If you signed a personal guarantee, the SBA and the federal government will want you to repay the loan.
SBA Loan Default
The SBA Loan Structure
Before we can answer what happens if I don't pay back an SBA loan, you need to understand your liability. Businesses use SBA 7a loans for working capital. A third party lender, such as Wells Fargo, comprises the lending institution and the SBA guarantees a portion of the loan in the event of default. Usually, the borrower consists of your separate business entity that you own and operate - a corporation or a limited liability company (LLC).
However, the lender and the SBA require you, as a 20% or more owner, to sign a personal guarantee. You can download a copy of Form 148, the personal guarantee, that is commonly used for SBA loans. In some situations, the lender/SBA will require that you pledge personal collateral, such as your house or a rental property. Your business also pledges all of its assets, tangible and intangible, as collateral.
Default on the SBA Loan
Now we can answer what happens if I can't pay an SBA loan. Several consequences result when your business defaults on an SBA loan. First, the lender will seek payment from the business for the outstanding balance of the loan. However, if the business cannot pay the full amount, the lender will foreclose on the collateral pledged by the business. Your business assets may not have much value. In that case, the lender will abandon the collateral.
Now the lender will ask you to pay the amount due based on the personal guarantee you signed. Moreover, the lender will seek to foreclose on any personal collateral you pledged. The lender may also determine it should file a lawsuit against you in order to collect the debt.
Referral of the Debt to the SBA
In certain situations, especially when you have not pledged personal assets, the lender will conclude suing you as a personal guarantor is not worth the time or money. Thereafter, the lender will refer the debt to the SBA for collection. The SBA will send you a notice stating that you owe the debt. The notice will inform you that you have 60 days to pay or make other arrangements. Also, the notice will inform you that you have the ability to review documents related to your debt and a right to review if you believe you don't owe the debt.
Referral of the Debt to the Department of Treasury
If you fail to respond to the 60 day notice sent by the SBA, the SBA will refer your debt to the Treasury for collection. The Treasury has many options to collect the debt. For instance, the Treasury could refer the debt to the Department of Justice to file a lawsuit against you. In addition to filing suit, the Treasury can garnish your wages, take your tax refund, take some or all of any federal payments due you (i.e., Social Security, disability, military pension, etc.).
What Solutions Are Available to Me?
If your business defaulted on an SBA loan, you do have options available. The offer in compromise exists as a process wherein if you do not have the money to pay the debt in full, you can offer a portion as a settlement. Several factors both legal and financial go into whether an offer in compromise will be accepted and in what amount.
However, you need experienced legal counsel to greatly increase the chances of a successful offer in compromise. If you fail to submit the proper forms and documentation, your offer in compromise will be denied. Moreover, if you try to low-ball the SBA in your offer, you will find yourself facing aggressive collection tactics.
The attorneys at Protect Law Group provide you with the experience and assertive representation you need for a successful offer in compromise. Contact our offices today for a free initial consultation.