Bradley Partner James Bailey Quoted in American Banker on Small-Business Bankruptcy Program Adding Risk to Home Equity Loans

Bradley attorney James Bailey was quoted in American Banker on a small-business bankruptcy program that allows borrowers to restructure home equity loans used to fund business operations. In a case involving a bed and breakfast in California, the owner proposed a plan in the new bankruptcy program that would have reduced the secured portion of the mortgage to the value of the property and would be paid down over a new 30-year term at 4.25% interest, reducing the loan's value. The program provides a measure of relief to borrowers but can cause problems for banks and investors that hold the loans.

Bailey said that some small-business owners have had their modification under subchapter V challenged by the lender, notably in the case of the bed and breakfast.

In the bed and breakfast case, the court held that it would need to consider a number of factors to determine whether the mortgage was not used primarily to acquire the property and whether the loan proceeds were used primarily in connection with the small business. Bailey said lenders should continue to monitor the development of the law in this area.

“Lenders need to be aware that this is out there,” Bailey said.

The original article, "Small-Business Bankruptcy Program Adds New Risk to Home Equity Loans," appeared in American Banker on July 20, 2020.