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SBA Loan Defaults (FAQ).

I have defaulted on my SBA loan. What Happens Next?

The SBA Collection process follows a more or less standard path as set forth in the SBA Standard Operating Procedures (SOPS). But, to think the SOP’s describe the reality of the SBA collection process would be factually incorrect. The collection process can vary in a great many ways depending on the lender originating the loan and the SBA office handling the file once it is referred. However, in general, the events which follow after an SBA loan default are as follows:

1. The lender will attempt to pursue the borrower to collect the debt, usually resulting in closure of the business and a liquidation of all business collateral;

2. At some point, the lender will have done all they reasonably can to recover on the loan and they will deem the deficiency balance uncollectible;

3. Following a determination that the loan is uncollectible, the lender will make a claim against the SBA guarantee on the loan.SBA guarantees up to 85 percent of loans of $150,000 and less, and up to 75 percent of loans above $150,000;

4. The SBA will then send a 60 day demand notice to all guarantors on the loan as part of the personal guarantee associated with the loan documents. The letter will advise the borrower and guarantors to either pay the balance in full or present the SBA with an “Offer in Compromise” to settle for less than the full balance either in a lump sum payment or a payment plan. This will usually involve SBA Form 1150, SBA Form 770 and the personal financial statements provided when the loan was originated.

5. If you are working with the lender, they will decide whether to send your Offer on to the SBA. If they do so, they will also recommend acceptance, rejection or take no position at all. They don’t have to do anything and many won’t process an Offer in Compromise. In some cases, this is because the lender is unfamiliar with the process or simply believes they should not settle. Processing offers requires resources from the lender that may or may not be available and staff that may or may not be trained in the specific process of assembling the Tabs required for submission to the SBA for consideration.

6. If the SBA rejects the offer, they may entertain a negotiation or they may just pass the file off to the U.S. Treasury Department for action under the Treasury Offset Program (TOP). TOP can collect using a variety of methods, many unavailable to ordinary creditors, including wage garnishment, and garnishment of Social Security benefits and Retirement benefits. The Treasury can also offset against your Federal Income Tax Refund. And, there is no statute of limitations on these collection activities; they can potentially continue forever.

7. Settling with Treasury. At this point, it is very hard to do, but it is not impossible and is done. Settlement Offers are usually much higher than dealing with the SBA and 50% settlements are not at all unheard of when dealing with Treasury.

Can my SBA loan be discharged in bankruptcy?

With the exception of student loans, most government loans including SBA loans are routinely discharged in bankruptcy. Surprisingly, many debtors still believe that government loans cannot be discharged in bankruptcy. However, if a guarantor pledged any assets, whether business or personal, as additional collateral for the SBA loan, it is far from certain whether those liens will be eliminated by the bankruptcy discharge.

Bankruptcy, in general, will not eliminate a lender’s security interest in property. Because your bankruptcy discharge only wipes out your personal liability for your debts, your lender may still exercise their lien rights. This is true even while your bankruptcy is active, although your lender will have to seek relief from the bankruptcy court to do so. Should the SBA elect to do nothing during the bankruptcy, it can simply resume where it left off with its foreclosure action once the bankruptcy case has been concluded.

In Texas, however, a lender cannot require a borrower to pledge a lien on their personal residence because Texas homestead laws forbid it. So, while bankruptcy may not wipe out a lender’s lien on real property, the personal residences of Texas’ borrowers remains secure. However, the same cannot be said about investment real estate. Texas homestead laws will not stop a lender from placing a lien on other investment real estate owned by a personal guarantor. Nor will they prevent a foreclosure. Foreclosing on investment real estate to satisfy the remaining balance on an SBA loan happens all the time.

In conclusion, if you have pledged real estate to the SBA as a part of your personal guarantee, you would do well to carefully review this fact with your attorney. Bankruptcy may not be the answer. Fortunately, there are other options. The SBA will consider settlements under the SBA Offer in Compromise program.

I have an SBA loan. Won’t the government guaranty pay off my loan if I default?

The Small Business Administration (SBA) helps small businesses and entrepreneurs obtain loans. One of the ways it does so is by guaranteeing the loan so that the lender is insulated from the risk of loss. For standard 7(a) loans, the guaranty is for 85 percent of loans up to $150,000 and 75 percent of loans greater than $150,000. The maximum standard loan is $5 million. Many borrowers erroneously believe that in the event of a default they will be protected by the SBA guarantee and that their exposure will be limited to 15-25 percent of the remaining balance on the loan. Nothing could be further from the truth. The SBA guarantee is provided solely for the lender’s protection and to encourage loan origination by protecting the lender in the event of default, not the borrower.

If you default under your SBA loan, expect the business to be closed and all of the collateral pledged by the business to be liquidated as quickly as possible. However, after this occurs if any shortfall remains, expect a letter from the lender inquiring about the personal guarantee and making demand for full payment of all outstanding amounts due and owing on the SBA loan. Once this letter is received, it is best to immediately speak to legal counsel about working with your lender to reach a settlement under the SBA Offer in Compromise program, if you are trying avoid a lawsuit, foreclosure action or referral to the U.S. Treasury for enforced collection under the U.S. Treasury Offset Program (TOP).

A collection agency is contacting me about my SBA loan default. Is this real?

Once a loan has been referred to the U.S. Treasury due to non-payment or default of the loan, the Treasury utilizes several Private Collection Agencies to assist with debt collections. Always verify the collection agency’s information by contacting Treasury at 1-888-826-3127.

Why is the amount I owe Treasury so much higher than my SBA loan balance?

Once an SBA loan is referred to the U.S. Treasury for collection under the U.S. Treasury Offset Program, collection fees may add up to 30% more to your SBA deficiency balance. It is also more difficult to settle your SBA debt and it is not uncommon for SBA debts to settle for 50% of the remaining loan balance. So, it is best to contact the SBA before the loan is transferred to the Treasury.

If I want to settle my SBA loan, who do I contact?

In general, you will reach out to the lender first. Even in the event of an SBA loan default, your lender will generally continue to service the loan. If there is some unliquidated collateral remaining, your lender probably still has the file and has not invoked the SBA Guarantee. if this is the case, you will continue to work with the lender. However, at some point your lender will refer the matter to the SBA for further collection; this usually occurs when your lender feels like they have done all they reasonably can to collect from you.

After the SBA has your file, they will send you the borrower and all guarantors a letter, actually a 60-day demand notice. The letter will advise the borrower to either pay balance in full or present the SBA with documentation for an “Offer in Compromise” to settle for less than the full balance either in a lump sum payment or a payment plan. This will usually include, at a minimum SBA Form 1150, the SBA Form 770 or equivalent, and SBA Form 413 (a copy of the original personal financial statement provided during the origination of the loan). If you have already received such a letter from the SBA, then you may deal directly with them and, unless you are told otherwise, your lender is no longer involved.

Regardless of who is handling your file, you can initiate an offer to settle your SBA debt under the SBA Offer in Compromise program. Settlement under this program is far preferable to suit and/or eventual transfer to the U.S. Treasury for action under the Treasury Offset Program (TOP).

If you need help with an SBA Offer in Compromise, contact an SBA loan default attorney with the Perliski Law at (214) 446-3934 for a free phone consultation to see how we can help, or fill out our online contact form.