WHAT HAPPENS IF YOU DEFAULT ON YOUR SBA LOAN?
UNDERSTANDING YOUR SMALL BUSINESS ASSOCIATION LOAN (“SBA”)
First, you need to understand the hands that involved in your SBA loan. You may think that you have just taken on a loan through a private bank, like Wells Fargo or Chase, but in reality you have rally taken on a loan with the Federal Government. The SBA is a federal agency that was created to help entrepreneurs build their business by having access to lending. However, the SBA is not directly lending to the business. The SBA is lending to the bank that participates in SBA lending. The SBA guarantees a percentage of those loans to the banks so that there is less risk for the bank and more incentive for them to utilize this program to lend.
Therefore, when you default on these SBA loans, it is not just up to the bank to pursue you for the payment, but eventually it becomes the business of the federal government to pursue you for the payment. This also means that any compromise you make with the bank for repayment has to be approved by the SBA as well since it is their money that has guaranteed these loans and they have more to lose.
The typical steps in collection are the lender (the bank) will attempt to collect the debt through phone calls and letter writing letting the borrower know about the default and how to cure the default. If the borrower still does not pay or make some type of catch up agreement, the lender will then move on to collection through their rights under the SBA loan agreement. This includes forcing the sale of any and all assets the borrower used to collateralize the debt. This almost always includes all business assets and depending on the size of the loan, usually includes the borrower’s home and any other real property they own.
The lender may force the closure of your business by forcing an auction of all of the business assets. The lender may also move to foreclose on the borrower’s real property. At some point, the lender will have expended all of their options for recovery and the lender will make a claim against the SBA guarantee to collect what they were guaranteed as payback from a defaulted loan. The SBA guarantees up to 85 percent of loans of $150,000 and less and up to 75 percent of loans above $150,000.
At this point, the SBA will now take over servicing and collection on the defaulted note. The SBA will send a 60 day demand letter to the borrower asking for the deficit balance to be paid in full or to present the SBA with an “Offer in Compromise” of the claim. This process is similar to doing an offer in compromise with the IRS on your taxes but usually takes much longer. The offer in compromise in a process where the SBA will evaluate your finances to determine if they will accept an offer to settle the balance owed for less. The preference is, of course, to settle the claim in a lump sum; however, with a good debt lawyer that has worked on SBA claims before, a settlement in payments can be accomplished.
Doing an offer in compromise will require the borrower to provide business and personal taxes for the last few years and to disclose all of your assets and debts. The borrower must also come up with an offer to settle that is not only fair but also doable – meaning that your finances support your offer. Just like a loan modification on your home, the SBA wants to make sure that your finances support being able to make a payment to them each month. You can not state that you are negative at the end of the month and expect the SBA to accept an offer of payment when you have not demonstrated that you can pay.
What is best is if you talk to a debt settlement lawyer when you know you are going to default or when you first default so that your lawyer can work with the lender directly before then send it off to the SBA to service. Having an attorney involved in the process in the early stages is usually the most beneficial to the offer in compromise process.
If you are working with the lender on the offer in compromise, they will have to first approve the offer and then they will send the offer to the SBA for their approval or rejection. If the lender approves and the SBA rejects than the offer can not go through as both parties need to agree on the settlement terms. Dealing with the lender and the SBA can be difficult as they usually do not even let you know why they have rejected you so that you know how you can revise your offer to submit again and hopefully gain acceptance.
If the SBA rejects the offer, they may allow you to submit again or they may just send the file off to the United States Treasury Department (“USTD”). Once your file is with the USTD they have the means to be able to collect against you through various different methods such as taking your tax returns, garnishing wages, garnishing benefits and levying bank accounts. Unfortunately, because this is a federal loan, there is not stature of limitations on how long they have to collect nor do they even have to bring a lawsuit to gain a judgment to be able to collect.
At the point where your loan is with the USTD, you may still settle but it is very difficult and the settlement will most likely be higher than had you retained an attorney to work with the lender when you first defaulted.
Kevin Fallon McCarthy
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