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 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.
Our firm successfully resolved an SBA 7(a) loan default in the amount of $212,000 on behalf of an individual guarantor. The borrower’s business experienced a significant downturn in revenue and was unable to sustain operations, ultimately leading to closure and a remaining personal guaranty obligation.
After conducting a thorough financial review and preparing a comprehensive SBA Offer in Compromise (SBA OIC) submission, we negotiated directly with the SBA and lender to achieve a settlement of $50,000—approximately 24% of the outstanding balance. This favorable resolution released the guarantor from further personal liability and provided the opportunity to move forward free from the burden of enforced collection.
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.
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