Protecting Assets in Case of SBA Default

April 27, 2023

by a searcher from University of Georgia in Atlanta, GA, USA

Alice and Bob each took a $2mm SBA loan to buy identical businesses. However, their assets differ:
Alice’s assets: $500k in home equity $1.5mm stock portfolio

Bob’s assets: $500k in home equity

Both businesses became obsolete overnight due to a new ChatGPT3 feature. They both default.

Questions: 1) Do Alice and Bob lose all their assets? 2) How could Alice protect her $1.5mm in stocks?

For example, assume Alice is happily married to Zach. Wouldn’t it make sense to legally divorce Zach before applying for the loan? The divorce agreement could have Zach keep the $1.5mm in stock and have Alice keep the $500k in home equity. Then Alice could apply for the SBA loan using only her home equity as collateral.

What other options does Alice have to protect her assets?

Reply by a lender
from University of Missouri in St. Louis, MO, USA

Austin, the bank will enforce the full guarantee on the guarantors. In the is case a bank would do their best to avoid a default and work with the borrowers to get repaid. If the bank doesn't have cooperation they would sue both guarantors. The bank would likely go to the path of least resistance so even though they would equally sue both owners, clearly Alice has the cash. Depending on the loan amount, their assets do allow them some room to work with the bank to avoid a BK. Regarding the situation outlined, I understand what you're thinking, but if you are willing to get divorced before you do a loan to avoid protect assets, you should probably not be buying this business.

Reply by a searcher
from The University of Georgia in Atlanta, GA, USA

If Alice has a $1.5 million stock portfolio, odds are pretty good that Alice has access to a pretty good trust/estate attorney who can set up a trust on behalf of her spouse and kiddos and then transfer their assets to that trust. (If Bob and Alice are married, their kids will have to be the sole trust beneficiaries).

If Bob and Alice are also UGA grads, then Arnall Golden & Gregory in Atlanta would be the best place to go for that sort of expertise.

Hope this helps. Go Dawgs.

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