Chapter 11 And SBA Loan Cram Downs
Any business in the Tampa Bay area that received an SBA loan and has since filed for Chapter 11 bankruptcy may be concerned about creditor objections to the treatment of SBA loans in a reorganization plan, particularly those loans with collateral and personal guarantees. In some situations, it may be possible for business debtors filing for Chapter 11 bankruptcy to have their reorganization plans approved by the court despite a creditor objection through a “cram down.” Our Tampa bankruptcy lawyers want to provide you with more information to help you understand how a cram down might help your business in your Chapter 11 bankruptcy case.
Understanding SBA Loan Types
Small businesses, from retail establishments to restaurants and bars, across South Florida applied for and received different types of U.S. Small Business Administration (SBA) loans linked to COVID-19 pandemic relief over the last year, including Paycheck Protection Program (PPP) loans and loans through the Economic Injury Disaster Loan (EIDL) program. While PPP loans largely did not require collateral or personal guarantees, some EIDL loans did require collateral and/or a personal guarantee. Indeed, EIDL loans of more than $25,000 require collateral, and personal guarantees are required for loans of more than $200,000.
Even before the pandemic started, some businesses in the Tampa Bay area applied for and received certain forms of SBA funding, many of which required collateral and personal guarantees, and they may still owe money on those loans in the present.
Why a Secured Creditor Would Object to a Chapter 11 Reorganization Plan
For SBA loans requiring collateral, or for which the creditor has a loan, it is important to understand that the creditor may lose the collateral or lien during the bankruptcy case. How does this happen? As part of the debtor’s proposed terms under the repayment plan and debt reorganization, a secured creditor or lender can lose the collateral or can lose lien rights. Typically, the way for a secured creditor to retain collateral or a lien in a Chapter 11 bankruptcy case is to object to the plan and to oppose its confirmation.
In the context of SBA loans, the lender might object to a Chapter 11 reorganization plan that results in the loss of collateral or a lien—or a loss in value of the collateral based on the terms of the repayment plan—associated with an EIDL loan or another type of SBA loan. In many bankruptcy cases, the court will pay close attention to the objects of secured creditors. Yet it is important to know that the bankruptcy court does have an option to override any objections of secured creditors, including objects to the treatment of business loans and associated collateral, in what is known as a “cram down.”
What is the Cram Down and How Can It Help My Business?
Under the U.S. Bankruptcy Code, the bankruptcy court has a “cram down” power through Section 1129(b). According to this section of the U.S. Bankruptcy Code, the bankruptcy court can override the objections of a secured creditor and approve the reorganization plan, thereby reducing the debt of the small business filing for Chapter 11 bankruptcy.
The bankruptcy court cannot simply use the cram down power in any case, however. Under the U.S. Bankruptcy Code, the cram down provision can only apply if the debtor can show that “the plan does not discriminate unfairly, and is fair and equitable, with respect to each class of claims or interests that is impaired under, and has not accepted, the plan.”
Contact Our Tampa Bankruptcy Lawyers
If you have questions about Chapter 11 for your business and whether the cram down provision could allow the court to approve your reorganization plan despite creditor objections, our Tampa bankruptcy attorneys can assist you. Contact Samantha L. Dammer to learn more about our services.