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C Corp in trouble. SBA loan & bank credit line secured by home. Questions.

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  • C Corp in trouble. SBA loan & bank credit line secured by home. Questions.

    It's interesting what people will share with you when you confide that you are filing BK...

    So, a friend confessed that her C-Corp is having it's 4th bad year in a row. She is the only shareholder and has several employees. She's not sure how long she can hold on and feels terrible about the prospect of closing.

    Obviously future income is a concern but another is two loans that she believes may be secured by her home as well as business assets. One is an SBA loan and the other is a credit line from a bank. She has some decent equity in the home.

    Using round numbers, the home is valued at about 600K, she owes 200 to her first, 65 to her second leaving equity of about 335K. The SBA is for about 150K and the credit line is for about 75K.

    In Florida, I think home equity is protected. Maybe there is a limit. But I thought I read here that in this situation, the way to protect her equity (only real personal asset) would be to file personal BK and dissolve or just close the business letting the creditors liquidate assets.

    If she filed (ch 7 non-consumer?) would there be a lien strip possibility of her HEL, the SBA and/or the credit line?

    BTW I have advised she find a good attorney with business/BK experience (as I'm sure you all would) and join this forum!

  • #2
    Any protection that state law provides for home equity applies to unsecured creditors and maybe involuntary liens (e.g., judgment liens), not creditors to whom she pledged the home as collateral (i.e., voluntary liens). If her total debt secured by the home is $490K, she has $110K in equity. To strip a junior lien, the balance of all senior liens must be more than the value of the home. So, she won't be able to strip the liens. Depending on the terms of the loans, she may be vulnerable to foreclosure if she defaults on any of the loans.
    LadyInTheRed is in the black!
    Filed Chap 13 April 2010. Discharged May 2015.
    $143,000 in debt discharged for $36,500, including attorneys fees. Money well spent!

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    • #3
      What constitutes a senior lien?

      Maybe a Ch 13 would make more sense if her intent/goal to keep her home?

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      • #4
        The first lien recorded is a senior lien, aka the first mortgage. The second recorded lien is junior to the first lien, but senior to any later liens. The third lien is junior to both the first and second liens and senior to later liens, and so on and so on....

        A Chap 13 still wouldn't help with the liens against her house. If the Florida homestead exemption covers her equity, then she doesn't need a Chap 13 to protect the home unless she is delinquent on the loans secured by the home and having time to catch up while getting rid of her unsecured debt will solve her problems. When she finishes the 13 plan, she still needs to be able to make all of the secured debt payments. But, there could be other reasons for a Chap 13.

        I am basing this on extremely limited information. Your advice for her to consult an attorney with experience with business BKs is good advice. Her case is not simple.

        One important factor is whether all of the lenders holding liens on her house have a right to foreclose in the event of default. If the holder of the liens in the 3rd and/or 4th position doesn't have a right to foreclose, then she can default, continue to pay the 1st and 2nd liens and worry about the 3rd and 4th when she sells the house or try to settle them after they are discharged in BK.
        LadyInTheRed is in the black!
        Filed Chap 13 April 2010. Discharged May 2015.
        $143,000 in debt discharged for $36,500, including attorneys fees. Money well spent!

        Comment

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