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.
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.
Clients obtained an SBA 7(a) loan for $324,000 to buy a small business and its facility. The business and real estate had an appraisal value of $318,000 at the time of purchase. The business ultimately failed but the participating lender abandoned the business equipment and real estate collateral even though it had valid security liens. As a result, the lender recouped nearly nothing from the pledged collateral, leaving the business owners liable for the deficiency balance. The SBA paid the lender the 7(a) guaranty money and was assigned ownership of the debt, including the right to collect. However, the clients never received the SBA Official 60-Day Notice and were denied the opportunity to negotiate an Offer in Compromise (OIC) or a Workout directly with the SBA before being transferred to Treasury's Bureau of Fiscal Service, which added an additional $80,000 in collection fees. Treasury garnished and offset the clients' wages, federal salary and social security benefits. When the clients tried to negotiate with Treasury by themselves, they were offered an unaffordable repayment plan which would have caused severe financial hardship. Clients subsequently hired the Firm to litigate an Appeals Petition before the SBA Office & Hearings Appeals (OHA) challenging the legal enforceability and amount of the debt. The Firm successfully negotiated a term OIC that was approved by the SBA Office of General Counsel, saving the clients approximately $205,000.
Small business sole proprietor obtained an SBA COVID-EIDL loan for $500,000. Client defaulted causing SBA to charge-off the loan, accelerate the balance and refer the debt to Treasury's Bureau of Fiscal Service for aggressive collection. Treasury added $180,000 in collection fees totaling $680,000+. Client tried to negotiate with Treasury but was only offered a 3-year or 10-year repayment plan. Client hired the Firm to represent before the SBA, Treasury and a Private Collection Agency. After securing government records through discovery and reviewing them, we filed an Appeals Petition with the SBA Office of Hearings & Appeals (OHA) court challenging the SBA's referral of the debt to Treasury citing a host of purported violations. The Firm was able to negotiate a reinstatement and recall of the loan back to the SBA, participation in the Hardship Accommodation Plan, termination of Treasury's enforced collection and removal of the statutory collection fees.
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