An SBA loan is a loan to a small business that otherwise would not qualify for a loan through normal business lenders. The small business receives the funds because the lender’s risk is mitigated by the Small Business Administration’s guarantee. If your loan goes into default, the government will cover the losses of the lender up to 90%. A great program to get our economy stimulated and likely responsible for the creation of millions of jobs.
But there is another side to the coin. Because of the structure of these loans, they are simply riskier bets and more prone to default. So what happens when you find yourself in default on your SBA loan. How do you navigate this tricky situation?
We have been helping clients navigate through difficult business debt negotiations for decades and have organized this page to provide many resources you would need if you are facing a default on your SBA loan.
We have organized this page around the various stages of default that you may find yourself in currently so that you might find a solution.
- Early Default: What are your options to remedy this problem?
- What assets could be in jeopardy? How do I protect myself when in default on my loan and a resolution is not reached?
- Offer in Compromise (The SBA Debt Settlement Process)
- Life After Default
Early Default: What are your options to remedy this problem?
If you are struggling to make your SBA loan payments this could just be the symptom of a much bigger problem your business could be facing. Perhaps you never had the working capital you needed to reach your goals, maybe a large customer is slow paying you or you were a victim of the housing market collapse. Whatever the case may be, you should first start by making reductions in overhead, growing sales and managing your finances better. Read this article to understand the best way to prioritize your business debts and create a manageable debt repayment plan.
Next, If these efforts still fail and you are facing default on your SBA loan, you should first explore options with your lender for a SBA loan modification or deferment. The lender has some flexibility in allowing you the time to get back on track with your SBA loan payments, but it is a delicate dance. You cannot show too much cash flow, or you will be told to start paying as agreed. You also cannot show too much stress as your lender may simply elect to move you into liquidation. If you are seeking a SBA loan modification or deferment, you must read this article to understand your options.
Lastly, if your lender denies any modifications or deferments, they you really need to consider a debt workout, restructuring or an exit from the business, preferably one that has you coming out of it without losing everything. You should consult an expert such as Second Wind who can take you through this process and help you end up on top.
You should also consult with an attorney who specializes in these matters, but keep in mind that most legal defenses will fail. You borrowed the money and cannot pay it back, so your creditors will likely obtain a judgement against you no matter what you do. You can read more here about why legal defenses on SBA loan defaults fail.
What assets could be in jeopardy? How do I protect myself when in default on my loan and a resolution is not reached?
When you enter default on your SBA loan, your business bank accounts could certainly be in jeopardy. If you are keeping accounts in the same bank that is holding your loans, the lender would have the “right of offset” that allows them to take funds from your accounts to cover past due payments. Definitely keep this in mind and consider moving these funds to a new bank. You should also be aware that lenders have other means of getting to your bank accounts, even if they are in a different financial institution. You can read the article below for an in-depth guide on protecting your bank accounts, personal ones as well.
When it comes to the topic of losing your home, most business borrowers share the same anxieties about the prospect of being forced out of their house. Some SBA loans require a borrowers home be put up as collateral, some do not. However, if the bank does not have a lien on your home, it doesn’t mean you are off the hook, they could still go after this asset. To understand if your home is at risk, read this post which will outline various scenarios to help you understand your options.
How about your retirement accounts? Clients ask us all the time if their creditors will come after their retirement savings. There is no clear cut answer to this question as it depends on the laws in your State of residency, but generally most States have some laws in place to protect your nest egg, but it is not the case everywhere. Definitely do a little research and read our guide to understand if your creditors could attach to your retirement accounts.
Offer in Compromise (The SBA Debt Settlement Process)
The SBA has a specific process for helping borrowers who have defaulted and liquidated their business. You can settle your SBA debt by filing an offer in compromise directly with the lender who issued the loan. Based on our experience, the bank evaluates each settlement offer based on specific criteria that you must meet. If you meet their requirements for a satisfactory offer, it goes through several levels of approval before your settlement offer is accepted and you are relieved of further liability. You should know that IT IS POSSIBLE to settle your SBA debt for a fraction of the balance, we do it all the time for our clients. You can read more about the process by reading the two articles below:
Life After Default
So you have successfully settled your SBA loan obligation. Congratulations! Time to move on with your life and rebuild your finances, credit and confidence as a business owner. But before you move on you need to make sure you clear any remaining SBA liens, judgements and that you will not have any remaining tax obligations.
There is a debt forgiveness boogyman known as Debt cancelation income. The IRS once decided that if you are forgiven of $600 or more of debt that this is equivalent to your receiving income, so they have you account for the forgiveness as income on your tax returns. Yikes! This could be a massive tax bill if you receive forgiveness on a massive business loan. But don’t worry, the majority of our clients never pay any taxes on their debt forgiveness. Read how we do this in the below article.
As described above, many SBA loans require a lien on your personal residence. When you settle your SBA debt, you definitely want to make sure you follow the process for also obtaining a lien release on your home. When you are settling your debt, you want the bank out of your life forever, so do not make the mistake of settling your personal guarantee but leaving the liens in place. They could once again come back and bite you many years later when you have forgotten about them. Read this article about the process of getting these liens removed.
What if You Still Need Help?
Call Ken at 413-584-2581 and we will be delighted to review your situation and provide an honest assessment of your current debt situation. We have seen almost any debt problem imaginable and could help you navigate through these problems. We offer a no-cost, no-obligation consultation where we can discuss your specific circumstances and design an effective strategy that will yield the best results for you.