Are you concerned with what to do in the event of an SBA loan default? Then read about some things you'll need to consider when defaulting on an SBA loan.
Book a Consultation CallAs an entrepreneur, you need funding to get your small business up and running. If you tried going the traditional route of securing the funds you need to start your business, and you received a denial, you aren't alone.
At least 36% of companies were denied traditional funding due to their credit scores or low annual business income. Most businesses turn to the SBA to get the financing they need, but they face an SBA loan default if they can't make their payments on time.
If you are currently in this situation and need help with what to expect and guidance on what to do next, continue reading below! This brief SBA loan default guide will cover all you need to know about the default process and who you can contact for additional information.
Your SBA loan usually goes into default when you repeatedly fail to meet the legal conditions of the loan agreement. It will first be considered delinquent before your loan even gets to this point.
Loans typically become delinquent as soon as you miss a payment or pass your ten-day grace period. Each lender is different, but most will charge a fee even after just one day of missing your payment.
Depending on your loan agreement, your loan will fall to a default status after a certain amount of time passes. If you do nothing about your missed payments, your loan will fall into default status. This process usually happens between three to four months.
If you have no alternative options or you have no way to pay your loan, your lender will force your loan into default status. Once they do, they will start their standard loan collection process according to how it is outlined in your agreement.
Your lender should first reach out to you via email, mail, and phone. Federal Trade Commission guidelines restrict when, how, and how often your lender can reach out to you about your missed payments. Restrictions on their communication depends on the state that your business operates in.
Per your SBA loan agreement, the lender has the right to seize the collateral you put up for the loan. If the business collateral is not enough to pay the loan, the lender has the right to invoke your personal guarantee, if applicable.
This means they can take possession of your personal assets to recoup their loss. The lender may force you to sell your assets, or they can get a court order demanding money from your business accounts.
If your business assets and personal guarantee are not enough to cover your debt, the lender will file with the SBA for their guaranteed portion of the loan. Even if the SBA pays the lender back for the remainder of the loan, you aren't off the hook just yet.
The SBA will then reach out to you for repayment of the money they paid your lender as outlined in your agreement. The SBA will send you a 60-day demand letter that states that unless you respond to the SBA within 60 days, they will refer your case to the Treasury Department.
If you cannot pay what the SBA is asking you to pay, you will need to create an "offer in compromise." This offer in compromise is a payment plan or a lump sum settlement offer you are willing to pay to settle your debt.
When creating your offer in compromise, there are some documents you must present:
These documents should prove to the SBA that you don't have the means to pay back the money you owe within a reasonable time. If your argument is convincing enough, the SBA may accept your offer, even if the offer amount is less than what you owe.
If you need help creating an offer in compromise letter, you can reach out to a reputable SBA loan attorney. They can help prepare your documents and argue your case on your behalf.
If you don't respond to the SBA's 60-day demand letter or if the SBA doesn't accept your compromise letter, they will send your case to the Treasure Department. This department can withhold future tax refunds, garnish your wages, or file suit against you.
You can still work with the Treasure Department to work out a payment plan, but the process is much more complex. It is much easier to deal with the SBA instead.
As mentioned earlier, if you need help with creating an offer in compromise letter, you can reach out to a reputable attorney. Not only can they help with the letter, but they can help you with the entire situation.
You definitely don't want to go head to head with the SBA on your own if you aren't sure of their processes or your rights. You are more likely to succeed with your SBA loan default case with legal representation because they understand the default loan process. They also understand important SBA loan default statutes that pertain to your case.
It is very important to remember that even if trouble arises and your SBA loan defaults, there is still life after the default. There are reputable SBA attorneys who can help you navigate the default process and help you settle the debt.
Once you move past this moment, you can move forward and focus on restoring and improving your financial health. Contact us now if you are currently dealing with an SBA loan default and need someone to guide you through the process. You can also check out our blog for more tips about SBA loans.
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’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.
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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