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SBA Loan Repayment Options: Federal Debt Issues & Strategies

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SBA Loan Repayment Options: Federal Debt Issues & Strategies


The transcript of the video follows below for further review.

This blog article explains your SBA Loan Repayment options to address your problematic SBA loan. Also covered are ways to potentially get out of SBA loan default short of paying past due amounts and details about the federal government’s collection methods.

Many small business loans obtained in the commercial loan market are backed by the federal government’s Small Business Administration (SBA).

The federal government has extraordinary powers to collect defaulted SBA loans if you don’t pay. It can seize tax refunds, deny you new federal loans (e.g., FHA, VA, HUD loan or other federal benefits by placing you on the dreaded CAIVRS list), garnish your wages without a court order, charge you very large collection fees (up to 30% without even accruing or proving these actual fees), and even seize a portion of your Social Security benefits. To make matters worse, there is no time limit for administrative collection action on defaulted SBA loans. The federal government can keep trying to collect for twenty, forty, or even more years through their various administrative collection tactics unless you decide to challenge them.

Consequently, defaulted SBA loans require your immediate attention, both because of the federal government’s special collection powers and because of your right to verify, challenge and/or compromise the alleged debt payment obligations. However, you need to take immediate action — you cannot wait for the federal government or the assigned private collection agency to offer these options to you.

These special collection tactics and rights apply only to SBA-backed loans and not loans made by your bank, or another financial institution without any backing from the federal government. Those are called private commercial loans. How you deal with private loans will differ greatly from how you deal with SBA-guaranteed loans.

First Identify What Kind of SBA Loan You Have

Your rights, remedies and strategies will vary depending on the type of SBA loan you have.

You should review the SBA Loan Authorization to find out the type of SBA loan you have.

You should find out about the SBA loan balance outstanding, the type of SBA loan you have, who is currently servicing and/or collecting on your SBA loan (i.e., SBA Lender, CDC, SBA, Treasury/Bureau of Fiscal Service, Private Collection Agency or Third-Party Debt Buyer), and other pertinent SBA loan details.

You can also determine what type of SBA loan you have by checking your SBA loan instruments. If you do not have copies of your SBA loan papers, you will need to formally request them from your SBA loan holder, from the SBA or Treasury’s Bureau of Fiscal Service. Your business and/or personal credit report may also have information about your SBA loan.

How to Reduce or Delay Your SBA Loan Payments

If an SBA loan discharge, cancellation, or forgiveness is not currently available to you, the SBA Lender, CDC or federal government may also offer options to lower your monthly payments, so you don’t default.

The typical SBA loan repayment plan generally gives you up to fifteen (15) years to repay the SBA-backed loan.  This plan does not reduce your total obligation, but it may allow you pay it off more slowly and beyond the original terms of the Note. This may mean that additional interest may be added to the loan – unless you successfully negotiate a waiver of the interest – so it is very important that you consider retaining professional legal counsel to represent you in these types of complex negotiations as you could end up paying more interest in exchange for these more affordable monthly payments.

Extended Repayment Plan. This option allows you to extend repayment over a longer period (usually no more than fifteen years), thus lowering your monthly payment. However, you may be required to provide additional collateral to secure the debt or execute a confession of judgment in the event of default.

Income-Sensitive Repayment Plan. Income-sensitive repayment allows for reduced monthly payments due to your business’s financial circumstances.

Alternative Repayment Plan. If no other plan is affordable, SBA loan guarantors who have “exceptional circumstances” may be able to submit documentation to apply for a repayment plan that is affordable based on their “financial ability to pay.”  Note that high medical expenses or other secured debt obligation payments could be among the expenses you provide. There is no loan forgiveness under this plan.

Income Driven Repayment Plans. The federal government can entertain the option of considering a range of income-driven repayment (IDR) plans. These plans calculate your monthly payment after considering your income, rather than basing the plan on your SBA loan balance and a short temporal period. By lowering monthly payments—in some cases to zero—these plans can help you avoid default, which may prevent federal tax refund intercepts, administrative wage garnishment, seizure of benefits, and high collection costs.

For these IDR plans, your financials may be checked every year to determine income and allowable living expenses.

Deferments. If your business cannot manage its monthly payment, you may be able to choose to seek a deferment instead. A loan deferment lets you temporarily delay repaying your SBA loan, in 3 month increments for up to one year. Your business can renew the deferment period if it ends without a cure, but if not, your business must resume making payments. Deferments are not available if you are already in default.

Forbearances. If you cannot qualify for an SBA loan deferment, you may be able to still request an SBA loan “forbearance,” meaning you do not have to pay the principal amount for an agreed-upon period, and no adverse action will be taken against you during the forbearance period. You will eventually have to repay the full SBA loan amount and all accrued interest. In some cases, you should be able to get a forbearance even if you’re already in default. This will not get you out of default without further action.  However, you will probably be asked to pledge the “moon” as collateral.

What to Expect If You Are in Default on Your SBA Loan

The federal government has several aggressive collection tactics it can take if you are in default on an SBA loan, which usually means you have not made payments for at least 3 months – but no later than 6 months.

Denial of New SBA Loan or Other Federally-Backed Loans. If you’re in default, the federal government can deny you new federal loans and federally-backed loans.

Your Credit Report. Where applicable, many SBA loan defaults can appear on your credit report unless you file a formal dispute of the derogatory remarks.

Aggressive Collection Agency Contacts. Most SBA loan debt collection is perpetrated by private collection agencies hired by the federal government or other SBA loan holders. Private debt collectors are likely to be aggressive and do not inform you of your options that could help you out.

Collection Fees. When you are in default, a large portion of anything you pay to the Treasury’s Bureau of Fiscal Service or a private collection agency on the loan is applied to high collection fees and not to pay off your loan—fees can be as high as 30% of your alleged SBA/Treasury debt balance.

Federal Tax Refund Offsets. When in default, the federal government can intercept your tax refund, including your earned income tax credit. The only sure-fire way to avoid this is not to have a tax refund due by lowering your withholding or any estimated tax payments you make. If your joint tax refund is seized, your spouse can recover some of the amount by filing IRS Form 8379, a simple form available at www.irs.gov

You have the right to be notified before your federal tax refund is taken.

Administrative Wage Garnishment. When in default on an SBA loan, the federal government can garnish part of your wages without first obtaining a court judgment

There are a number of ways to contest an administrative wage garnishment:

  1. Request a formal hearing and explain why you think you need not repay the loan.
  2. Ask for a repayment agreement, especially before the administrative wage garnishment begins.
  3. Explain you were involuntarily terminated from your old job and have not been continuously employed in your new job for a full year.

Federal Benefit Offsets. The federal government may be able to seize a part of your government benefits, including Social Security, Social Security Disability, certain railroad retirement benefits, and Black Lung Part B benefits. Some benefits are exempt from seizure, including Supplemental Security Income (SSI), Veterans benefits, and Black Lung Part C. To find out which benefits can be seized or are protected, go to www.fms.treas.gov

You should also receive a notice warning you that your benefits are going to be taken, with information about your right to request a hearing with the agency that is collecting the money. Request a formal hearing if you think you have defenses to repayment or if you are facing financial hardship.

Lawsuits. There is a certain time limit for the federal government to sue you in federal or state court to collect on the defaulted SBA debt. If you are sued, you may have defenses and you can resolve the lawsuit by getting out of default and resuming payments, or by negotiating a settlement such as an offer in compromise or by filing for bankruptcy.

License Revocations. Some states allow professional and vocational boards to refuse to certify, certify with restrictions, suspend, or revoke your professional or vocational license, or even fine you if you default on a federally-guaranteed loan.

Getting Out of SBA Loan Default

As described above, after you default on your SBA loan, you may be subjected to harsh collection tactics and lose access to some available repayment plans and deferments. It is greatly to your advantage to get out of SBA loan default.

Reach a Settlement to Pay Off Your SBA Loan Balance. You can get out of default by negotiating a settlement with your loan holder or the SBA to pay a lesser amount to pay off the loan. It can be difficult to negotiate a “good” deal, and you probably will need a large, lump-sum amount to offer. Get any settlement in a writing that confirms that you no longer owe anything, then pay on time, and request a satisfaction letter as proof of your payment in case someone attempts to collect further from you. Consult with a tax professional about any tax liability from your settlement.

More Help with SBA Loan Problems

Information to help you with all types of SBA problems is available at SBA-Attorneys.com

If you have a dispute or questions, it is prudent first to contact a professional (such as an attorney who focuses on these types of SBA loan cases). To ask a question or request a case evaluation appointment with one of our Firm Attorneys, go to https://www.sba-attorneys.com/contact/ or call toll-free 888-756-9969. You can also contact us at 888-303-6975

This presentation contains images that were used under a Creative Commons License. Click here to see the full list of images and attributions:


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