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What is an SBA Loan? What Happens if You Default on it?

Someone recently asked us a series of questions about what happens if you default on an SBA loan. Here are our answers from Lendio’s president, Levi King:

What is an SBA Loan?

SBA loans are loans to small businesses that are unable to get a business loan through normal lending channels with reasonable terms. The program operates through private-sector lenders that provide business loans, which are guaranteed by the Small Business Administration (SBA).

Are SBA loans always personally guaranteed?

Yes on the vast majority of SBA loans. The only rare exception would be businesses with tons of collateral, lots of time in business, and super clean financials.

Who collects defaulted loans, the lender or the government, or both?

The lender collects. The SBA just guarantees the loan to the bank. The lender collects what they can, and then they can make an insurance claim for the percentage of the loan covered under the insurance, but not recovered by their collection efforts.

What is the collection process like for defaulted SBA loans?

Just like any other bad business debt that is personally guaranteed, first they’ll foreclose on any collateral that was put up to secure the loan, then they’ll sue the business for default, then they’ll sue the guarantor(s) for default, and they’ll get a judgment against the business, guarantor(s) or both.

What might borrowers expect?

Depends on each state’s laws, but in general they will face 25% wage garnishment, they can intercept any dividends paid out of corporations the individual has ownership in (even other businesses), they can seize bank accounts, and other physical property collateralized by the loan and/or awarded in a judgment.

Can SBA loans be discharged in bankruptcy?

Yes. Once you’ve Bankrupt out of one SBA loan, you can’t get approved for another one.

Are there restrictions on what types of SBA loans can or cannot be discharged?

No restrictions other than the normal bankrupt restrictions placed on any type of business situation. For more information on other types of sba loans, see 504 loans & 7(a) loans.

Can business owners negotiate settlements on SBA loans?

Yes, just like any other type of debt that goes delinquent.

How can you negotiate settlements on SBA loans?

Go 90+ days late on the loan, and either negotiate directly with the lender or use an attorney. You will be 1099′d for the forgiven debt and probably barred from SBA loans in the future (if the SBA suffered a loss).

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About the Author

  • Dan Bischoff

Comments

  1. Hi, my name is Nancy delos Reyes. We have SBA loan with Bank of America. Since our business sales went down 2 years ago I have hard time paying my SBA loan payment every month. I have been late paying my loan since May 2011. I have try to do settlement with the bank but they don’t accept our offer. I am afraid of lawsuit and loosing my business or assets. Please give me some opinion what to do.

    Thanks,
    Nancy delos Reyes
    email: myjazzbass@sbcglobal.net

    • Nancy, I wish you had contacted me earlier. I am an attorney and have been since 1977. Our company has been dealing with borrowers struggling with SBA loans for more than 30 years and much of what you hear on this web site and others is frankly…. WRONG!!! We resolve SBA loans every day. In nearly every case we do so without you being sued and, in nearly every case, without any damage to your personal credit score. You see, when the loan was made, it was not made to you, but rather to your company…. The LLC or corporation that actually owns your business. You guaranteed the loan, but you are NOT personally on the loan documents. The bank did not make the loan because it was so excited about your business, but because the SBA guaranteed to reimburse the bank 70% to 90% of the unpaid balance should your business be unable to repay the loan.

      The only requirement that the bank has to get paid by the SBA is that the assets securing the loan be sold. There is no requirement that they sue you, take your house or anything else. If you hire experts in this field, like our firm, we work with the bank to get the assets sold and get the bank paid off by the SBA. At the same time, we present the SBA with what is called an “Offer-In-Compromise”. This is basically an explanation of your situation and a personal financial statement. And for most people today, with real estate prices down, it is easy to show that, even if the SBA were to sue you, they would not collect much of what is owed.

      We routinely settle these claims for less than $.10 on the dollar. We get your personal guarantee removed and the liens released on your property. And because the loan was made to your company and not to you, it will not affect your personal credit score. And contrary to what is said above, you will not get a 1099 for the amount of debt that was not repaid. You will be barred from getting another SBA loan, but that is it. You will be free to move on with your life!!!

      • Our company ust paid off our secured SBA loan, we have struggled during the duration of the loan and have accumulated some 12,000 in late fees and penalties from the bank. They want to make some kind of payment plan and reduce the amount and at one time offered to dismiss all fees if we paid off the loan. What can I do to get rid of these late fees and get a release.

        denise

        • Denise, your situation is like many others that we deal with on a daily basis here at Bridge Management. Feel free to email me anytime at Ryan@BridgeMgt.com and I can give you some insight that the bank would accept for payment plan options to prevent this from getting passed to the Treasury Department.

      • John what firm do you work for and how would one get ahold of you. I am basically in the same boat as the post you replied to and looking for options before things completely go south.

        • Brandon, feel free to contact me anytime at 401-390-3800 and I will be more than happy to discuss any SBA related default topics. We are experts with SBA Defaults, Offer in Compromises, release of personal guarantees, liens on property and assets, etc.

      • John Do you have a phone number that I could call you at about my SBA LOANS?

        Thank-you,
        A W Rodgers

      • I am looking for representation with my SBA lender to settle my loan as I am out of business.

        Please contact me via email above or via cell 209-518-3703.

        Regards,

        Courtney Vasquez

        • Courtney, I would recommend you contact an attorney familiar with this situation to help you settle your loan with the SBA.

        • Here at Bridge Management we are experts in SBA Default situations, personal guarantees, Offer in Compromises, debt workouts, etc. I am always available to answer questions or concerns. Ryan@BridgeMgt.com 401-390-3800 Direct Number

      • Please send me your contact info. We are in need of your services.

    • Nancy, It is very important to know what your options and your rights are in a distressed situation. The SBA has guidelines for default situations and you can utilize their Offer in Compromise procedure which is an alternative to bankruptcy and can keep your personal credit in tact. Here at Bridge Management we are experts with SBA Default situations, personal guarantees, lien releases, Offer in Compromises, SBA workouts and restructures, etc. Feel free to email or call me anytime to discuss any type of situation. Ryan@BridgeMgt.com 401-390-3800 Direct http://www.BridgeMgt.com

  2. Hello, Can the sba garnish wages in the state of Texas.?

    • Che’ri, the SBA can certainly garnish wages in any state. Texas is among the most protected states in the country via the homestead exemption act, however that does not protect wage garnishment. The number one goal for all of my clients is to get an Offer in Compromise in front of the SBA prior to any type of wage garnishment procedure. It is very important to engage somebody with experience with defaulted SBA loans as well as Offer in Compromises. Ryan@BridgeMgt.com with any questions or concerns.

  3. I had an SBA loan (w/ my ex-husband) in 2007. I overpaid each month and in 2011 decided to restructure my business (divorced in 2009, ex still on loan docs). Contacted the bank who said I could defer to interest only for 3-6 months if paperwork was filled out by both parties. I filled mine out and submitted, ex SAID he did same. Received no statements from bank, so assumed (my fault – ass out of you & me) that everything was fine. Get ready to make payment in Oct (deferment started. In Mar) and saw that the bank had pulled $32,000 out of my accnts! No judgment, no court date. My ex never turned in the paperwork, so I was in default. But $32,000? How can they take that money (including money from 2 trust accnts) with no notice to me? And I was in that bank at least 2 x per week, and no one ever said, hey – you need to pay your SBA loan. Is it legal to just remove $$ from an account w/ no judgment?

    • Wow, Sherry. That’s an awful story. I can’t speak for the bank’s policies, but it’s more than worth looking into further. Hope you can get this taken care of.

    • Hi Sherry, this is a very difficult situation that you are going through. Send me an email and I will guide you in the right direction. All we do is work with defaulted SBA loans, personal guarantees, and debt settlements.

      • I had a Partner in a C Corportation 50/50 I left the corp in 2007- With a 48 page legal document signed by the boss of us – With everything he was liable for including the SBA loan he stop paying and claim bankruptcy they cam after me 3 years latter and took money from ,me. What do i do? Long was with bank of America.

        • Anthony, sorry to hear about your situation. Every SBA loan is different. You should probably talk to someone like Ryan above who has commented on this thread for debt settlement.

      • Where are you located? are you a debtor-creditor attorney? do you know someone who could help me with a situation similar to
        Sherry’s but in North Carolina?

      • Hi Ryan,
        My wife and I along with my parents are personal guarantors on a SBA loan and we have Defaulted
        on it. The bank is discussing with us about a OIC
        but in all reality we feel lost. I have talked to
        Second Wind Consultants and did not have a great
        experiance with them on a conferance call today
        as they were very abrupt and rude. Are SBA loan
        is approximately 600,000 and their fees with front
        end and back end cost would be 100,000 + but they
        guaranteed us they could get rid of the debt. People
        who are in this position are not normally capable of pulling out this type of cash. Please Healp.
        of cash

        • Luis, i’m sorry to hear about your experience with Second Wind Consultants, please give me a call or send me an email if you still have questions or concerns. Those fees that were quoted to you are absolutely outrageous and i’m sure that is not affordable to you. A defaulted SBA loan is simply a debt issue, not a legal issue. Don’t lose any more sleep over this, there is always a solution!

  4. Every defaulted SBA loan is different. Depending on the local banker, state, Personal guarantees, etc. All we do here at BMC is deal with defaulted SBA loans, personal guarantee and lien negotiations, and debt settlement. Feel Free to email me any ask any questions. Ryan@BridgeMgt.com

  5. We had a small business loan and the bank liened all our property, including personal home and rental house. We had to file Chapter 7 personally because of securing our business debt. We have been discharged for several years but the liens remain. The bank was repaid their 25% of the business loan by sale of our business property. The SBA guaranteed the 75%. Is there any possibility of getting the liens removed?

    • Hi Sandra,

      Yes you can get the liens released by doing what is called an “OIC” Offer in Compromise. Depending on what your financial statement looks like now is going to depend on what the offer will be. Feel free to email me or call me. Ryan@BridgeMgt.com 401-390-3800

  6. Yes Sandra, the liens can be removed. Unfortunately even with Bankruptcy you are still obligated to repay the SBA debt according to the Personal guarantee which is why they still have a lien on your home. We do debt settlements like that on a daily basis with the SBA, and every situation is different. Feel free to message me. Ryan@BridgeMgt.com

  7. I have an SBA disaster loan from Huricane Katrina. I have been separated from my husband for over 2 years. Our home was foreclosed on in Feb. 2010 by the mortgage company. My husband refuses to give me a divorce so I have decided to move on with my life. I have been renting for over 2 years now and am ready to buy a home for my children and myself. Everything has been going well on the mortgage paperwork until a Cavirs was run and it came up with a default on the SBA loan. My husband is being garnished by the SBA and has been working on a payment plan with. So can I get the Cavirs removed so that I can continues with the process of buying a home?

    • Tracey, your question seems to be the million dollar question from many defaulted borrowers over the last several years. CAIVRS is an internal reported credit system that the government uses for defaulted federal loans such as SBA, USDA, FHA, etc. I recently took on a case where a borrower had declared personal bankruptcy to relieve himself of the SBA debt and after 2 years repaired his credit and wanted to buy a house via an FHA Loan but he came up on the CAIVRS list. There is a big misunderstanding within the SBA guidelines and main office in Virginia on whether bankruptcy should relieve a borrower who claimed personal BK from the CAIVRS list. Needless to say, we were able to get him successfully taken off the list without having him pay the SBA any money and he is now in his new home with an FHA loan. The only other way to get taken off the CAIVRS list is to pay it off in full, or submit an Offer in Compromise and ask for release from the CAIVRS list.

  8. Hello,

    I had an SBA loan from 2005 to 2008. The property securing part of the loan was surrendered and the loan was discharged in bankruptcy in 2008, however, I am getting contacted by a law firm that is trying collect the balance of the loan. How can they try to collect on the debt when it was discharged? It seems so strange that this would happen this long after the discharge. Thank you for your help!

    • Hi Lorie,

      Unfortunately your situation is like many others that I deal with on a daily basis. In your situation the SBA got a portion of the balance from the foreclosure on the business and the real estate involved. However you are still Personally Guaranteed for the remaining balance. You need to do what is called an “OIC” Offer in Compromise. You do not want to get into wage garnishment or sweeping of personal accounts by the US Department of Treasury. Send me an Email Ryan@BridgeMgt.com

  9. Just to clarify the answer to the last question, an attorney is NOT required to negotiate the settlement of an SBA loan. What you DO need is an SBA settlement expert.

    I am the founder of a consulting firm that only handles SBA debt settlements, and have written 75 articles on the topic of SBA Offer In Compromise including why an attorney is not always the answer.

  10. I got a SBA disaster loan after hurricane Rita. I lost everything that I own. I just heard that the SBA forgave loans that were made to the state. What about me? is there any way that I can get my loan forgiven or reduced without ruining my credit? I lost everything that I own and ended up with a 30 year bill. Not fair. Does anyone know if it is possible for me to get my loan forgiven?

    Any help would be greatly appreciated!

  11. Hi,
    We bought a house in NH in May 2010 and are in the process of refinancing it (in Sept 2012). In going thru the refi process, we found out that the seller of our house had taken a SBA loan, using our current house as collateral. Seems like the Title and the Closing company completely missed on this lien. We do have Title Insurance for the house. What are my options?
    Thanks,
    John

  12. I have a question about an sba issued loan.
    3 partners took out loan on a building in California. We have refinanced the building and the bank (1st loan) devauled the building and refinanced our loan, the (2nd sba) is still owed some money on the settlement. They will 1099 us for the remaining balance due. The question is …2 of the three partners have no money and are close to filing chap11. Can the sba go after 1 partner for full amount?

  13. I defaulted on an Sba loan in 2007. I just filed federal taxes and was to receive a refund. I received a letter stating they are keeping my return. My worry is my house. Will they send me notice of liens? Can they forclose on it? The loan was for $14,500.

    • PG, it sounds like you should speak with your tax accountant or tax attorney.

    • PG, your situation sounds very familiar to emails and phone calls that I get weekly. It sounds like you did the typical run and hide in a default situation back in 2007. What happened was, after a period of time the SBA passed this file down to the US Department of Treasury and eventually your file ended up on somebody’s desk and they took your tax returns. The next thing they will do is start a wage garnishment proceeding. I would not worry about a foreclosure as there is not enough money owed for them to pursue that. You need to contact the Department of Treasury, and track your file down and negotiate some type of payment plan with them.

  14. Hi – Can you help me too?

    I had a SBA backed loan through Washington Mutual – I couldnt make payments and tried to negotiate a lower payment to payoff as bad debt. They told me I had to default but would never negotiate an affordable payment. So it went to court – now I am paying off the full debt to SBA directly at the amount I could pay per month. I understood my dealings with the bank to be over and my debt moved to SBA. However, I have received a 1099-C from the bank as a cancellation of debt for 1/2 amount still owed and says have to report as income??!!
    I am not getting any cancellation of my debt with SBA and certainly no offset as income. Do I have to report this as income or is there some way to dispute? Or have I unwillingly allowed this as part of some court proceeding with the debt to SBA

    Thanks

    • Amanda, Thanks for reaching out to us, but this is a question for your tax preparer.

    • Amanda, typically a 1099 sent by SBA debt is for debt forgiveness and is not looked at by the IRS as ordinary income. We always advise our clients to run this by your accountant and make sure they schedule that properly on your tax returns so you do not have to pay tax as ordinary income.

  15. Hi need some advice. I am 1/7th partnership in an SBA that we defaulted on. The other 6 partners are I person who used his other 6 businesses for the loan. Who decides how this loan is to be divided? If he went bankrupt on his business can the come after me for the whole loan of $665,000?
    Thanks

    • Janice, you should consult legal council to determine what you’re liability is in this situation.

    • Hi Janice, unfortunately your question comes up often and you will not like the answer. Every guarantor who signs on the loan documents as a guarantor is individually responsible for the full balance if the other guarantors were to file personal BK. However, you are still able to do what is called an Offer in Compromise ” OIC ” for a settlement much less than the balance owed. An OIC is put in place for borrowers who are able to pay back something without having to file Bankruptcy. Most attorneys have zero experience dealing with SBA defaults, never mind financial documentation. It is typically less expensive and more beneficial to hire a consultant who has experience in the SBA field such as Bridge Management Consulting.

  16. Hello,
    I had a SBA loan in 2009, due to economical and hardship situations I couldn’t pay it and I close the business. I finally decided to file for Bankruptcy Chapter 7 last year (2012) and my case was discharged. I recently filed my taxes and I received a letter from IRS stating that SBA is garnishing my money. What should I do? Thank you in advance for your advice.

  17. Apparently it’s a little known fact that a personal bankruptcy does not keep the government from garnishment payments that come from the government, such as tax returns. They can’t levy your assets, but they take your tax returns.

  18. Hi, I live in California and defaulted on an SBA loan in 2003 when my business closed. I continued making sparatic payments through 2008 and could no longer make payments and had no other contact with SBA until 2013. My final response to SBA was the Statue of Limitations was passed on collecting on the loan, which in California is 4 years. Recently, my Federal tax return. What can be done at this point?

  19. Hi Barbara,
    As Ty Kiisel has said, there are other options for you at this point. Since you live in California, there may be other options that you are not aware of that may be of benefit to you.

    You may contact me at: dbutler4financing@gmail.com.

    Sincerely,

    D. Butler

  20. Hello i have a LARGE delinquent SBA loan. I was Divorced in 2009 but the judge gave the company to her in the divorce. She ran the company into the ground in 6 months and sold the assets. I have recently became legally disabled and have a large back pay coming to me for about 2 years worth of disability pay. i have not worked in 4 years. will the treasury take it all? what are my options as i cannot afford tooth paste until my pay kicks in later this month.

    thank you

    • John, your best bet is to consult an attorney to see what your options are.

    • John, your situation is very familiar to situations we deal with on a daily basis here at Bridge Management. You can flip a coin and figure out if the treasury will take all of it. If they know about it, the odds are certainly likely they will get it. You should seriously consider speaking to a BK attorney to include the SBA debt so you can protect your disability and future wage garnishment.

  21. Thank you. i am seeing one on Monday. I will post my options for future use here!

  22. HI ALL,

    My question is that I had a SBA loan of $75000 and was unable to repay due to real estates slump back in 2009/ 2009, and I had filled a chapter 7 which did not discharge. Now what are my options to clear SBA loan.
    THANKS ADVANCE.
    ADJ

  23. Hi, Thanks for sharing this post. It means a lot for many people out their planning to have loans.

  24. Our business, an S-corp, secured an SBA loan in 2007. We defaulted in 2012 when our business closed. All assets that were collateral were sold and we got a loan for the remaining equity in our home, also collateral, which went towards the balance. The remainder, apx 50k, has been sent to the SBA or Treasury, not sure if there is a distinction there for collections. Are we personally liable and what can we expect now?

  25. Any advices or helps?

    I have in California n went into default on my sba 7a loan since 2010. All the collateral properties including the business property were sold. Now I still owe approx. $750,000.00. I have not pay or heard from the bank since 2011. What should I do or expect next?

  26. I will be receiving a 1099-C from my bank for the amount that they did not get reinbursed from the SBA on my defaulted loan. The bank has indicated that the 1099-C is in process. Will the SBA ALSO send me a 1099-C for the amount of the difference? Just checking.

  27. Closed corp. bankruptcy. Behind on house payments.
    There is SBA lien on home, do not want to lose home. Bank not motivated talk settlement , Can they be motivated only choice let go to foreclosure and save HELP!!

    • Because the SBA doesn’t always fully collateralize an SBA loan with business assets, it’s not uncommon for them to pursue personal assets in the event of a default. I am not an attorney. I would recommend you seek the advice of one familiar with working with these types of issues. I am unaware of anything that would compel a bank to talk settlement.

  28. need help sba 7a over ml.hotel went bankrupt 2008

  29. I took out a Bank of America sba loan in 2006 last payment was 2/2008 then default now 6 years later performant recovery is telling me all kinds of horror stories that can happen if I don’t pay, I’m on disability now what should I do?

  30. BMC can you assist me?

    I am a widow as of 8/31/12 and the SBA wants me to pay off our loan from Hurricane Irene.

    I asked several times for negotiation with Gregory Lien of their company, he would not assist me or direct me to who could help me.

    I am unemployed, and I wish to settle with them. IN fact I have been slowly paying off all joint debts since he passed, but other companies have worked with me. SBA will not seem to.

    Can you please contact me?

  31. I filed for chapter 7 in 2008 and it included a secured SBA loan. I noticed you said if you have 1 loan discharged through BK then you can’t get another, but what if I pay that loan in full now. Will I be eligible for future loans, since it’s not defaulted and paid in full?

  32. my partner (awesome credit) and myself (not so much) are looking at applying for an sba loan to fund our start up from the building brand phase to a sales phase. I have a FHA backed home loan that we went late on so we could qualify for a modification and we are still in the trial period. How and does this effect our ability to secure a sba loan?

    • Aaron,
      It’s possible your partner’s credit might carry the day for you, but that will depend on the bank, the underwriter, etc. Any ding on your credit will show up. You need to demonstrate to the bank you and your partner are a good credit risk. Startup funding is tough, even on its best days. Good luck.

  33. How is the SBA 75% guarantee calculated? Is it based solely on principal & interest left after a foreclosure or can other fees be included ? Can the bank collect late charges, foreclosure fees, etc. from the SBA if the principal and interest are paid by the borrower?

  34. Because of unemployment, I defaulted on a SBA disaster loan for the contents of my home. The collection company has charged an outrageous administration fee. What can I do to reduce the administrative fee. Once I started working, I’ve been paying my loan every month for the past eight months, but they will not reduce the fee. Help?

  35. John Homan
    Can you contact me PLEASE!!!! I May need your services? Thank you.

  36. John,
    The best way to start is by completing a Lendio profile to see your matches. You can do that here.

  37. Here at Bridge Management Consulting we are experts with SBA loan defaults, personal guarantees, lien removals, Offer in Compromises, etc. Feel free to contact me anytime to discuss any type of SBA loan issues that you may have or may see in the near future.