SBA Loan Default: Bankruptcy
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You don't want to think about what might happen when disaster strikes. After all, your business is doing well.
But when a natural disaster like Hurricane Harvey strikes, there may be a fallout in your business that's outside of your control.
Here, we're breaking down SBA disaster loans, how they work, and how they can help your business after a disaster.
SBA Disaster Loans
First, let's cover the basics. What are disaster loans?
Provided by the U.S. Small Business Administration, disaster loans are special funds designated for the relief of businesses and homeowners in designated disaster areas following a flood, storm, fire, drought, or similar disasters.
Basically, it's funding earmarked specifically for businesses that do not have the means to remain operational as a result of a natural disaster.
Since the needs of a business following a natural disaster are diverse, the uses of a disaster loan are equally diverse.
These loans are designated to promote business continuity. As such, they can be used for any of the following:
Economic injury is for businesses that did not sustain physical damage but, because of the natural disaster, their business continuity is disrupted.
There's also a specific subset of economic injury recovery for military reservists, which is for businesses with employees who were called to active duty because of a disaster and whose operations are disrupted by their absence.
To be clear: disaster loans are for the express purpose of recovery after a disaster. Returning to the status quo, if you will. The loans cannot be used to expand your facilities or operations, though you may be eligible to receive additional funds for improvements that reduce your future risk.
With this in mind, there are a variety of SBA disaster loans depending on what you need to accomplish. The types of disaster loans include:
These are all long-term, low-interest loans. Most of them are available in amounts up to $2 million and are designated by specific uses.
With that in mind, who can qualify for one of these loans?
As a rule, any business that has incurred physical or economic damage could potentially qualify for a loan.
Even if your business has an insurance policy that you're waiting to find out about, the SBA still recommends that you apply for a loan. But keep in mind that if your insurance disbursement and the loan both come through, you'll have to apply the disbursement to the loan you receive.
In addition, if you have available credit elsewhere, you are still eligible to apply for a loan. However, because of this external credit, the SBA may grant you a loan at a higher interest rate.
So, if you know that you need help from a disaster loan, and you know that your business stands a good chance of qualifying, how do you apply for a disaster loan?
The first step is to go to the US Small Business Administration website. Once you're there, you first need to find out if you're in a declared disaster area (even if your business did suffer from a disaster, if you're not in a declared disaster zone, you won't qualify).
To do this, simply search declared disaster areas.
If your business is in a declared disaster area, you can return to the homepage and click on "Apply for Assistance."
While you can apply by mail, the fastest way to receive a decision is by applying online.
You'll need to have access to the following information:
Once you have this information, you can start the three-part process:
Once the SBA receives your signed loan closing documents, the initial disbursement of $25,000 for physical or economic damage will be made. You'll also be assigned a caseworker to make sure you meet the loan conditions and to schedule future disbursements.
Now, with all of that in mind, let's talk about what kinds of interest and repayment rates you can get on a disaster loan.
In accordance with SBA rules, participating lenders set their interest rates based on the prime rate plus a markup.
So, if your loan is more than $50,000 and the term is shorter than seven years, your rate will be based on the prime rate with a maximum markup of 2.25%. As of December last year, the maximum rate for a loan like this was 6.75%.
If your loan is more than $50,000 but the term is seven years or longer, then the maximum markup is 2.75%. Last year, the maximum rates for loans like this were around 7.25%.
Now, because you're getting an SBA loan and not a loan through a private lender, you'll get a longer repayment period. The exact term depends on what the loan will be used for.
For daily operations loans, you'll have seven years. For new equipment purchases, you'll have ten years, and for real estate, you can have up to 25 years.
In general, the longer the repayment term, the lower the interest rate and the lower your regular payments will be.
If you have defaulted on an SBA disaster loan you will need assertive and experienced legal counsel when dealing with the federal government.
The good news is that you don't have to go through this frightening time alone. An SBA loan lawyer can help you manage these treacherous waters.
Take a look at our available services, or get in touch today to see what we can do for you.
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.
Client personally guaranteed SBA 7(a) loan balance of over $150,000. Business failed and eventually shut down. SBA then pursued client for the balance. We intervened and was able to present an SBA OIC that was accepted for $30,000.
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.
The client personally guaranteed an SBA 7(a) loan for $150,000. His business revenue decreased significantly causing default and an accelerated balance of $143,000. The client received the SBA's Official 60-day notice with the debt scheduled for referral to the Treasury’s Bureau of Fiscal Service for aggressive collection in less than 26 days. We were hired to represent him, respond to the SBA's Official 60-day notice, and prevent enforced collection by the Treasury and the Department of Justice. We successfully negotiated a structured workout with an extended maturity date that included a reduction of the 14% interest rate and removal of substantial collection fees (30% of the loan balance), effectively saving the client over $242,000.
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