When your business is in default and you begin settlement or workout discussions, it’s important to take steps to protect your bank accounts.
Many clients ask us, “Can bank accounts be garnished in an SBA loan default?” Simply put, yes they can. So here is what you need to know if you are at risk of being garnished in an SBA loan default.
When your business enters into default with your creditors and begins settlement or workout discussions, it is important that you take steps to protect your bank accounts. Creditors have a variety of ways to attach and garnish both business and personal accounts for defaulted borrowers and guarantors, so it is critical that you take the below measures to protect yourself from your creditors:
Right of Offset
This is the most common method of collecting on bank accounts because it requires minimal effort on the part of the creditor. Simply put, the right of offset gives a creditor the right to sweep any cash you keep in bank accounts within their institution. For example, if you owe “Bank X” on a secured business loan and you also keep you deposit accounts with “Bank X”, as soon as you enter into default on your loan, the bank can use the cash in your deposit accounts to pay down the debt you owe to them. Moving your deposit accounts out of banking institutions to which you owe money removes their ability to offset your accounts. In short, if you are banking at the same institution where you owe money, you must move these accounts immediately, or you will be subject to an SBA garnishment in a default situation.
Post-Judgment SBA Garnishment
For creditors who do not have the right of offset, they can still collect on bank accounts once they obtain a judgment. In most states, this requires that the creditor sues the business and that the court award the creditor a judgment. Once that judgment is received, the creditor can make garnishment actions against any known bank accounts of the debtor. We suggest moving any accounts that your creditors may be aware of because if they know where you are banking, they can issue a garnishment to that institution. Any funds held at that bank in your name can be frozen and turned over to your creditors. In the past you may have sent them a check from that account, given them the right to ACH, or submitted other certified funds, which indicate which bank you use and what your account number is. Armed with this information, a creditor will use it against you. By opening new accounts that your previous creditors are unaware of, you significantly reduce the likelihood of garnishment because even with a judgment, a creditor will not know which bank and which account to garnish – keeping your cash safe from a collection, at least for a period of time.
Although this action is rare, a creditor can garnish a bank account before obtaining a judgment. As stated above, they must know the location where you are keeping accounts, so change your bank accounts before entering default with your creditors. This is rare and aggressive action on the part of your creditor, but be aware, it can happen.
Changing both your personal and business bank accounts and keeping the location of accounts unknown to creditors is a simple step that creates protection for your cash. Not following these instructions can result in loss of personal savings, an inability to make payroll, or an inability to order necessary products and services.
Way too often do we have clients that fail to listen to these simple instructions because, “it is too much of a hassle” or because “I have everything on autopay and ACH, it will take too long to change over.” Would you rather go through the hassle of changing your bank accounts or would you rather miss your payroll because your accounts got swept? The answer is simple, don’t overlook this small measure, make sure you move your bank accounts when entering default with your creditors.
If you have any further questions on this topic or if you are struggling with any other debt related issues. Feel free to contact us for a free no-obligation consultation.