Owners with at least least a 20% stake in an SBA loan financed business will be required to execute a personal guarantee. This means that, as an owner, you are promising to pay the SBA lender and/or the government in the event the Borrower (your business) defaults and can no longer make the loan payments. If you believe your business is in trouble, SBA debt relief options may be available that could release you from your personal guarantee, including:
(i) a loan assumption under which a third-party takes over your business and your SBA loan (in such instances you may be able to negotiate a release of your personal guarantee, but this is not automatic);
(ii) a sale of your business assets to a bona fide third-party for value followed by an offer to settle the remaining balance due – known as an SBA Offer in Compromise; and
(iii) a SBA loan modification, if your business can be saved by change in your loan terms. The SBA lender may agree to an SBA loan modification adjusting the balance, loan payment, term or the interest rate of your loan.
If you fail to honor your personal guarantee, the SBA lender can file suit against you in a court of law to collect the debt. Even if the SBA lender chooses not to do so, the SBA can also choose to do so, or the SBA may simply refer your SBA debt to the U.S. Treasury for collection through the administrative offset process. Once in Treasury, you may be subject wage garnishment as well. Therefore, if your business is failing, it essential that you understand your SBA debt relief options.
Get ahead of the problem before your SBA lender begins the SBA loan default and SBA collections process without hearing from you.
If you default on an SBA loan, your lender will frequently file a lawsuit against the borrower and all guarantors. The lender does this as part of a mandated process to maximize recovery before requesting the SBA to honor their loan guarantee agreement. However, we find that even at this stage, a lender will usually consider a reasonable offer in compromise from a guarantor. If the offer is accepted, the suit can be dismissed prior to the entry of judgement.
In many cases, lawsuits are never filed by the lender, but once the SBA pays the loan guarantee to the lender, the lender will assign certain rights to the SBA to collect on the Note and Guarantees. In such situations, the SBA itself may decide to take legal action against guarantors who have significant non-exempt property (e.g., stock portfolios, rental properties) and/or substantial incomes.
If the SBA refers a matter for a civil action, then the U.S. Attorney’s office, Civil Division, will likely prepare and file suit against you in federal court. This can be a shocking event, but it does not mean settlement is off the table. If you have been sued by the U.S. Attorney in federal court, you should consult with your attorney immediately. If you do not respond correctly or in a timely fashion, certain rights may be lost and you may have a judgment entered against you. The suit is a wake up call that the government considers the debt collectible and that previous attempts were perceived as either insincere or woefully inadequate given your income and assets.
How long does the SBA have to file suit?
The SBA has 6-years to file suit against a guarantor in the absence of other events or agreements that might toll (suspend) this period of time. The limitations period will be measured not from the time of your default with the lender, but from the time the SBA took possession of the Note. In short, the government will get its full 6-years even if the transfer of the Note occurred near the end of the lenders statute of limitations (governed by state law). Once SBA owns the Note, federal law will be applied to determine the limitations period and will control in any lawsuit.
It is settled law that state limitations statutes are relevant in determining a claim’s viability at the time the federal agency acquires the claim. If the state statute of limitations has expired before the government acquires a claim, that claim is not revived by transfer to a federal agency. FDIC v. Former Officers & Directors of Metro. Bank, 884 F.2d 1304, 1309 n. 4 (9th Cir.1989), cert. denied, 496 U.S. 936, 110 S.Ct. 3215, 110 L.Ed.2d 662 (1990). However, if it has not expired before the government acquires the claim, then the government will enjoy the full length of the federal statue of limitations.
In United States v. Summerlin, 310 U.S. 414, 60 S.Ct. 1019, 84 L.Ed. 1283 (1940), the Court held “that the United States is not bound by state statutes of limitations in enforcing its rights.” Therefore, the relevant federal statue of limitations for contract actions is contained in 28 U.S.C. § 2415(a) and is six (6) years. Therefore, the SBA, as a federal agency has six (6) years to file a lawsuit to collect, but is not barred by any limitations period in an action to foreclose on real property. In this case, 28 U.S.C. § 2415(a) is silent on foreclosure actions. The Supreme Court has instructed that, as a sovereign, the United States is subject to a limitations period only when Congress has expressly created one. Guaranty Trust Co. v. United States, 304 U.S. 126, 133, 58 S.Ct. 785, 789, 82 L.Ed. 1224 (1938) (citing United States v. Thompson, 98 U.S. 486, 488-89, 25 L.Ed. 194 (1878)). In the absence of such a limitation none exists. In Farmers Home Administration v. Mudhead, 42 F.3d 964 (5th Cir. 1995), the court also noted that there is “absent a specific federal limitation” and commented that “28 U.S.C. § 2415(c) does not apply to actions to foreclose mortgages.” Id. at 966 & n.5.
Therefore, when reviewing a foreclosure action in connection with a defaulted SBA loan, borrowers should not be surprised to find themselves embroiled in a foreclosure action many years into the future and well beyond the state state of limitations for such actions.