruptcy will take depends upon whether you have assets to distribute. Most Chapter 7 cases are completed quite quickly. But if you have unexempt assets, your Chapter 7 case could have a more extended timeline. Asset cases take longer. If the trustee must liquidate assets and distribute proceeds to creditors, that takes time. Your attorney should advise you before you even file whether you have an asset or no-asset case.

If all of your property is fully protected by exemption, then you will have a no-asset case. No asset cases take three months, start to finish, from filing to discharge. Other types of actions, like adversary proceedings, can delay the closure of a Chapter 7. But the vast majority of Chapter 7 bankruptcies close about 90 days after filing.

Chapter 13 bankruptcy

Chapter 13 bankruptcy allows you to propose a repayment plan that lasts from three to five years. Your household income and type of debt determine whether you have a three-year (36 months) or five-year (60 months) repayment plan. If you want to make up missed payments on a secured debt, like a home mortgage, then usually you will want to file a five-year plan.

And at the end of your plan, all remaining balances on your debts will be discharged. Chapter 13 bankruptcy is available to almost every consumer debtor, but you must have steady monthly income to qualify.

Chapter 11 bankruptcy

Individual debtors may also use Chapter 11 of the bankruptcy code. Typically, Chapter 11 bankruptcy is reserved for high earners or those with multiple real estate or business assets. If you are able to “pre-package” your case, then the process may be over in a matter of weeks. Other Chapter 11 reorganization plans last two years, five years, or even longer. Chapter 11 offers flexibility but comes with costs, too. Most consumer debtors are better served by Chapter 7 or Chapter 13.

How long does bankruptcy take?

Chapter 7 usually takes three months, start to finish. Chapter 13 takes between three and five years. And Chapter 11 can be over very quickly or take more than five years.

If timing is a concern for you, be sure to ask your attorney about your expected timeline before you even file. Note that for most credit reporting, the date of the bankruptcy filing (and not the discharge date or date of case closure) is the most important date in your case.

Your financial freedom of choice may be limited while you remain in an active bankruptcy. If you have concerns about how long your bankruptcy will take, discuss them with your attorney from the outset so he can plan your case appropriately.

Those sticky, sticky student loans

Just look at the graph below, which shows how “sticky” student loans are. The graph represents debt held by different age groups, and the orange bar represents student loans. On average, as you can see, student loans stay with us for much of our lives.

According to the National Association of Chapter 13 Trustees, between 1980 and 2010, the costs for college increased at a rate approximately five times the rate of inflation, and outstanding student loan debt now tops $1.5 trillion. Meanwhile, the default rates on student loans in the U.S. have nearly doubled since 2006. Many young people are filing Chapter 13 bankruptcy to escape the crushing burden of student loans.

Student loans are not dischargeable in Chapter 13

A Chapter 13 bankruptcy will not discharge your student loans. In many cases, you can repay only a percentage of your unsecured debts and discharge the rest of the balances. Unfortunately, however, you will still owe any unpaid student loan balances after you receive a Chapter 13 bankruptcy discharge. The Bankruptcy Code treats student loans differently than it does any other type of unsecured debt.

Call is growing for bringing back the discharge for student loans in bankruptcy. On June 21, 2018, the non-profit, non-partisan National Bankruptcy Conference (NBC) released a position paper recommending reinstatement of the discharge of student loans. The paper notes that many student loans are for ineffective educational programs or programs that the debtor never completes. Astonishingly, almost half of all students who enter college do not graduate and receive a degree.

The editorial board at Bloomberg recently put it best: Let Student Borrowers Declare Bankruptcy, Already.

Repay your student loans in Chapter 13 bankruptcy

While student loans may not be discharged, you can repay your student loans in Chapter 13 bankruptcy. In bankruptcy, the “classification” of claims means grouping together creditors for similar repayment through the Chapter 13 Plan. Most courts have held that student loans are inherently different from other unsecured creditors due to their nondischargeability and are thus are subject to separate classification.

The usual purpose of separately classifying student loan debts is to pay the student loan creditor more than what is being paid to other unsecured creditors. Classifying student loans separately can be accomplished through 11 U.S.C. 523(a)(8), 1122 and 1322 of the Bankruptcy Code.

[I]t is often in the debtor’s interest to pay off
as much of the student loan debt
in the Chapter 13 plan as is permissible.
One way to pay more on the student loan
than on other unsecured debts
is to provide in the Plan that the debtor
will maintain direct ongoing monthly payments
to a student loan creditor . . .

National Bankruptcy Conference,
Student Loan Dischargeability (2018)

You may be able to reduce your payout to unsecured creditors by maintaining your monthly payments to student loans. At the confirmation stage, courts look to balance the financial needs of bankruptcy debtors with those of their creditors. For example, a Chapter 13 Plan may not provide for 100 percent repayment of student loans while the remaining unsecured creditors receive 0 percent. Such a Plan would not be fair to the non-student-loan unsecured creditors.

Talk to a bankruptcy attorney

Claim classification and Plan calculation are as much an art as a science. The bankruptcy trustee, United States Trustee, and bankruptcy judge will closely examine your income and expenses, calculation of disposable income, and claims register to determine whether your Chapter 13 Plan should be confirmed. If you want to repay your student loans in Chapter 13 bankruptcy, talk it over with an experienced bankruptcy attorney.

Before an auction is scheduled, you have lots of foreclosure prevention options. But the only sure-fire way to stop foreclosure immediately is to file bankruptcy.

Chapter 13 bankruptcy stops foreclosure immediately

Bankruptcy is a powerful legal mechanism that enjoins all creditor actions, including a scheduled foreclosure auction. You may want to keep the property. Chapter 13 reorganization allows you to make up any missed mortgage payments over a three to five year period. If you can afford your mortgage, plus enough to repay the arrearage, then you will be able to keep the property. Many clients find their lenders more open to a mortgage modification once they file for bankruptcy protection.

Perhaps, however, you can no longer afford the property. If your property has equity, Chapter 13 allows you the time you need to list, market, and sell the property.

Or maybe you’re not yet sure what to do with the property. In most cases, it is not advisable to simply allow the property to sell at foreclosure auction. Keep your options open until you decide on the course of action best suited to your circumstances.

Stop foreclosure immediately — don’t wait until it’s too late

Once your lender schedules a foreclosure auction, it may be too late even to reinstate your loan. Consider filing bankruptcy prior to the scheduling of a sale to save on attorneys fees and costs. But you must absolutely file bankruptcy before the foreclosure auction actually takes place. If you file a minute too late, the property is lost forever.

Lee Legal routinely files emergency bankruptcy to stop foreclosure. Call us at (202) 448-5136 to stop foreclosure in Virginia, Maryland, or Washington, D.C.

You owe taxes from previous years

If you owe taxes for previous years, the IRS will automatically apply your refund against the taxes you owe. You will receive a notice of intent to levy in the mail. If your refund is larger than your total tax liability, then you will receive a refund for the amount of the difference.

You haven’t filed all of your returns

If you haven’t filed returns for a previous year, the IRS may keep your tax refund until you file those returns. You may not owe anything once you file any missing returns, in which case you will get your refund once the returns are processed. But if you do owe taxes for the unfiled years, see above: the IRS will automatically apply your refund against your outstanding liability.

You are delinquent on student loans

The U.S. student loan situation is a big hot mess. The current student loan delinquency rate is 11.2 percent. The Treasury Offset Program will seize your tax refund to pay down your student loans if you are in serious default. If you want to keep your tax refund, consider entering into an income-based repayment program prior to filing your return.

You owe back child support

The Treasury Offset Program can also seize your tax refund to pay off back child support. If you are seriously delinquent, the IRS may keep your tax refund to offset the delinquency. If your refund is larger than the back child support, then you are entitled to the difference. But you may need to contact child support services to obtain the balance of your refund. Do this as soon as you receive the notice of intent to offset.

You missed the filing deadline

If you don’t file a tax return for a year in which you’re due a refund, you can file the return within three years and still receive the refund. After that, you’re out of luck, because there’e a statute of limitations on tax refunds. In short, if you wait too long (three years) to file your return then you permanently lose your ability to claim a refund from that return year.

Your refund is going to the bankruptcy trustee

In a Chapter 7 bankruptcy, your attorney will in most cases be able to fully protect your tax refund. If you are in a Chapter 13 percentage repayment plan, however, you will likely have to cough up your refunds to the Chapter 13 trustee. That’s why it’s important to reduce your exemptions so that you’re not overpaying your taxes each year.

The Chapter 13 Current Monthly Income Statement

Official Form 122C-1 is the so-called Statement of Your Current Monthly Income and Calculation of Commitment Period. And Official Form 122C-2 supposedly determines your Chapter 13 Calculation of Your Disposable Income. Some of the information used in the forms come from your personal records. Most of the information, however, comes from the Census Bureau and the IRS.

These forms purport to calculate your disposable monthly income. But the results they produce are often wildly inaccurate. Many types of deductions are disallowed, including children’s expenses, student loan payments, and other types of monthly expenses.

Schedule I and Schedule J

No rational person believes that the Current Monthly Income statement calculates a realistic computation of disposable monthly income. Chapter 13 trustees often look instead to Schedules I and J to determine disposable income.

• Schedule I: Your Income requires your employment and income information and provides for paycheck deductions. All income must be entered here, including rental income, domestic support obligations, and regular contributions to household income.
• Schedule J: Your Expenses requires you to list all of your expenses. Schedule J calculates your monthly net income. These schedules often reflect your true income more accurately than the Current Monthly Income Statement. You should carefully review with your attorney each line of your income and expense schedules before you file them.

Your monthly net income often determines your Chapter 13 plan payment. But not always.

The Chapter 7 Liquidation Test

Even though you have filed a Chapter 13 and not a Chapter 7, you still must pass the Chapter 7 liquidation test. See 11 U.S.C. 1129(a)(7)(A)(ii). This test requires that the unsecured creditors in your Chapter 13 case must be paid at least as much as they would if your case were filed under Chapter 7. For most Chapter 13 debtors, the liquidation test poses no problem. If you have significant assets, however, then you may need to pay more into your Chapter 13 Plan to protect the equity in those assets.

How Much Will I Have to Pay in a Chapter 13 Bankruptcy?

How much you will have to pay depends not only on your specific income and expenses, but also your debt and kind of debt. Secured and unsecured creditors receive different types of protections in Chapter 13. And your assets can affect your Chapter 13 plan payment, too. Talk to an experienced bankruptcy attorney to determine the probable range of your plan payment based on your specific lifestyle and circumstances.

An income tax refund received after a bankruptcy is filed is subject to turnover. Doan v. Hudgins, 672 F.2d 831, 833 (11th Cir. 1982). The trustee will seek to seize your tax refund and distribute the proceeds to your creditors. You must proactively protect your tax refund in bankruptcy.

Chapter 7 vs. Chapter 13

Tax refunds as assets in Chapter 7 are always subject to liquidation. But cases filed later in the year, or right before tax season, see more tax refund turnovers. Again, if you can exempt your tax refund, then the trustee will have no interest in liquidating it for distribution to creditors.

In Chapter 13, however, if you propose a 100 percent repayment plan, then your tax refunds are yours to keep. Chapter 13 percentage plan cases often result in tax refund turnover to the trustee. You will want to discuss with your attorney how best to adjust your withholdings to minimize the amount of tax overpayment you make each year.

How to protect your tax refund in bankruptcy

The exemption laws applicable to your jurisdiction determine how much of your tax refund you can protect. Virginia and Maryland bankruptcy filers must use the state exemptions. Washington, D.C. filers may use either the state or federal exemptions.

Many people rely on their tax refunds to tune up their cars, fix the roof, pay tuition, shore up emergency savings, or even to take a badly-needed vacation. If you want to protect your tax refund in bankruptcy, let your attorney advise you how best to do so.

What is a Chapter 13 Plan?

When you file a Chapter 13 bankruptcy, you are doing so for one of many reasons. First, because you make too much household income to qualify for a Chapter 7. Or because you have valuable assets to protect. Or you may want to repay mortgage arrearage over time.

Your Chapter 13 Plan tells your creditors how much and over what period of time you will pay them. Creditors are categorized and a repayment scheduled is proposed. Any interested party can object. Once confirmed, the Chapter 13 Plan re-writes the contracts between you and your creditors.

The new Plans are powerful

Chapter 13 allows you to strip liens and cram down secured claims. The new Plans serve notice on creditors of your intention and terms. Without objection to your Plan, lienstrips and cramdowns can be accomplished through the Plan without further legal action. The new Plans are more powerful.

The new Plans are also more efficient. They set default interest rates and priority of payment. Valuations and treatment of creditors are clarified. The required level of notice to each creditor is established in the new Plans, too.

But with power comes complexity

The former Maryland Chapter 13 Plan was three pages, while the new one is seven. Virginia’s new Plan increased the page number from six to eight. The new Chapter 13 Plan in Washington, D.C. increased from one page to 11. The new forms are powerful, but also more complex.

The language of the new Plans is accessible, and the forms are pretty. They have clickable boxes. But the financial concepts and ramifications contained in the new Plans are far from simple. Obtaining court confirmation of your Chapter 13 Plan should not be your primary goal. Instead, you should be focused on extracting the maximum benefit from your bankruptcy.

Do not file Chapter 13 without a lawyer

Simply put, obtaining Chapter 13 Plan confirmation has become more complicated for debtors. That is especially true for people who want to accomplish specific goals through their Chapter 13.

The American Bankruptcy Institute recently found that pro se cases are at least five times as likely to result in early dismissal than cases in which the debtor has hired a lawyer. The ABI found that “unrepresented debtors in Chapter 13 have virtually no chance of completing a repayment plan.” The ABI labels these cases “dead on arrival.”

Do not end up getting trapped in a Chapter 13 Plan that does not achieve the results you expected from your bankruptcy. Do not file a Chapter 13 without a lawyer.

Most of our clients feel their credit card purchases to be investments. From clothing and food and appliances to rental cars and educational expenses, most people use plastic to purchase with the intent of repayment.

Overextension of credit is where most people run into trouble. At that point you may want to talk to a bankruptcy attorney. Lee Legal serves D.C., Maryland, and Northern Virginia.

Breaking the debt cycle

Once you realize that you cannot reasonably ever repay all of your creditors, consider bankruptcy. If you have assets or income to protect, Chapter 13 requires creditors to conform to a plan proposed by you. If you have few valuable assets or income insufficient to meet your obligations, Chapter 7 can wipe the slate clean and let you start over.

Before you send away good money after bad, talk to a bankruptcy lawyer. We help our clients break the cycle of debt.

Stop paying the credit cards

Once you know you qualify for a Chapter 7 bankruptcy, then you can stop paying credit card bills. You can’t rack up charges or use them other than necessities before filing. But you won’t need to send most creditors another penny.

If you qualify for a Chapter 13 bankruptcy, stop paying the monthly amounts and start your bankruptcy. If you know you have to file, don’t procrastinate.

This applies to many other types of debts, too. You can stop paying old utility and medical bills, lines of credit, and personal loans. All of these debts will be discharged in your bankruptcy.

Don’t send good money after bad

Another way to explain it is by the so-called “sunk cost fallacy.” A sunk cost is money already invested. The more you invest, the more difficult those sunk costs are to abandon. Yet rational decisions should be made on future value. Knowing when you’re sending good money after bad isn’t really so easy. We often have emotional attachments to our investments.

Miscalculation is often difficult to admit. Once you realize you’re overextended financially, the sooner you correct course, the better.

Debt Collection. If you have a debt in collection, you have rights. You’re likely going to want to hire a lawyer to enforce those rights. If you have many debts in collection, consider bankruptcy. If you have just a few debts, however, consider hiring an attorney to settle the debt.

Foreclosure. If you are in preforeclosure, act quickly to preserve your options. If you have a foreclosure auction scheduled, you only have two options: reinstate the loan or file bankruptcy. Timing is incredibly important in foreclosure cases. Contact an attorney immediately if you default on your mortgage.

Repossession. If you are facing repossession, you have options before the vehicle is repossessed. Afterwards, not so much. If you have a debt resulting from a former repossession, you can eliminate that debt in a Chapter 7 bankruptcy. If you want to stop a repo before it happens, a Chapter 13 bankruptcy may do the trick.

Garnishment. Garnishment can often severely impact your monthly finances, and garnishment reflects very negatively on your credit score and credit report. Often, the only way to terminate a garnishment wage order is by filing bankruptcy.

Taxes. If you withhold too little from your paycheck, you will get more money with which to pay your bills. But artificially increasing your deductions creates a tax liability for you at the end of the year. We can help you identify which deductions are appropriate for you. And we can help you determine which taxes may or may not be forgiven.

Lawsuits. You could spend thousands of dollars defending a lawsuit that you’re sure you will win. And then you might lose. In many cases, it makes sense instead to moot the suit in bankruptcy. On the other hand, it could make sense to fight the suit and attempt to settle. Talk to an attorney. Don’t try to handle a lawsuit on your own.

Student Loans. You may be in deferment or forbearance right now. But when your monthly student loan payment comes due, will you be able to pay it? Student loans are not dischargeable in a Chapter 7 bankruptcy. But paying your student loans in a Chapter 13 bankruptcy allows you some breathing room to pay your other debts.

Lee Legal Can Diagnose Your Financial Condition

Financial problems don’t solve themselves. Many financial problems aren’t even obvious problems at first. Don’t try to self-diagnose your condition. Seek out an objective analysis and generate a plan unique to your circumstances and goals. Call Lee Legal to schedule your financial diagnosis.

If You Can Afford to Pay Your Debt

Chapter 7 Bankruptcy. Your credit will show a Chapter 7 filing for ten (10) years. If you make enough money to afford repaying your debts, then you should do that. You may forego some money in the short-term, but avoiding bankruptcy when you can afford to repay may pay off for you big time in the long-term.

Chapter 13 Bankruptcy. If you can afford to repay your debt, but not in less than five years, then consider a Chapter 13 bankruptcy. Your attorney will propose a repayment plan suitable to your budget. And a Chapter 13 bankruptcy will remain on your credit report for only seven (7) years.

If You Are Uncollectible

You may make very little income or have no income at all. Social Security may be your only source of income. Your credit score may already be very low. If you have only enough money to pay for your most basic expenses, as well as those of your dependents, then you may be an “uncollectible” debtor.

If a creditor deems you to be uncollectible, then bankruptcy might not be the best choice for you. Questions of whether or not a person should file bankruptcy due to uncollectible status usually occur near end of life.

If You Have Mostly Student Loan Debt

Chapter 7 bankruptcy eliminates student loan debt only in the rarest of circumstances. If you decide to file a Chapter 7, it will not be to discharge your student loans. Chapter 7 won’t help you at all. Student loans are nondischargeable.

Still, Chapter 13 bankruptcy may help if your student loan payments exceed your living expenses. You can use Chapter 13 to reduce or delay altogether your monthly student loan payments obligations during the term of your Chapter 13 plan. Any balances remaining on your loans after the Chapter 13 bankruptcy is over, however, must be repaid.

If You Cannot Exempt All of Your Assets

Most people do not have to worry about unexempt assets. Most Chapter 7 bankruptcy debtors have “no-asset, no-distribution” cases. Even if you own some valuable property, in many cases it will not be financially feasible to liquidate it. The amount of your debt in relation to the value of your assets is a helpful but not entirely reliable indicator.

If you own many valuable assets, however, like real estate or cars or financial instruments of any type, then you must carefully weigh whether bankruptcy is the right choice for you. Likewise, if you are expecting an inheritance or have a valuable legal claim, disclose these assets to your bankruptcy lawyer right from the outset. Your bankruptcy lawyer will analyze how they fit into your larger financial picture.

When You Should NOT File for Bankruptcy

Bankruptcy might not help with child support. In some case, bankruptcy doesn’t help with eviction. Bankruptcy is not one-size-fits-all, and bankruptcy doesn’t fix every problem. A good bankruptcy lawyer will tell you when you should file for bankruptcy. But a great bankruptcy lawyer will tell you when you should NOT file for bankruptcy.