SBA Loan Default: What Happens if You Don't Pay?
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.
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.
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.
The client personally guaranteed an SBA 504 loan balance of $375,000. Debt had been cross-referred to the Treasury at the time we got involved with the case. We successfully had debt recalled to the SBA where we then presented an SBA OIC that was accepted for $58,000.
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