Did you know that personal bankruptcy doesn't always mean you can walk away from your SBA loan? Here's what you need to know about SBA loan collateral.
Book a Consultation CallDid you know that 50% of small businesses fail in their 5th year? The reasons could be different in each case, but about 82% of those that fail cite cash flow problems as the reason.
This may be why banks consider small businesses as a high risk, which reduces the chances of securing a loan. That's why many of them turn to an SBA loan, which poses fewer risks for financial institutions.
You may have already availed of this option but are now facing a bankruptcy. You might be wondering now what happens to your SBA loan collateral then.
If you want to learn more about SBA loans, defaulting, and bankruptcy, read on. Find out everything that happens when you default on an SBA loan and when you file for a bankruptcy.
SBA Loan Collateral
An SBA loan is a loan for small businesses, a partial amount of which has a guarantee by the US Small Business Administration. This alleviates some of the risks that a private financial institution might face. This then makes it easier for a small business to obtain a loan if the other traditional channels don't work.
The partial guarantee by the federal agency can cover up to 85% of the loan. However, the application process is strict and tedious, so you'll need to have a lot of patience to secure it.
You'll also have to sign a personal guarantee in most cases. The lender can then sue you or place a lien on your property if you default.
There are some steps you can take before filing for a bankruptcy in case of an SBA loan default. First, let's make a distinction between delinquency and default.
A delinquency is when you're falling behind your payments but not too far behind for the lender to consider you unable to pay. A default happens when you've been unable to make a payment for a long period of time. That period depends on your terms with the lender.
The best thing to do when facing a loan default is to prevent it in the first place. When you've been delinquent for too long, contact the lender right away instead of waiting for the loan to default.
The financial institution would much prefer it if you come forward yourself. They don't like going through the default process, so they may rather hear you out.
In some cases, they'll be willing to work with you and figure out a solution that's best for both of you. Defaulting a loan is a hassle for everyone involved, even with the lender.
The SBA will have to approve the agreement, though.
If you're unable to work a deal with the lender and SBA, you will be more likely to go into a loan default. The lender will acquire your business assets.
If that's not enough to recover their losses, they'll go after your personal assets, too. They can do this because you likely signed a personal guarantee.
The only time they'll go to the SBA to get the guarantee is when your assets are not enough to cover the loan amount. In that case, you won't have any problems with the lender anymore. Your next problem, however, is going to be the government who will go after you to get back the money it gave to the lender.
Still, the government would rather you pay up than punish you. You'll be able to work out a repayment plan in most cases. What happens if you declare a bankruptcy, though?
It's a popular misconception that an SBA loan is not dischargeable due to it being a loan from a federal agency. However, as we've explained above, the SBA is not the one giving out the loan, it's only a partial guarantor. Moreover, many other government loans are still dischargeable through bankruptcy.
With that said, an SBA loan is dischargeable through bankruptcy. Still, do note that there are still some things that you'll be liable for.
A bankruptcy will erase your personal liability for your debts. However, it will not be able to erase the lender's lien or security interest on your property. That means that if you have a secured debt, which requires you to submit a collateral, the bankruptcy will only be enforceable on the debt itself and not on the collateral.
The SBA's definition of collateral consists of business and personal assets. Your personal assets include your car or your mortgage.
The business assets can include your building, equipment, and accounts receivable. In some cases, it can also include your inventory. These can be a collateral as long as the bank can sell them for cash.
Whichever you used as a collateral, lenders will be able to acquire the assets either through repossession or foreclosure. Banks and other financial institutions can also contest your bankruptcy.
When a lender objects to the bankruptcy, their lawyers scrutinize the filing. This is to see if the debtor has breached any requirement in the contract.
For example, the lender finds out that you disposed of your collateral. They may find that you relinquished your claim on the property or transferred it via a gift transaction to other third parties.
This can open a complaint process, which can disqualify the discharge on some of your debts. This is also a criminal fraud, and so you might even face federal indictment.
Whatever it is that's worrying you, whether it's an SBA loan default, your SBA loan collateral, or a bankruptcy, talk to your lawyer. He/she will be able to discuss these things with you.
Contact us now if you need any help with your SBA loan.
Millions of Dollars in SBA Debts Resolved via Offer in Compromise and Negotiated Repayment Agreements without our Clients filing for Bankruptcy or Facing Home Foreclosure
Millions of Dollars in Treasury Debts Defended Against via AWG Hearings, Treasury Offset Program Resolution, Cross-servicing Disputes, Private Collection Agency Representation, Compromise Offers and Negotiated Repayment Agreements
Our Attorneys are Authorized by the Agency Practice Act to Represent Federal Debtors Nationwide before the SBA, The SBA Office of Hearings and Appeals, the Treasury Department, and the Bureau of Fiscal Service.
Clients obtained an SBA 7(a) loan for their small business in the amount of $298,000. They pledged their primary residence and personal guarantees as direct collateral for the loan. The business failed, the lender was paid the 7(a) guaranty money and the debt was assigned to the SBA. Clients received the Official 60-Day Notice giving them a couple of options to resolve the debt balance directly with the SBA before referral to Treasury's Bureau of Fiscal Service. The risk of referral to Treasury would add nearly $95,000 to the SBA principal loan balance. With the default interest rate at 7.5%, the amount of money to pay toward interest was projected at $198,600. Clients hired the Firm with only 4 days left to respond to the 60-Day due process notice. Because the clients were not eligible for an Offer in Compromise (OIC) due to the significant equity in their home and the SBA lien encumbering it, the Firm Attorneys proposed a Structured Workout to resolve the SBA debt. After back and forth negotiations, the SBA Loan Specialist assigned to the case approved the Workout terms which prevented potential foreclosure of their home, but also saved the clients approximately $294,000 over the agreed-upon Workout term with a waiver of all contractual and statutory administrative fees, collection costs, penalties, and interest.
Client’s small business obtained an SBA 7(a) loan for $750,000. She and her husband signed personal guarantees exposing all of their non-exempt income and assets. With just 18 months left on the maturity date and payment on the remaining balance, the Great Recession of 2008 hit, which ultimately caused the business to fail and default on the loan terms. The 7(a) lender accelerated and sent a demand for full payment of the remaining loan balance. The SBA lender’s note allowed for a default interest rate of about 7% per year. In response to the lender's aggressive collection action, Client's husband filed for Chapter 7 bankruptcy in an attempt to protect against their personal assets. However, his bankruptcy discharge did not relieve the Client's personal guarantee liability for the SBA debt. The SBA lender opted to pursue the SBA 7(a) Guaranty and subsequently assigned the loan and the right to enforce collection against the Client to the SBA. The Client then received the SBA Official 60-Day Notice. After conducting a Case Evaluation with her, she then hired the Firm to respond and negotiate on her behalf with just 34 days left before the impending referral to Treasury. The Client wanted to dispute the SBA’s alleged debt balance as stated in the 60-Day Notice by claiming the 7(a) lender failed to liquidate business collateral in a commercially reasonable manner - which if done properly - proceeds would have paid back the entire debt balance. However, due to time constraints, waivers contained in the SBA loan instruments, including the fact the Client was not able to inspect the SBA's records for investigation purposes before the remaining deadline, Client agreed to submit a Structured Workout for the alleged balance in response to the Official 60-Day Notice as she was not eligible for an Offer in Compromise (OIC) because of equity in non-exempt income and assets. After back and forth negotiations, the SBA Loan Specialist approved the Workout proposal, reducing the Client's purported liability by nearly $142,142.27 in accrued interest, and statutory collection fees. Without the Firm's intervention and subsequent approval of the Workout proposal, the Client's debt amount (with accrued interest, Treasury's statutory collection fee and Treasury's interest based on the Current Value of Funds Rate (CVFR) would have been nearly $291,030.
Our firm successfully negotiated an SBA offer in compromise (SBA OIC), settling a $974,535.93 SBA loan balance for just $18,000. The offerors, personal guarantors on an SBA 7(a) loan, originally obtained financing to purchase a commercial building in Lancaster, California.
The borrower filed for bankruptcy, and the third-party lender (TPL) foreclosed on the property. Despite the loan default, the SBA pursued the offerors for repayment. Given their limited income, lack of significant assets, and approaching retirement, we presented a strong case demonstrating their financial hardship.
Through strategic negotiations, we secured a favorable SBA settlement, reducing the nearly $1 million debt to a fraction of the amount owed. This outcome allowed the offerors to resolve their liability without prolonged financial strain.
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