What happens if you don't pay back your SBA loan? If you signed a personal guarantee, the SBA and the federal government will want you to pay the loan.
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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.
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.
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.
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.).
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 initial consultation.
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 $150,000. COVID-19 caused the business to fail, and the loan went into default with a balance of $133,000. Client initially hired a non-attorney consultant to negotiate an OIC. The SBA summarily rejected the ineligible OIC and the debt was referred to Treasury’sBureau of Fiscal Service for enforced collection in the debt amount of $195,000. We were hired to intervene and initiated discovery for SBA and Fiscal Service records. We were able to recall the case from Fiscal Service back to the SBA. We then negotiated a structured workout with favorable terms that saves the client approximately $198,000 over the agreed-upon workout term by waiving contractual and statutory administrative fees, collection costs, penalties, and interest.
Clients personally guaranteed SBA 504 loan balance of $750,000. Clients also pledged the business’s equipment/inventory and their home as additional collateral. Clients had agreed to a voluntary sale of their home to pay down the balance. We intervened and rejected the proposed home sale. Instead, we negotiated an acceptable term repayment agreement and release of lien on the home.
Clients' 7(a) loan was referred to Treasury's Bureau of Fiscal Service for enforced collection in 2015. They not only personally guaranteed the loan, but also pledged their primary residence as additional collateral. One of the clients filed for Chapter 7 bankruptcy thinking that it would discharge the SBA 7(a) lien encumbering their home. They later discovered that they were mistakenly advised. The Firm was subsequently hired to review their case and defend against a series of collection actions. Eventually, we were able to negotiate a structured workout for $180,000 directly with the SBA, saving them approximately $250,000 (by reducing the default interest rate and removing Treasury's substantial collection fees) and from possible foreclosure.
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