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The Legal Defense for SBA-Backed Bank Loan Default

Article | June 22, 2019

Here’s what you need to know if you are in default on your SBA-backed bank loan and the bank has filed a judgment against you. *As of June 1, 2024, does not apply to EIDL loans.

When a business enters into payment default on an SBA-backed bank loan, the SBA and the bank often take legal action against both the borrower and the guarantor. They will sue for breach of contract and pursue a judgment as the initial steps in the foreclosure of the business and its assets. Judgments are awarded to creditors once they have sued a business and proven to the court that money was owed to them that was not paid by the borrower.

Once a judgment is received, the lender can then use a variety of post-judgment actions to collect against the business. These include garnishing wages, levying bank accounts and foreclosing on the business and personal assets.

If you’re currently in this situation, you’re probably asking yourself, what is the best legal defense for SBA-backed loan default?

Judgments Go to the Lenders

Here’s the harsh reality.

There is generally no legal defense for an SBA-backed loan default.

Despite this, business owners typically hire an attorney, begin creating a response to the lawsuit and hope for the best. The problem is that often the judgment is awarded to the lender despite whatever defense is presented, thus rendering this effort futile and a waste of money. At best, attorneys may delay the process, but most do not have the ability to stop the inevitable.

The bottom line is: if you and your business took out a loan, experienced the benefit of that capital and then were unable to repay as promised, the lender has a right to receive a judgment. Only in rare cases where fraud or negligence has occurred on the part of the lender might there be a defense that can stop a judgment.

So now youwho are already struggling financiallyhave spent money you can’t afford on legal services, just to be faced with the probable loss of your business anyway.

But There’s Good News

So what can you do to avoid foreclosure on your assets and bankruptcy? You can pursue a debt workout and business reorganization with Second Wind Consultants.

There is only so much money you may or may not have available to pay back a loan, and that is constant whether a lawsuit is filed or not. Lenders and the SBA truly understand that they can’t squeeze blood from a stone, and, like you, they don’t want to waste money on a lawsuit either. There is a middle ground that provides significant benefits to both sides, and Second Wind can lead the way.

I Opted for a Debt WorkoutNow What?

If you choose to pursue a debt workout, your next step is simply to cooperate with your lender, and if appropriate, consent to the judgment rather than fighting it.

Why?

Because by cooperating with the lender and focusing on working together towards a debt workout and settlement, you give lender little incentive to take any post-judgment actions against you. If the SBA and the lender believe that you are working in good faith to resolve the defaulted loan and that the workout plan will net them the same amount that collecting on their judgment would, they will likely settle with you even after receiving their judgment.

The lender may still obtain a judgment before accepting any settlement, but they do this to “preserve their rights” and secure their ability to collect should a settlement not be reached. They also have a duty to show the SBA that they have followed the required guidelines of, “exhausting legal remedies against the defaulted borrower and guarantor…”

As nerve-wracking as this may be, Second Wind will guide you through every step of what comes next. Rather than focusing on a way to delay or stop the judgment, we will create a debt workout strategy that the lender and SBA can support. The victory is in building a plan that meets the lender’s and the SBA’s guidelines and that gives the lender a financial incentive not to use the judgment once it’s awarded.

Yes, resolve business debt.

Find out more about the rational and ethical path to preserving the value of your business and resolving unsupportable debt.

Here’s what will happen next:

  • Initial Assessment

    We'll contact you for an initial fact-finding conversation to assess your situation.

  • Full Debt Consultation

    We'll schedule a no-obligation, one-hour consultation with a RISE Debt Resolution Strategist within 24 hours.

  • Know Every Option

    You decide the path that is in your best interest.

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