A Small Business Administration (SBA) loan is a government-backed loan provided through private lenders to give small business owners access to funding they might not otherwise get.
Business assets and a personal guarantee from the business owner back most SBA loans. This means that if the loan defaults, the business owner is held personally responsible and their assets may be used to cover the debt.
Going through a small business administration loan default can have serious consequences for both your business and personal finances. The good news is that understanding what happens if you default can help you plan a defense strategy and take steps to limit the damage.
Although many attorneys believe there aren’t ways to defend against foreclosure on an SBA loan, there are strategies you can use. Our foreclosure team has experience with SBA loan defaults and foreclosure cases. Contact Denbeaux & Denbeaux today to schedule a free consultation with an SBA loan default attorney and learn how we can help.
Defaulting on an SBA Loan
If you are late on a payment, it doesn’t automatically mean you are in SBA loan default. There is a difference between being delinquent on a loan and defaulting on an SBA loan. Here’s how it works:
Delinquent Status
An SBA loan is considered delinquent when you’ve missed at least one payment.
At this point, your lender will reach out to you to discuss the missed payment(s) and possible repayment options. Under SBA guidelines, lenders are required to make a reasonable effort to resolve delinquencies before declaring an SBA loan default, so you will have the chance to fix the issue before it escalates.
Default Status
If missed payments continue and aren’t addressed, the loan will typically move into default status after about 60-90 days. However, nonpayment isn’t the only reason a loan can default. Other situations include:
- Not maintaining the required level of insurance
- Failing to pay property taxes
- Closing the business or becoming insolvent.
Once the loan is in default, the lender begins the collection process. Think of delinquency as a warning stage where you still have the chance to address the problem. Once the loan is in default, the SBA loan default process begins, and it can be much more difficult to resolve.
What Happens If You Default on an SBA Loan?
If you’re behind on payments, knowing how the SBA loan default process works will help you understand what happens if you default on a SBA loan. Below is an overview of what to expect:
Step 1: Lender Initiates Foreclosure
Once your loan is in default, your lender will start trying to collect what’s owed, which may include selling off assets tied to the loan (through the guarantee).
Step 2: Lender Files for SBA Guarantee Payment
If the lender can’t recover what’s owed by selling assets or repayment, they can use the SBA guarantee. The SBA will pay the lender the loan guarantee. From that point, the debt shifts from the lender to the SBA.
Step 3: SBA Sends a Demand Letter
The SBA will reach out to you to collect the outstanding loan balance. They’ll send you a 60-day demand letter that outlines how much you owe, when it’s due, and repayment options. Typically, the repayment options include negotiating a lump-sum settlement (known as an Offer in Compromise) or setting up a manageable repayment plan.
Step 4: Loan is Transferred to the U.S. Department of the Treasury
If you don’t respond to the demand letter or can’t reach an agreement with the SBA, your debt will be transferred to the U.S. Department of the Treasury. At this point, the collection becomes more aggressive. In an SBA loan default, the Department of the Treasury has the authority to collect money by:
- Taking a portion of your wages
- Withholding social security benefits or tax refunds
- Pulling money directly from your bank accounts (known as “offsetting”)
Can an SBA Loan Be Foreclosed On?
If your SBA loan goes into default, your lender can foreclose on the property tied to the loan to recover what’s owed. An SBA foreclosure can include any business assets or personal property that was tied to the loan through a personal guarantee.
The SBA foreclosure process often moves faster and with fewer protections than a residential foreclosure. For example, in New Jersey, residential foreclosures must go through the judicial foreclosure process, which requires lenders to provide notice and go through the legal system. In contrast, the SBA foreclosure process can begin as soon as the loan is in default, giving borrowers less time to respond or build a legal defense.
Even though the SBA foreclosure process has fewer protections, you still have options. In some cases, you may be able to fight foreclosure and protect your home.
Can SBA Loan Foreclosure Be Stopped?
While defenses against SBA foreclosures are limited, there are situations where the commercial foreclosure process can be stopped. Lenders are required to follow SBA servicing guidelines and federal foreclosure laws. If they made any mistakes, you may have grounds to challenge the SBA loan foreclosure.
Common defenses include, but are not limited to:
- Loan Servicing Errors: If your lender didn’t provide proper notice, didn’t offer loss mitigation options (like loan modifications), or misapplied your payments.
- Violation of Foreclosure Law: If your lender used fraudulent defaults, charged excessive default interest, or used improper lending tactics.
- Personal Guarantee Disputes: If the guarantee was signed incorrectly, wasn’t notarized, included misleading terms, or was signed under pressure or misrepresentation.
If you think you have a case against SBA loan foreclosure, contact a foreclosure attorney as soon as possible. The earlier you act, the more options you have to stop foreclosure. Contact Joshua Denbeaux today to learn more about how we can help.
Long-Term Consequences of Defaulting on an SBA Loan
If you’re behind on payments, you may be wondering, “What happens if you can’t pay SBA loan?” In addition to the immediate collection process, an SBA loan default can create other lasting financial consequences, including:
- Credit Damage: A default is reported to credit bureaus, lowering your score for years. This can make it harder to get approved for loans, housing, or certain jobs.
- Personal Liability: Because most SBA loans require a personal guarantee, your home, savings, or other personal assets may be at risk.
- Tax Implications: If part of your debt is forgiven through settlement, the IRS may treat the forgiven balance as taxable income.
- Federal Program Eligibility: A default can prevent you from receiving future SBA loans, other federal financing programs, and some government contracts.
- Ongoing Collections: Once transferred to the Department of Treasury, collection methods such as wage garnishment and bank account offsetting can continue for years.
The impacts of defaulting on an SBA loan are serious and can have financial implications for years. The earlier you act, the more options you have to prevent the situation from escalating.
How an SBA Loan Default Attorney Can Help
If you are concerned that you may default on an SBA loan, having an experienced SBA loan default lawyer can make a significant difference in your case. An SBA loan default attorney can help you challenge improper foreclosure or collection actions, negotiate to reduce your debt or better repayment terms, and protect your personal assets from collection tied to personal guarantees.
Contact Denbeaux & Denbeaux today for a free consultation to learn how we may be able to help you prevent default on an SBA loan.
