Chapter 7 Bankruptcy or Closing and Dissolving: Which Is Better for a Distressed Failing Business?

 

Chapter 7 Bankruptcy or Closing and Dissolving: Which Is Better for a Distressed Failing Business?

When a business can no longer pay its debts, the owners usually have two options. 

They can file Chapter 7 bankruptcy, or they can wind the company down themselves, file a final tax return, and dissolve under state law. 

Each path has real advantages and real risks. The right choice depends largely on what happened in the business before the shutdown.

Option 1: Chapter 7 Bankruptcy

In a Chapter 7 case, a bankruptcy trustee is appointed to take control of the company’s assets and review its books and records. The business is closed whenthe chapter 7 Bankruptcy Petition petition is filed. The trustee and the trustee’s staff examine the company’s financial history. If they find payments that may be recoverable, such as preferential payments or fraudulent conveyances made to insiders or third parties, the trustee can commence adversary proceedings. These are lawsuits in the bankruptcy court to recover that money for the estate. In appropriate cases, the trustee can also retain a forensic accountant.

Pros:

• An independent, court-supervised process for liquidating assets and distributing proceeds.

• A single forum for handling creditor claims.

• A clear record that the company’s affairs were disclosed and reviewed.

Cons:

• The trustee, not the owner, controls the process and the assets.

• Your books, records, and past transactions will be examined, including payments to insiders and affiliates.

• Transfers made before filing can be challenged and recovered through litigation.

Option 2: Close, Wind Down, and Dissolve Under New York Law

The alternative is to manage the shutdown yourself. That typically means closing the business, taking down the website, selling inventory and other assets, collecting accounts receivable, filing a final tax return, securing the books and records, and dissolving the entity under state law.

In New York, dissolution ordinarily requires:

1. Proper shareholder authorization;

2. New York State tax clearance and, when applicable, New York City tax clearance; and

3. Filing a Certificate of Dissolution with the Department of State, with the required consents and the $60 filing fee.

The governing provisions are New York Business Corporation Law (“BCL”) §§ 1001-1008. A court order is not a routine filing requirement.

Pros:

• You control the timing and the process.

• It is typically less expensive and less public than a bankruptcy filing.

• There is no trustee reviewing the company’s history.

Cons:

• No court supervises how assets are sold or distributed.

• Creditors who are not paid may pursue the company, and potentially others, outside of bankruptcy. 

• Guarantors of Business debt can be sued by creditors.

• Decisions about which creditors to pay, and in what order, carry risk if they are later questioned.

• Missing or incomplete books and records can create problems later.

• Creditors can attempt to pierce the corporate veil or pursue alter ego theories to pursue the business’s owners.

What Happens If You Do Nothing

Closing the doors does not end the company’s existence. If a corporation does nothing and does not pay its corporate franchise tax for two years, the State will dissolve it by proclamation. 

How to Decide

• Were payments made to insiders or favored creditors before the shutdown, did the business pay the owners personal expenses? If so, understand the exposure before choosing a path.

• Are creditors likely to sue?

• Are there significant assets, receivables, or inventory to liquidate and distribute?

• Are there tax or personal guarantee obligations?

The right answer is different for every business. Review the numbers and the company’s recent transactions before deciding to file or dissolve.

If your business is in distress and you are weighing these options, contact James Shenwick, Esq. jshenwick@gmail.com  917 363 3391 to discuss your situation.

Jim Shenwick, Esq  917 363 3391  jshenwick@gmail.com 

Please click the link to schedule a telephone call with me.

 https://calendly.com/james-shenwick/15min

We help individuals & businesses with too much debt! & creditors in Bankruptcy cases

How to Pay Off or Pay Down Debt per New York Post

 

Snowball or avalanche? The best debt repayment plan depends on one thing

https://nypost.com/business/debt-snowball-vs-debt-avalanche-comparison/?utm_source=gmail&utm_campaign=android_nyp&preferred_app=nypost

Individuals with questions about paying down Debt should contact Jim Shenwick, Esq

Jim Shenwick, Esq  917 363 3391  jshenwick@gmail.com 

Please click the link to schedule a telephone call with me.

 https://calendly.com/james-shenwick/15min

We help individuals & businesses with too much debt! & creditors in Bankruptcy cases

New York Post Article 10-13-2026 The 8 common mistakes borrowers make when Consolidating Debt

 

The 8 consolidation mistakes that can sink borrowers

1. Consolidating debt without addressing why it accumulated

If monthly expenses keep exceeding income, moving balances to a new account does not solve the underlying budget problem. A consolidation loan probably won’t help someone who continues to spend more than they earn unless that person cuts spending or increases income.

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2. Judging a consolidation loan by its monthly payment alone 

A lower payment may simply mean the lender has stretched repayment over more years, which can increase the total amount of interest and fees paid. The CFPB specifically warns that a longer term can make a consolidation loan cost more overall even when the required monthly payment falls.

Fees can widen that gap. Personal installment loans may include origination, documentation, credit insurance, non-filing insurance and late fees, so borrowers should compare the annual percentage rate (APR) and total repayment cost rather than only the advertised interest rate.

3. Treating a promotional balance transfer rate as temporary

Many cards advertise a 0% or low introductory rate, but the promotion generally lasts for a limited period and a transfer fee usually applies. New purchases on the same card can also be subject to different interest rules.

Before moving a balance, calculate the monthly amount needed to eliminate the transferred debt during the promotional period, including the transfer fee. If that payment does not fit the household budget, the borrower could reach the end of the promotion with a remaining balance that is suddenly subject to the card’s regular rate.

4. Using home equity to finance discretionary spending on credit cards

Think carefully before turning unsecured credit card debt into debt secured by a home. A home equity loan may carry a lower rate, but it uses your house as collateral. Don’t make the mistake of thinking your creditors can’t force the sale of your house! What’s more, home equity borrowing may also involve upfront costs that outweigh the savings from not paying credit card interest.

Using home equity for consolidation also reduces the equity available for emergencies. That change in risk matters because credit card balances are not secured by the borrower’s home, while a home equity loan puts the property at risk if the borrower cannot make the payments.

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5. Not shopping around for the best rates

Rates, fees and repayment terms vary among lenders, and the CFPB recommends reviewing disclosures and comparing offers before signing. The relevant comparison is not which lender offers the lowest monthly payment, but which option produces the lowest reasonable total cost while keeping the payment affordable.

6. Running up more credit card debt 

Consolidation doesn’t erase the old debt, it merely moves that debt into a new account. When you continue to make charges on the card you just paid off, you can end up owing both the consolidation loan amount and another round of revolving balances. Taking on new debt to pay off old debt may simply postpone the problem if you don’t rein in your spending.

7. Assuming every paid-off credit card should be closed immediately

You may think cutting up your credit cards is a sign of virtue, but closing a credit card can have negative effects on your credit. It immediately raises your credit utilization ratio, which can lower your credit score. If keeping an account open means you are paying a hefty annual fee, it might be worth the risk, but having an open, unused line of credit is actually good for your credit reputation.

8. Not knowing the difference between debt consolidation and debt settlement

A consolidation loan generally pays off several debts and leaves the borrower with one new loan, while debt settlement companies typically try to negotiate reduced payoffs with creditors. Both options are widely pursued by individuals managing heavy balances; a study by Freedom Debt Relief found that 30% of heavily indebted borrowers have used a debt-consolidation personal loan and 27% have used debt settlement. 

Settlement firms may ask for forbearance from creditors and advise consumers to stop paying while they save for a lump-sum settlement. Unfortunately, in those scenarios, interest and fees are allowed to grow and can expose you to collection efforts if negotiations fail.

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Positive steps you can take to reduce your debt

Before consolidating, list each debt’s balance, APR, minimum payment and expected payoff date. Then compare those numbers with the new loan’s APR, fees, term, monthly payment and total repayment cost. Contact your current creditors because some may reduce an interest rate, waive fees, lower a minimum payment or adjust a due date.

The bottom line is that the practical test for consolidation is not whether it produces one bill instead of five. It is whether the new arrangement lowers the real cost of repayment, fits the household budget and comes with a plan that prevents new balances from replacing the ones that were just paid off.

Bankruptcy Filing Fees as of 10-12-2026

 

Bankruptcy Filing Fees as of 10-12-2026

 

 

Chapter	Filing Fee
7	$338.00
13	$313.00
11	$1,738.00

Tax Consequences of an SBA EIDL Loan Default

 

Does Defaulting on an SBA EIDL Loan Result in Taxable Income?

Bottom line: Defaulting on an SBA EIDL loan can create a federal income tax bill on top of the collection problem, and many borrowers and their advisors never ask about it.

Background

After the PPP loans, the SBA made Economic Injury Disaster Loans (EIDL) to small businesses. The loans ranged from $20,000 to $2 million. Unlike PPP loans, EIDL loans are not forgivable. If a loan exceeded $200,000, the business principal was required to guarantee it.

A significant number of borrowers have defaulted. They now face collection efforts by the SBA, the Treasury Offset Program, or collection agencies retained by the Treasury Offset Program.

The Question Most Borrowers Forget to Ask

Clients and their advisors usually call us about liability: what happens to the business, and what happens to the guarantor personally. They rarely ask about the tax consequences of the default, including cancellation of debt (COD) income under section 108 of the Internal Revenue Code.

The general principle is that a borrower who receives loan proceeds and does not repay them has received an economic benefit. The unpaid amount is taxed as ordinary income, not capital gain. A default can therefore leave a borrower owing tax on money that has already been spent.

See our prior posts, Increased SBA and Treasury Collection Actions on Defaulted SBA Loans https://shenwick.blogspot.com/2026/01/increased-sba-and-treasury-collection.html

and

Treasury Offset Program (TOP) and SBA EIDL Loans

https://shenwick.blogspot.com/2024/04/treasury-offset-program-top-and-sba.html

Ways to Avoid Recognizing COD Income

The Internal Revenue Code provides exceptions under Section 108:

1. Bankruptcy. If the individual facing COD income files a personal bankruptcy case, the discharged debt does not generate COD income.

2. Insolvency (balance sheet test). If the borrower's liabilities exceed the borrower's assets, and the borrower files the appropriate form with the Form 1040, the borrower does not have to recognize COD income.

Other tax strategies may also be available, depending on the borrower's circumstances.

Talk to Us Before the Tax Return Is Filed

If you or your client has defaulted on an SBA EIDL loan, contact Jim Shenwick to discuss the consequences of the default and the ordinary income that may have to be recognized. Addressing COD income before the return is filed keeps more options open.

Jim Shenwick, Esq  917 363 3391  jshenwick@gmail.com 

Please click the link to schedule a telephone call with me.

 https://calendly.com/james-shenwick/15min

We help individuals & businesses with too much debt! & creditors in Bankruptcy cases

Subchapter V Debt Limit May Permanently Increase to $7.5 Million

 Subchapter V Debt Limit May Permanently Increase to $7.5 Million

On August 3, 2026, the U.S. Senate unanimously passed S. 3977, the Bankruptcy Threshold Adjustment Act of 2026. The bill would permanently restore the Subchapter V debt limit to $7.5 million for qualifying small businesses and individuals seeking to reorganize under Chapter 11.

If S. 3977 becomes law, the $7.5 million Subchapter V debt limit would become permanent. A companion bill, H.R. 7730, is already moving through the House of Representatives.

The full story can be found below at JD Supra

https://www.jdsupra.com/legalnews/senate-passes-bill-to-permanently-raise-2736770/

For a prior post we wrote about Subchapter V bankruptcy see SBA EIDL Loans and Subchapter V Bankruptcy

https://shenwick.blogspot.com/2026/07/sba-eidl-loans-and-subchapter-v.html

Clients and advisors with questions about Subchapter V bankruptcy should contact Jim Shenwick, Esq. at jshenwick@gmail.com or 917-363-3391.

 


SBA EIDL Loans and Subchapter V Bankruptcy

Two clients recently came to my firm with the same problem: an LLC had guaranteed an SBA EIDL loan, the loan was in default, and they wanted to know whether a Subchapter V filing could put the loan back on track.

The short answer: yes, in most cases the LLC can restructure the debt through a confirmed Subchapter V plan. But the outcome — and whether the business will have enough cash flow to actually make the payments — depends on where the loan sits in the collection pipeline when the case is filed. And a Subchapter V filing does not, by itself, protect a personal guarantor.

How Subchapter V Treats SBA EIDL Debt
An LLC in Subchapter V can propose to pay the SBA claim over the plan term and bind the SBA if the plan is confirmed under Chapter 11, Subchapter V. SBA EIDL debt is treated like other commercial secured or unsecured debt — subject to the loan documents, any collateral, and any guaranties.

If the loan was accelerated or placed in default, a confirmed plan may provide for cure and maintenance, or other restructured treatment, depending on the note, the maturity date, and whether the debt is secured.

The real question for most clients isn't whether the debt can be restructured — it's whether the LLC will have the disposable income to service it post-confirmation. That analysis depends on where the loan is in the servicing chain.

1. The Loan Is Still Serviced by the SBA (Best Case)
If the loan has not yet been referred to Treasury for cross-servicing, the debtor can generally propose to:

Cure prepetition payment defaults through the Subchapter V plan.
Reinstate the loan on its original maturity schedule (typically 30 years).
Resume regular monthly payments.

The SBA has frequently accepted Chapter 11 plans that cure arrears over the life of the plan (or another negotiated period), leave the remaining loan balance in place, and continue the original interest rate. This functions much like reinstatement, though the Bankruptcy Code does not use that term for ordinary secured or unsecured loans outside certain specific contexts.

2. The Loan Has Been Referred to Treasury
Once the SBA refers the loan to the U.S. Department of the Treasury for cross-servicing, Treasury takes over collection, adds administrative fees of 30%, and may initiate offsets and other collection efforts.
Filing Subchapter V triggers the automatic stay under 11 U.S.C. § 362, which stops most collection activity. However, Treasury does not automatically return the loan to the SBA simply because a bankruptcy case is filed.
In practice:

Treasury will usually suspend collection during the case.
The SBA participates as a creditor in the bankruptcy.
After confirmation, the agencies determine who services the loan going forward.

Whether servicing returns to the SBA is an administrative decision, not a right created by the Bankruptcy Code.
3. Treasury Has Already Accelerated the Debt
Acceleration alone does not necessarily prevent Chapter 11 treatment. The debtor may still propose a plan that restructures repayment, modifies payment terms (subject to applicable Code provisions), or pays the claim over time — provided the plan satisfies confirmation requirements. Subchapter V gives debtors considerably more flexibility than Chapter 7 or Chapter 13 to restructure business debt.

4. The SBA's Position in Subchapter V
The SBA generally evaluates:

Feasibility under 11 U.S.C. § 1191.
Adequate treatment of its claim.
Cash flow.
Collateral value.
Continued business operations.
Likelihood of repayment.

Bifurcating the Claim Under Section 506(a)
If the EIDL loan is between $25,000 and $200,000, it is secured by a blanket UCC-1 lien on all corporate personal property. If the liquidation value of that collateral is less than the loan balance, the debtor may be able to use 11 U.S.C. § 506(a) to bifurcate the claim into secured and unsecured components.
Example: If the collateral is worth $20,000 and the SBA EIDL loan balance is $150,000, the SBA holds a secured claim of $20,000 (the value of the assets) and an unsecured claim for the $130,000 deficiency.
Plan treatment: Rather than reinstating the original contract, the debtor can propose a non-consensual cram-down plan under 11 U.S.C. § 1191(b). The $20,000 secured claim is paid over time with appropriate cram-down interest, and the remaining $130,000 is treated as a general unsecured claim, receiving pro-rata distribution from the debtor's disposable income over a 3-to-5 year plan period. Any unpaid unsecured balance is discharged under 11 U.S.C. § 1192.
In Side Yard Public House, Inc. and Milovan, Inc., No. 25-04126 (Bankr. S.D. Cal. June 26, 2026), a bankruptcy court in the Southern District of California confirmed an Amended Subchapter V Plan classifying SBA COVID EIDL loan claims into secured and unsecured classes. The plan was confirmed on a consensual basis under 11 U.S.C. § 1191(a), based on SBA ballots cast in favor of the plan with proper DOJ/SBA authorization. The court noted this was the first known instance of the SBA voting in a Subchapter V plan in that district.

The Guarantor Problem
While the LLC can use Subchapter V to modify, reinstate, or strip down the EIDL debt, the corporate filing does not automatically protect or reinstate the position of a personal guarantor (required on EIDL loans exceeding $200,000).

The automatic stay is entity-specific. The filing triggers the automatic stay under 11 U.S.C. § 362(a) for the LLC only. It does not extend to non-debtor guarantors.
Treasury cross-servicing continues regardless. If the loan has already defaulted and been referred to Treasury for cross-servicing or the Treasury Offset Program (TOP), the government can — and will — continue administrative wage garnishments, Social Security offsets, and federal tax refund seizures against the individual guarantor, despite the LLC's pending Subchapter V case.
No non-debtor discharges. Following the Supreme Court's ruling in Harrington v. Purdue Pharma L.P., non-consensual third-party releases in a Chapter 11 plan are strictly prohibited. The LLC's Subchapter V plan cannot be used to force a release or modification of the individual owner's personal guarantee without the SBA's express consent.

Resolving Guarantor Exposure
To address the guarantor's exposure alongside the LLC's reinstatement or cram-down, two mechanisms are generally available:

Parallel individual bankruptcy. The individual files a concurrent Chapter 7, Chapter 13, or Subchapter V case personally to discharge or manage the guarantee liability — effectively piggybacking on the asset valuations established in the corporate Subchapter V case.
Consensual post-petition settlement. Propose an out-of-court administrative settlement or Offer in Compromise (OIC) directly with the SBA/Treasury, using new value (such as third-party funds or exempt personal assets) to buy out the guarantee, structured conditionally upon confirmation of the LLC's Subchapter V plan.

Bottom line: If a Subchapter V plan is confirmed, the personal guarantor remains fully liable for the entire deficiency or unpaid balance of the EIDL loan, absent a separate workout with the SBA or Treasury, or a bankruptcy filing by the guarantor. Confirmation of a Subchapter V plan that alters, reduces, or discharges the LLC's liability does not alter or discharge the liability of a third-party non-debtor guarantor.
 

SBA EIDL Loans to Nonprofits: Workout Strategies, Treasury Risk, and Bankruptcy Options

At Shenwick & Associates, we are seeing a sharp increase in nonprofit borrowers seeking relief from COVID-19 Economic Injury Disaster Loans (EIDL). Unlike traditional commercial workouts, there is no standardized SBA workout program for nonprofit EIDL borrowers. The result is an opaque, discretionary process that requires a disciplined, well-documented approach.
This post outlines the available paths: out-of-court workouts with the SBA, Treasury referral issues, and bankruptcy as a last resort.

I. Statutory Framework and Loan Characteristics
EIDL loans were issued under 15 U.S.C. § 636(b)(2). For nonprofit entities, these loans typically:
Did not require personal guarantees (contrast with for-profit borrowers  with SBA EIDL loans over $200,000.00)
May or may not be secured, depending on loan size and documentation.
Once in default, the SBA has authority to pursue administrative collection, including referral to Treasury for offset under 31 U.S.C. § 3716.

II. No Formal “Workout Program” — Practical Reality
There is no codified EIDL modification program. Instead:
Borrowers must request relief directly from SBA servicing.
The SBA’s institutional position is to seek full repayment.
Concessions are discretionary and heavily documentation-driven.
Despite this, the SBA has continued to consider hardship-based modifications prior to Treasury referral.

III. Core Workout Strategy (Pre-Treasury)
The primary opportunity is an out-of-court loan modification.
Required submission typically includes:
Current financial statements (balance sheet and P&L).
Cash flow projections.
Last three years of IRS Form 990.
Board resolution authorizing negotiations.
Narrative explaining financial distress and mission impact.
Effective requests include:
Temporary reduced payments.
Interest-only periods.
Six-month review/reset periods.
Re-amortization where permitted.
The key leverage point is demonstrating that enforced collection will impair a functioning public-benefit mission.

IV. Distressed but Viable Nonprofits: Structured Workout Package
Where the nonprofit is insolvent but operational, a formal workout package should be submitted:
Narrative:
Cause of revenue decline.
Current programming and beneficiaries served.
Public harm resulting from liquidation.
Financials:
Three years of Form 990.
Current balance sheet and income statement.
Cash flow projections.
Settlement Proposal:
Lump-sum payment (often donor-funded).
Discounted payoff.
Structured settlement over time.

V. Treasury Referral: Escalated Risk
Recent SBA activity reflects aggressive referral of delinquent EIDL loans to Treasury.
Consequences include:
Administrative offset (tax refunds, federal payments).
Additional fees and penalties.
Loss of direct negotiation access with SBA servicing.
Critical objectives at this stage:
Obtain and verify the Treasury balance.
Challenge improper fees or accounting errors.
Attempt to recall or return the loan to SBA servicing.

VI. Bankruptcy Considerations
When workouts fail, bankruptcy becomes the final option.
Chapter 11:
Allows nonprofit reorganization and continued operations.
SBA debt can be restructured through a plan.
Chapter 7:
Provides liquidation.
EIDL obligations are dischargeable as unsecured federal debt.
Secured collateral, if any, will be administered for the benefit of the SBA.
Unlike for-profit borrowers, the absence of personal guarantees limits guarantor exposure.

Early engagement with SBA servicing materially improves outcomes and can prevent a referral to Treasury.

A structured, evidence-based submission is essential.

Treasury referral significantly reduces flexibility.

Bankruptcy remains a viable but last-resort tool, particularly where mission preservation is not feasible.

Shenwick & Associates continues to advise nonprofit borrowers navigating these issues, with a focus on pre-Treasury resolution and strategic positioning for compromise.

Jim Shenwick, Esq  917 363 3391  jshenwick@gmail.com 
Please click the link to schedule a telephone call with me.
 https://calendly.com/james-shenwick/15min

We help individuals & businesses with too much debt! & creditors in Bankruptcy cases

Pre-Bankruptcy Planning: What's Permitted and What Will Get You in Trouble

 

Pre-Bankruptcy Planning: What's Permitted and What Will Get You in Trouble By James (Jim) Shenwick, Esq. | jshenwick@gmail.com | 917-363-3391 | Bankruptcy Attorney | Scarsdale, NY

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One of the most common questions I get from clients headed toward bankruptcy is: "Can I give my house to my sister before I file?" or "Can I sell my car to my brother for $1,000?"
The short answer: Pre-bankruptcy planning is legal. Fraudulent transfers are not. The line between the two is where most people get into trouble.

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What the Bankruptcy Code Permits
Debtors may engage in pre-bankruptcy planning. Converting non-exempt assets into exempt ones — paying down a mortgage on a homestead, funding an exempt retirement account, purchasing tools of the trade — are recognized strategies courts have upheld.
What the Code prohibits is transferring property for nothing, or for far less than it is worth, to put it beyond creditors' reach. Chapter 7 Trustees have powerful avoidance tools to reverse exactly those moves.
Under 11 U.S.C. § 548, a Trustee can avoid transfers made within two years of filing if the debtor received less than reasonably equivalent value while insolvent. State fraudulent transfer law, incorporated through 11 U.S.C. § 544(b), can extend that look-back period to four to six years, depending on the state.

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A Recent Case That Draws the Line
In re Albrecht, from the United States Bankruptcy Court for the Eastern District of North Carolina, illustrates precisely where pre-bankruptcy planning crosses into fraudulent transfer territory.
The Facts
Lucas Albrecht was insolvent and approaching a Chapter 7 filing. He co-owned a Raleigh home valued at $420,000 with his domestic partner, Kirsten Moore, held as joint tenants. His half-interest was exposed to his individual creditors.
Under North Carolina law, property held as tenants by the entirety — available only to married couples — is shielded from the individual debts of either spouse. Albrecht and Moore married. The following day, they re-deeded the property from joint tenancy to tenancy by the entirety. Weeks later, Albrecht filed Chapter 7.
The Chapter 7 Trustee moved to void the transaction. The court agreed — on two independent grounds.

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Ground One: Constructive Fraudulent Transfer
Constructive fraud requires no proof of bad intent. The Trustee must establish only:
1.     A transfer occurred;
2.     The debtor was insolvent; and
3.     The debtor received less than reasonably equivalent value.
The court held the transfer was constructively fraudulent as a matter of law.

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Ground Two: Actual Fraudulent Transfer
The court also found actual fraudulent intent — that Albrecht acted with intent to hinder, delay, or defraud creditors. Because debtors rarely document that intent, courts apply the "badges of fraud" analysis.
The badges present here:

• Transfer to an insider — a spouse married one day before the re-deeding

• Debtor retained possession and control after the transfer

• Substantially all non-exempt assets were transferred

• Debtor was insolvent at the time of transfer

• Less than reasonably equivalent value was received

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What This Means for Pre-Bankruptcy Planning
Legitimate pre-bankruptcy planning exists and is well-established. Paying down a mortgage, contributing to a 401(k), or purchasing exempt personal property can be entirely appropriate — provided it is done in good faith, without actual intent to defraud, and as far in advance of filing as possible. Timing matters enormously.
What is not permitted:

• Gifting property to a family member or friend

• Selling an asset to an insider at a steep discount

• Restructuring asset ownership to put it beyond creditor reach on the eve of bankruptcy, without providing reasonably equivalent value to the estate in return

Albrecht is particularly instructive because it involved a legally recognized ownership form — tenancy by the entirety — that would have been entirely valid had it predated the financial distress. The problem was timing and purpose: the conversion occurred the day after the wedding, weeks before filing, while Albrecht was already insolvent, and the sole purpose was to remove the asset from creditor reach.

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The Trustee's Avoidance Powers Are Broad
Chapter 7 Trustees use their avoidance powers routinely. The federal look-back window is two years under § 548. State fraudulent transfer statutes — available to Trustees through § 544(b) — reach back up to six years. Trustees scrutinize real property transfers, deed changes, and asset dispositions made in the period leading up to a filing.

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Bottom Line
Pre-bankruptcy planning is a legitimate part of bankruptcy practice. But it must be done carefully and timed properly, with full understanding of the avoidance rules. Any transfer of significant value — to a family member, a friend, or a third party at below-market price — made while the debtor is insolvent and on the eve of bankruptcy is a target. A legal structure (a deed, a sale, even a marriage) does not insulate the transaction.

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James (Jim) Shenwick is a bankruptcy attorney in New York representing individuals and businesses in Chapter 7 and Chapter 11 proceedings, creditor/debtor disputes, and bankruptcy litigation.
Jim Shenwick, Esq. | 917-363-3391 | jshenwick@gmail.com
Schedule a call
Please click the link to schedule a telephone call with me.
https://calendly.com/james-shenwick/15min
 
We help individuals and businesses with too much debt — and creditors in bankruptcy cases.

SBA EIDL Loan Defaults: What Small Business Borrowers Need to Know

 

SBA EIDL Loan Defaults: What Small Business Borrowers Need to Know

 In these times of high gasoline and diesel prices and high interest rates, many  small business owners are facing difficulty in repaying SBA Economic Injury Disaster Loans (EIDL) received during the COVID-19 pandemic. 

 Background

The SBA issued approximately $378 billion in EIDL loans to small businesses during the pandemic. Based on our experience, approximately 70% of borrowers have defaulted or will default on their repayment obligations. At Shenwick & Associates, we have been contacted by or have represented over 250 borrowers who have defaulted on SBA EIDL loans. Those loans ranged from $20,000 to $2,000,000. Loans exceeding $200,000 required a personal guarantee from the principal borrower, and interest rates were approximately 3% to 3.2%.

Previously, borrowers experiencing financial hardship could apply for a loan modification that reduced their required monthly payment to 10% of the scheduled amount for a six-month period. That hardship payment program has since ended. Borrowers who are more than 90 days delinquent are now being referred to the U.S. Department of the Treasury for collection. As a precursor to referral, the SBA issues a 60-day demand letter to borrowers who are more than 60 days past due, advising that failure to cure the delinquency will result in referral to Treasury for collection action.

 Treasury Collection Remedies

Once a loan is referred to Treasury, the following collection tools become available:

1.    Seizure of federal tax refunds owed to the defaulted borrower

2.    Offset of up to 15% of Social Security payments for individual borrowers or guarantors

3.    Garnishment of up to 15% of wages of individual borrowers or guarantors

4.    Seizure of federal payments owed to the borrower, including payments to defense contractors, Medicaid reimbursements, and payments to medical providers serving Medicaid patients

In addition, a 30% penalty is assessed on the outstanding loan balance upon referral to Treasury. Treasury has also engaged five collection agencies to pursue collection action on referred loans.

 Comments and Observations from Jim Shenwick

1.    Act before referral to Treasury. Borrowers who have defaulted or are struggling to meet their payment obligations should contact the SBA promptly to explore a workout arrangement. Resolving the default at the SBA level avoids both the 30% penalty and the more aggressive collection mechanisms available to Treasury.

2.    Recall from Treasury is extremely difficult. Once a loan has been referred from the SBA to Treasury, it is very difficult — as a practical matter — to have the loan recalled. Proactive engagement with the SBA is far preferable to attempting to unwind a Treasury referral.

3.    Personal guarantees add significant complexity. If the loan exceeded $200,000 and an individual provided a personal guarantee, the matter becomes considerably more complex. Any workout must address the obligations of both the borrower entity and the individual guarantor.

4.    Tax consequences for LLC members. If the loan was made to a pass-through entity such as a limited liability company and the loan balance is discharged or forgiven, the LLC members may recognize ordinary income under Section 108 of the Internal Revenue Code. Treasury will issue a Form 1099-C to the LLC members reflecting the cancellation of debt income.

5.    Exercise caution with three-year repayment plans. The collection agencies retained by Treasury are actively promoting three-year repayment workout arrangements. In our experience, these plans are often economically unworkable for most borrowers and should be carefully evaluated — ideally with legal counsel — before any agreement is signed.

6.    Ten-year repayment plans are available from Treasury. Treasury will offer eligible defaulted borrowers a 10-year repayment plan; however, both the borrower and any guarantor must provide extensive financial disclosure and documentation as a condition of approval.

7.    Offers in compromise remain elusive with the SBA and/or Treasury 

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Borrowers and guarantors who have defaulted on SBA EIDL loans are encouraged to contact Jim Shenwick, Esq. to discuss their situation, available options, and strategy.

📞 917-363-3391 📧 jshenwick@gmail.com 📅 Schedule a 15-minute telephone consultation

Please click the link to schedule a telephone call with me.

https://calendly.com/james-shenwick/15min