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.
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 and guarantors obtained an SBA COVID-EIDL loan for $1,000,000. Clients defaulted causing SBA to charge-off the loan, accelerate the balance and refer the debt to Treasury's Bureau of Fiscal Service for collection. Treasury added nearly $500,000 in collection fees totaling $1,500,000. Clients were served with the SBA's Official 60-Day Notice and exercised the Repayment option by applying for the SBA’s Hardship Accommodation Plan. However, their application was summarily rejected by the SBA without providing any meaningful reasons. Clients hired the Firm to represent them against the SBA, Treasury and a Private Collection Agency. After securing government records through discovery, we filed an Appeals Petition with the SBA Office of Hearings & Appeals (OHA) court challenging the SBA's referral of the debt to Treasury. During litigation and before the OHA court issued a final Decision and Order, the Firm successfully negotiated a reinstatement and recall of the loan back to the SBA, a modification of the original repayment terms, termination of Treasury's enforced collection and removal of the statutory collection fees.
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.
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