Did you default on an SBA loan? We're telling you what happens if you don't pay and what you can do with an SBA loan default.
Book a Consultation CallFor thousands of small businesses around the country, the Small Business Administration (SBA) is a lifeline, helping them secure loans when no one else is lending.
Small business helps create jobs, increase tax revenues, and strengthen the nation's gross domestic product (GDP). They help the country remain independent and strong in the international marketplace.
The SBA guarantees loans from banks like Wells Fargo and Chase to help more small businesses start and stay in business.
But when a small business fails, an SBA loan default may occur. If you have an SBA loan, it's important to understand what happens when you default on an SBA loan.
Let's look at what's involved.
Investing in a small business is very risky. Starting a business requires a lot of starting capital and it can take years for that business to become profitable.
An entrepreneur may have the know-how, drive and inspiration to start this business. But he/she may lack sufficient capital to get started or to even qualify for a loan.
While the SBA does require that you have a certain amount of "skin in the game", you can qualify for SBA loans with less personal financial investment. This allows amazing businesses who would otherwise never get a shot to prove that they've got what it takes to succeed.
The SBA is a federal agency. When you have an SBA loan the federal government is a player in the loan process.
But when you take out an SBA loan, you're not borrowing from the SBA directly. The SBA is set up to guarantee a portion of the loans from lenders.
So in addition to the federal government, you'll also have a lender that's investing in you and expecting a return on that investment.
Banks lose money when they have to pursue someone in SBA loan default, so sometimes they may choose to work with you to reduce the damaging effects of a default on themselves.
While you can expect any new terms to be largely in the bank's favor, the arrangement will be mutually beneficial.
In these cases, it's important to recognize that should you reach an agreement with the bank, this will need to be approved by the SBA as well.
This can create that proverbial "red tape" that many encounter when working with a federal agency.
It's highly preferable to work with your lender before the SBA loan default.
Once the SBA loan default has occurred the collections process will begin.
The bank will send you a letter and call you. It's important to realize that FTC guidelines that specify how, when, where and how often they can contact you don't apply to business loans. Any related laws that may apply will vary by state.
During the initial collections phase, if you don't come to some kind of catch-up agreement, the bank will move forward in accordance with the SBA loan agreement.
Per the agreement, they may be able to force you to sell assets. This will most often begin with business assets. But could include your personal home or other real estate if used as collateral.
Your control in the situation may be limited. The lender may be able to force your business to shut down and auction off these assets.
The lender will exhaust all options to collect the debt before filing with the SBA for the portion of the loan that was guaranteed minus the amount that they were able to collect.
At this point, you may be left with no assets either personal or business. But the process is not complete.
Once the lender is out of the picture, the SBA is still out the money that they paid to the bank as part of the SBA loan agreement.
As you'd be well aware if you've ever dealt with the IRS, the federal government has much greater recourse to secure repayment of the loan.
The SBA will first send you a 60-day demand letter. At this point, you have been referred to the Treasury Department, who will pick up the collections if you do not resolve before the due date.
Within this 60-day period, you will be required to either settle the debt or provide an "offer in compromise".
Your finances will be thoroughly scrutinized to determine how much you have the ability to pay.
They prefer, of course, for you to pay a lump sum. But payment plans can be negotiated.
In the offer in compromise you will give a detailed accounting of your finances including:
The offer in compromise should be compelling and strongly numbers based. Those numbers should be clearly supported by the attachments. These numbers should demonstrate that the SBA won't be able to recover the amount borrowed in a reasonable amount of time.
Additionally, an offer in compromise is only accepted if you have ceased operations and your business has been completely liquidated.
The offer in compromise is often a one shot deal. If they reject it, they may allow you to refile if it's in their best interest. Otherwise, your debt now "belongs to" the US Treasury Department
This department has the ability to garnish wages, keep any future owed tax refund or file suit and seek a civil court judgement against you.
Once you've reached this stage, settling the SBA loan default is still possible. But it becomes much more difficult.
Going through an SBA loan default is serious business. It's scary. And you could end up paying more than you have to.
We're here to help you navigate the SBA loan default process. If you're in default, get pre-qualified by filling out our quick online form today.
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 $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.
Client personally guaranteed SBA 7(a) loan for $350,000. The small business failed but because of the personal guarantee liability, the client continued to pay the monthly principal & interest out-of-pocket draining his savings. The client hired a local attorney but quickly realized that he was not familiar with SBA-backed loans or their standard operating procedures. Our firm was subsequently hired after the client received the SBA's official 60-day notice. After back-and-forth negotiations, we were able to convince the SBA to reinstate the loan, retract the acceleration of the outstanding balance, modify the original terms, and approve a structured workout reducing the interest rate from 7.75% to 0% and extending the maturity date for a longer period to make the monthly payments affordable. In conclusion, not only we were able to help the client avoid litigation and bankruptcy, but our SBA lawyers also saved him approximately $227,945 over the term of the workout.
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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