6. Banking Motivation “101” Default Loan $1,000,000 Capital Set-Aside $1,000,000 $19,000,000 $190,000,000 Reduce Loan Portfolio $10,000,000 = $500,000 income Your bad loan become very painful to the Bank! They are highly motivated to settle the loan ASAP, and recover SBA guarantee! Moreover, Bank can recover 75%-80% of loan from SBA!
8. Alternative: Second Wind vs. Bankruptcy Comparison Second Wind Bankruptcy Controlling Interest Borrowers best interests Creditors best interests Process Business, negotiated Legal, mandated Timeframe 3 – 12 months 2 – 6 months Impact on Credit Rating None / limited Severe Results Save the business, Save the home Save the Home Cost Determined by results: 15% of debt “eliminated” Typically $30K - $50K
9. ABCs of Bankruptcy Bankruptcy Filing Description Chapter 11: Business Reorganization. Chapter 11 is a re-organization. It attempts to keep the business operating while the debts are sidelined. Debtor must preset court with plan to payback everyone in the following order: 1) Secured creditors 2) Unsecured creditors 3) Preferred stockholders, 4) common stockholders. Typically the secured creditors get the lions share of any assets, or paid back over time, and unsecured creditors get beaten up badly. For small businesses, 8 out of 10 end up being converted by the courts to Chapter 7s, where the company is shut-down and liquidated. Business owner usually keeps their home. Chapter 13: Simpler Chapter 11 Chapter 13 is intended to be a less complicated, less expensive workout. Usually the debt is either not reduced, or reduced nominally, with payments stretched out over time. A Chapter 13 can work for a small debtor, with limited assets. Chapter 7: Dead Duck Chapter 7 is the ultimate bankruptcy. It eliminates all business debt, but costs you all your business assets. If you have personally guaranteed the loan(s), the courts can/will include them in bankruptcy. If you have a good attorney, you can usually keep your home, but you will likely have to refinance it. Bottom line = take away the debt, lose the business, keep the house.