SBA Loan Default: What Happens When You Default & What You Can Do About It
A small business owner may be passionate and committed to their ideas, but things don’t always go according to plan. If you lack funds or are worried about making payments for your SBA loan, it may be time to start learning about delinquency and defaulting on loans.
Table of Contents
From Delinquent To Default
A loan will go into default when a borrower repeatedly fails to meet the legal conditions of the loan. Before you default on a loan, chances are the loan will first be deemed delinquent. Although they aren’t exactly the same problem, both loan delinquency and default can do serious damage to your credit score. A loan becomes delinquent as soon as you have missed or are late making a payment, even if only by one day. If your loan becomes delinquent, your lender may charge you late fees or increase your interest rate. If you don’t take care of a delinquent loan quickly, it can easily lead to a default.
When Is My SBA Loan In Default?
Depending on the specifics of your loan agreement, a delinquent loan will fall into default status after a certain amount of time has passed and no action has been taken on the outstanding balance. Lenders will usually wait anywhere from 90–120 days before considering a delinquent loan to be in default.
What Happens If You Default On An SBA Loan
If no alternative options are possible, or you have no ability to make payments, your lender may force you to default on the loan. They will then begin standard loan collection procedures, as outlined on your SBA loan agreement.
First, your lender will contact you via phone and email. You should know that FTC guidelines that restrict how often, when, and how collectors may contact you don’t apply to business loans, so any restrictions on this communication will depend on which state your business operates.
The bank will then be able to seize any collateral you put up on the loan, first business assets and then personal, per your agreement. If your business has failed and there are no remaining assets to fulfill repayment, your personal guarantee will be invoked. Alternatively, they may force you to sell your assets, or obtain a court order demanding any money in your business accounts.
If the loan is still not repaid in full, the lender will then file with the SBA for the guaranteed portion of the loan, minus any amount they were able to collect through alternative means.
Although the loan will have been fully paid back to the lender at this point by the SBA, the process is unfortunately not over. The SBA will then contact you for repayment of the funds they gave to the bank as part of your SBA loan agreement. This communication will come in the form of a “60-day demand letter.” This letter states that, unless you respond within 60 days, your case will be transferred to the Treasury Department.
If you cannot pay what the SBA is demanding, you’ll need to put together an “offer in compromise”: a proposed payment plan, or lump sum of money, to settle your debt. This compromise will open a dialogue between you and the SBA to settle your debts in an amicable manner.
When creating an appeal, you will need documentation of tax returns, business and personal assets, income statements, expense reports, and more. These documents should serve as proof that you cannot repay the borrowed funds to the SBA in a reasonable time period, and show you are in need of a more lenient payment plan. If your argument is convincing, the SBA might accept the offer, even if it amounts to less money than you owe.
If you do not respond to the 60-day demand letter, or the SBA does not accept your offer in compromise, your case will be transferred to the Treasury Department. The Treasury has the ability to garnish wages, withhold future tax refunds, or file suit against you in a civil court. They will collect the debt by any means necessary if you have not resolved by the given deadline. While it is still possible to settle at this point, it is much more difficult, so it’s recommended that you work with the SBA before it gets to this point.
Tips To Avoid Defaulting On Your Loan
Communicate With Your Lender
If you’re struggling to make payments on your loan, you should first contact your lender to discuss your position. This is always preferable to waiting until the problem worsens. You may find a better way to fix your temporary financial issues by speaking with your lender transparently, rather than waiting for the loan to default.
Create A Modified Repayment Plan
If you communicate honestly with your lender, they may be open to helping you create a more feasible payment plan or reducing the overall cost of your loan. SBA partner lenders are almost always willing to work with borrowers since they lose money when they have to chase down someone in SBA loan default. You can expect any proposed repayment plan to be largely in favor of the lender, but it will most likely be a better option than defaulting.
Final Thoughts
Above all else, remember that defaulting on an SBA loan is serious, but it is not the end of the world. Although it can be a stressful time, it is possible to recover after you’ve settled the debt. Do what you can to avoid defaulting, but if you must, just keep moving forward, and keep improving your financial health!
Merchant Maverick Contributor
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I am getting refinance thru VA (I am veteran), but they want to settle a SBA loan orig 12,500 in 2009.
I filed Bankruptcy in 2013 October Discharged. SBA included and did not protest. The issue is now with
Treasury. The Treasury never contacted me on claim now or even since I bought my House with FHA in
2015 May. Now they let me know of money due. I will call Treasury Dept Thurs 7/18 and ask If they accept 12,500 orig balance or balnace now ( from your experience is it orig balance or recent with interest). I can pay 70/80% of balance 12,500 or recent which is 10K plus 3.5 K or 13500 payment in one shot minus % from 2009 or 2013 BK date to present. Will they accept my offer? Can I do offer in compromise? Will this get me off the record to continue my VA loan, which is 3.20% better than 3.75% now, delete PMI , reduce my monthly from 1,500 to 1,300 (I will get Cash back from equity 10 K and payments 1300 still at 3.2%….. House went up 50K but I didnt want cash, only this time due to SBA default). Will the Tresaury let me slide …. If I pay 12,500 in one shot instead of 3 yrs (also because I want to get good Loan NOW}. Will they forgive the years from 2009 or 2013 until Now? I was ignorant about the debt because I was told BK took care of that, Please respond
This comment refers to an earlier version of this post and may be outdated.
Hi Andres,
This is really outside of our expertise, unfortunately, and we wouldn’t want to give you advice we aren’t too sure about. I’d suggest contacting legal aid services in your area and consulting with a lawyer that specializes in this area of law. We are so sorry we couldn’t help, and we wish you all the best!
Hi Andres,
I know this comment is a few months old, but wanted to chime in just in case someone else has a similar question.
In some cases, I’ve had clients who either filed for personal chapter 7 bankruptcy OR have settled their SBA debt, yet they still get a letter from the Treasury. In my experience, there are a few different explanations:
1) The letter is addressed to the business entity, NOT you personally. If the business is closed and dissolved, there isn’t much that the Treasury/SBA will do to collect. If you were discharged from chapter 7 (personal) BK, they can’t come after your personal assets.
2) It’s a mistake. I’ve have a fair number of clients get letters from SBA even after we settled. In each case, we send a copy of the settlement agreement and it got resolved.
If your business filed for a BK, and you are still personally liable, settling with the Treasury is typically difficult. At best I’ve seen settlements of 50% (years ago) but more recently they want 70-80% of the entire balance (including their 28% fee). Payments plans are possible, but typically require that you repay the entire debt in full over a short period of time like 3 years.
I hope this helps!
Hi! I just wanted to clear up an error in your article. The 60-day letter that comes from the SBA is your LAST chance to settle with the SBA or the lender. This article stated that the 60 day letter states “that your case has been transferred to the Treasury Department”. This is not the case. The 60-day letter gives you 60 days to contact the SBA (it’s a department known as Treasury Offset, so it can be confusing), and if they don’t hear from you at that point, then it goes to Treasury.
And to be clear, settling with the Treasury is VERY difficult, and almost always MUCH more expensive than if you settle directly with the lender or the SBA. So if you get a 60-day letter and want to settle, that is your last chance to work out reasonable settlement terms (let’s say in the 5% to 40% range). Otherwise, the Treasury, who usually offers the same terms to everyone, will want 70% to 80% of the loan balance. And that’s after they hit you with a 28% penalty, which means they REALLY are going to seek the entire balance from you. And they always require lump sums. If you want to a payment plan with the Treasury, they will require you to pay it off in full over an extremely short time from of 2-3 years.
I used to work for the largest SBA lender in the USA, and I now work exclusively with borrowers who can’t afford their SBA loans. I can tell you definitively that if you want to settle your SBA debt, DO NOT WAIT until the file goes to Treasury. I’ve had borrowers tell me that their attorney or CPA (who knows nothing about SBA) told them to wait it out, and eventually the SBA will settle for pennies on the dollar. This may work for other types of creditors, but not the SBA.
This comment refers to an earlier version of this post and may be outdated.
Hi Jason,
Thank you so much for bringing this to our attention! We will be updating the review to reflect this new information. Stay tuned!
This comment refers to an earlier version of this post and may be outdated.