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Common Causes Of SBA Loan Defaults

Understand common causes of SBA loan defaults and learn how to prevent them. Empower yourself with strategies from Protect Law Group to resolve SBA debts.

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Are You Facing Challenges with Your SBA Loan?

As a small business owner, you may have sought financial assistance from the U.S Small Business Administration (SBA) through their loan programs. But what happens when you default on your SBA loan? In this article, we will delve into the various common causes of SBA loan defaults and give some insight on how Protect Law Group can help you mitigate the damages resulting from such defaults.

Understanding SBA Loan Default

SBA loan default occurs when a borrower fails to meet the terms and conditions of the SBA loan agreement. Failure to make timely payments, declare bankruptcy, or misuse of loan funds are all examples of conditions that may lead to a loan default.

What Causes SBA Loan Defaults?

Several factors can cause SBA loan defaults. These include, but are not limited to:

  1. Financial Mismanagement: Improvement of financial management skills and practices can easily prevent this root cause of default.
  2. Economic Instability: Often the character of the economy can have a profound influence on a business’s ability to repay a loan.
  3. External Factors: Unpredictable circumstances such as natural disasters or global pandemics can drastically affect a business’s cash flow.
  4. Inadequate Business Planning: Lack of sound business planning can lead a business into troubled waters.
  5. Unforeseen Operational Costs: If the costs of running the business are much higher than projected, this can render a business unable to make timely loan repayments.

Understanding the root cause of your SBA loan default is the first step towards formulating a strategy to navigate and potentially resolve your SBA debt collection matter.

How Protect Law Group can Assist with Your SBA Loan Concerns

Protect Law Group, through their team of educated and experienced attorneys, specializes in representing federal debtors and small business owners across the United States. They offer a broad spectrum of services aimed at tackling SBA loans and other Treasury debt issues.

Proactive Defense Strategies

Protect Law Group helps you develop proactive strategies to defend and potentially resolve your SBA debt collection matter. The firm applies legal authorities to support your positions and reviews the bases for filing Appeals Petitions with the SBA Office of Hearings and Appeals.

Investigating Errors

The attorneys at Protect Law Group are committed to examining all aspects of your case in detail. They help investigate factual, procedural, and legal errors and how to prosecute or defend against them effectively.

Responding to Notices

Notices sent by the SBA regarding your debt can be daunting. However, Protect Law Group jumps into action to intervene in response to these notices, whether they pertain to administrative offsets or federal salary offsets.

In addition to these services, Protect Law Group also provides SBA Offer in Compromise, structured workouts, administrative litigation, negotiations, and cross-servicing disputes services, among others.

Avoiding Foreclosure and Bankruptcy

Protect Law Group works diligently to help clients avoid the negative fallout from SBA loan defaults, such as foreclosure or bankruptcy. Through expert negotiation skills and a tailored plan of action, they aim to minimize damage to your personal or business financial health.

Customer Experience Beyond Expectation

At Protect Law Group, exceeding client expectations is a key objective. They pride themselves in delivering excellent customer experience, irrespective of the complexity of your case.

Summary

Navigating an SBA loan default can be a complex process fraught with potential pitfalls. However, understanding the causes of default and seeking expert help in the form of a legal firm like Protect Law Group can make the journey less daunting and more manageable. If you’re faced with an SBA loan issue, reach out for a case evaluation, as a well-armed client is best positioned for successful resolution.

Frequently Asked Questions

1. What is an SBA loan default?

An SBA loan default occurs when a borrower fails to meet the terms of the SBA loan agreement, which may include late payments, failure to use funds properly, or bankruptcy. This can lead to serious financial and legal consequences for the borrower.

2. What are the most common causes of SBA loan defaults?

Common causes include financial mismanagement, economic instability, lack of proper business planning, unforeseen operational costs, and external factors such as natural disasters or global events affecting business cash flow.

3. How can financial mismanagement lead to an SBA loan default?

Financial mismanagement, such as poor budgeting or cash flow planning, can make it difficult to meet loan payments, leading to a default. Improving financial management practices is essential to avoid this outcome.

4. Can economic instability affect my SBA loan repayments?

Yes, economic downturns or market instability can reduce revenue and impact a business’s ability to meet loan obligations, increasing the risk of loan default.

5. How can Protect Law Group help if I am facing SBA loan default?

Protect Law Group provides legal services to help business owners develop strategies to manage SBA loan defaults, including appeals, offer-in-compromise, and negotiation with the SBA to potentially reduce or restructure debt.

6. What options do I have to avoid foreclosure if I default on an SBA loan?

Options include negotiating with the SBA for alternative payment solutions, restructuring the loan, or pursuing an offer-in-compromise to settle the debt for less than the full amount.

7. What is an SBA Offer in Compromise?

An SBA Offer in Compromise is a settlement process that allows borrowers in default to negotiate a reduced payoff amount with the SBA, potentially resolving the debt without full repayment.

8. How does inadequate business planning lead to loan default?

Without sound planning, businesses may encounter unexpected expenses or revenue shortfalls, making it challenging to meet loan payments, which can ultimately lead to default.

9. What steps should I take if I receive a default notice from the SBA?

Contacting a legal firm like Protect Law Group is advisable. They can guide you through the response process and help you explore options to manage the default, including appeal petitions or structured workouts.

10. Can natural disasters or pandemics impact SBA loan repayments?

Yes, events like natural disasters or pandemics can severely disrupt business operations and cash flow, leading to difficulty in meeting loan repayments and increasing the risk of default.

 

Frequently Asked Questions

$154,000 SBA COVID-19 EIDL - AUDIT REPRESENTATION & RELEASE OF COLLATERAL

$154,000 SBA COVID-19 EIDL - AUDIT REPRESENTATION & RELEASE OF COLLATERAL

Our firm successfully assisted a client in closing an SBA Disaster Loan tied to a COVID-19 Economic Injury Disaster Loan (EIDL). The borrower obtained an EIDL loan of $153,800, but due to the prolonged economic impact of the COVID-19 pandemic, the business was unable to recover and ultimately closed.

As part of the business closure review and audit, we worked closely with the SBA to negotiate a resolution. The borrower was required to pay only $1,625 to release the remaining collateral, effectively closing the matter without further financial liability for the owner/officer.

This case highlights the importance of strategic negotiations when dealing with SBA settlements, particularly for businesses that have shut down due to unforeseen economic challenges. If you or your business are struggling with SBA loan debt, we focus on SBA Offer in Compromise (SBA OIC) solutions to help settle outstanding obligations efficiently.

$150,000 SBA 7A LOAN – NEGOTIATED WORKOUT AGREEMENT

$150,000 SBA 7A LOAN – NEGOTIATED WORKOUT AGREEMENT

Client’s small business obtained an SBA 7(a) loan for $150,000.  He and his wife signed personal guarantees and pledged their home as collateral. The SBA loan went into default, the term or maturity date was accelerated and demand for payment of the entire amount claimed was made.  The SBA lender’s note gave it the right to adjust the default interest rate from 7.25% to 18% per annum. The business filed for Chapter 11 bankruptcy but was dismissed after 3 years due to its inability to continue with payments under the plan. Clients wanted to file for Chapter 7 bankruptcy, which would have been a mistake as their home had significant equity to repay the SBA loan balance in full as the Trustee would likely seize and sell the home to repay the secured and unsecured creditors. However, the SBA lender opted to pursue the SBA 7(a) Guaranty and subsequently assigned the loan and the right to enforce collection to the SBA. Clients then received the SBA Official 60-Day Notice and hired the Firm to respond to it and negotiate on their behalf. Clients disputed the SBA’s alleged balance of $148,000, as several payments made to the SBA lender during the Chapter 11 reorganization were not accounted for. To challenge the SBA’s claimed debt balance, the Firm Attorneys initiated expedited discovery to obtain government records. SBA records disclosed the true amount owed was about $97,000. Moreover, because the Clients’ home had significant equity, they were not eligible for an Offer in Compromise or an immediate Release of Lien for Consideration, despite being incorrectly advised by non-attorney consulting companies that they were. Instead, our Firm Attorneys recommended a Workout of $97,000 spread over a lengthy term and a waiver of the applicable interest rate making the monthly payment affordable. After back and forth negotiations, SBA approved the Workout proposal, thereby saving the home from imminent foreclosure and reducing the Clients' liability by nearly $81,000 in incorrect principal balance, accrued interest, and statutory collection fees.

$310,000 SBA 7A LOAN - SBA OIC TERM WORKOUT

$310,000 SBA 7A LOAN - SBA OIC TERM WORKOUT

Client personally guaranteed an SBA 7(a) loan for $100,000 from the lender. The SBA loan went into early default in 2006 less than 12 months from disbursement. The SBA paid the 7(a) guaranty monies to the lender and subsequently acquired the deficiency balance of about $96,000, including the right to collect against the guarantor. However, the SBA sent the Official 60-Day Due Process Notice to the Client's defunct business address instead of his personal residence, which he never received. As a result, the debt was transferred to Treasury's Bureau of Fiscal Service where substantial collection fees were assessed, including accrued interest per the promissory note. Treasury eventually referred the debt to a Private Collection Agency (PCA) - Pioneer Credit Recovery, Inc. Pioneer sent a demand letter claiming a debt balance of almost $310,000 - a shocking 223% increase from the original loan amount assigned to the SBA. Client's social security disability benefits were seized through the Treasury Offset Program (TOP). Client hired the Firm to represent him as the debt continued to snowball despite seizure of his social security benefits and federal tax refunds as the involuntary payments were first applied to Treasury's collection fees, then to accrued interest with minimal allocation to the SBA principal balance.

We initially submitted a Cross-Servicing Dispute (CSD) challenging the referral of the debt to Treasury based on the defective notice sent to the defunct business address. Despite overwhelming evidence proving a violation of the Client's Due Process rights, the SBA still rejected the CSD. As a result, an Appeals Petition was filed with the SBA Office of Hearings & Appeals (OHA) Court challenging the SBA decision and its certification the debt was legally enforceable in the amount claimed. After several months of litigation before the SBA OHA Court, our Firm Attorney successfully negotiated an Offer in Compromise (OIC) Term Workout with the SBA Supervising Trial Attorney for $82,000 spread over a term of 74 months at a significantly reduced interest rate saving the Client an estimated $241,000 in Treasury collection fees, accrued interest (contract interest rate and Current Value of Funds Rate (CVFR)), and the PCA contingency fee.

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