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).
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.
Hello, Can the sba garnish wages in the state of Texas.?
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?
Karen you can send me an email or call me anytime. I do SBA debt settlements and workouts everyday here at Bridge Management for defaulted businesses. Ryan@BridgeMgt.com. Don’t hesitate to ask any questions.
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!
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
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
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
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?
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
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.
Jason, you interested in writing a guest post for Lendio about SBA offer in compromise?
Hi Dan,
I would be happy to write a guest post. Please email me (jason@jasontees.com) or call me (877-436-4533) so we can discuss the details.
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!
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
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?
Ehlers, yes the SBA can go after every guarantor individually for the full amount owed. If they do not get a proper OIC submitted they will pass it down to the US Dept. of Treasury. You do not want that to happen! Feel free to email me anytime. Ryan@BridgeMgt.com
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.
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.
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.
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.
Monica, you should talk to an attorney about your particular situation.
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.