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SBA Loan Default: What Happens When You Default & What You Can Do About It

    Merchant Maverick Contributor
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    Raquel Torres

    Hi so my mother in law just got served with seize papers on the house we live in. Her husband which has been deceased now for some years is the one who did the loan in 2006 and now all she gets is 700 a month and hasn’t been able to pay on it since he has passed. She is now disabled. I have a 3 kids and unfortunately my husband cannot afford the 73,000 worth of debt that has been inherited basically to him.. What can we do at this point to try and save this house and our family from being on the street? We have until March 9th.

      Jessica Dinsmore

      Hi Raquel,

      Ugh, what an unfortunate situation… I’m so sorry. You can attempt to contact the SBA to find out if there’s anything they can do (i.e., an offer in compromise), at this point, it may be unlikely, but it certainly doesn’t hurt to try to find out if you have any other options. If you aren’t able to get anywhere going that route, you should contact a lawyer. At the very least, you can get a consultation (which is usually pretty low cost) to find out if there are any options available to you at this stage in the default process. I hope this information helps you find some relief. Best wishes to you!


        I have an odd one.. what if this 60day demand letter was never received but the bank (local bank) still has a lien against the business? Filed BK7 which included sole proprietorship in ’16. Was told business assets would be kept if reduced homestead exception. Have been able to rebuild but now want to incorporate except lien exists. Have contacted the bank in hopes we can settle this without too many issues and costs especially given the times of the day. Hoping I might be able to get some feedback as to what I might expect. Thanks

          Jessica Dinsmore

          Hi N.A.,

          We’d recommend talking to an attorney. With regard to liens, there are usually specific steps to follow and an attorney can help you negotiate the process. And oftentimes, getting communication from an attorney can be enough to get the process initiated. Best wishes to you!

            Nathalie Goldie

            I have a client who’s currently under escrow and has caivrs SBA Default 2006 Louisiana Hurrican Katrina Aftermath / Disaster Loan. We reached out to SBA and they said that they transferred the loan to US Treasury. We call US treasury said that Mr Wiley does not have any federal debt.

            For 30 days we’ve been going in circles, either waiting for a payoff from SBA if there’s still a debt or we get referred back to US Treasury and US Treasury states Mr Wiley does not have any debt.

            Any input would be appreciated.

              Jessica Dinsmore

              Hi Nathalie,

              Typically the Treasury is pretty aggressive with debt collection, so if they’re saying it doesn’t exist and the client isn’t getting notices from them, that’s pretty odd. Do you know if your client’s tax refunds or wages have been garnished? That’s a fairly long time, so it’s possible the debt got paid down but CAIVRS didn’t get updated? Are you able to get the Treasury’s statement in writing? Was the loan underwritten by any entity other than the SBA (you might have to contact them)? If all else fails, you can try to get the escrow holder to waive the requirement. Best of luck with all this!

                Larry Frutkin

                I have a business that has been hit very hard by COVID. We have a potential buyer at 40% of what is owed on the loan. Have you seen the SBA willing to negotiate a lower payoff amount to prevent the business from closing and to get the loan off of their books? Thank you

                  Erica Seppala

                  Hi Larry!

                  From all the research I have done, I don’t believe that the SBA will negotiate a lower payoff amount for businesses that are still in operations. There is an Offer in Compromise (OIC) program, but unfortunately, this option is available only to businesses that can’t afford to make their loan payments after liquidation. I would certainly encourage you to reach out to the SBA to find out about the best options for your business. Good luck!


                    If I settled an SBA loan in 2010. How long does the offer in compromise stay on my federal record? When would I be eligible to get another SBA loan?

                      Jessica Dinsmore

                      Hello Gene,

                      Unfortunately, we aren’t sure if it ever comes off. This is what we could find on the SBA website:

                      While SBA will no longer attempt to collect this debt, the compromising of it (not paying the entire balance in full) may preclude you from borrowing funds from any federal agency in the future.


                        What will happen if I leave the country forever with a debt?

                          Jessica Dinsmore

                          Hey Mike,

                          Avoiding debt repayment is pretty far outside of our expertise, so it may be best if you seek advice from an attorney, which I am not. That said, you will continue to owe on your debts in this country until they are paid. And in some instances, passports can be refused and any assets remaining in the U.S. would potentially be at risk. It would probably be easier (for the sake of your mental health) to try to settle the debt in one way or another. No amount of money is worth your peace. I wish you all the best.


                            What do I do if the bank did everything in their power to get me to close on a bad SBA loan? What I mean by that is that the bank was the one who recommended the due diligence company who basically did not detect that the business I was buying was fraudulent or at least worth a lot a lot less than what I paid for it. The bank also recommended the attorney that represented me on the DL, little did I know that that attorney did not represent me in my best interest. Now I can’t pay the note. I’m worried about losing my home and everything I’ve worked for. I hate to sound like a victim but I really was victimized in this case. If anyone has any tips I’d depreciate it.

                              Jessica Dinsmore

                              Hey Jay,

                              That sounds terrible! I’m so sorry that happened to you! I think it would be in your best interest to seek legal counsel, as this is pretty far outside our area of expertise. If you call the Bar Association in your jurisdiction they may be able to refer you for a low-cost consultation, or possibly other helpful resources. You may also consider contacting the Consumer Financial Protection Bureau. All the best!

                                subhash patel

                                i paid off sba 7a loan and still sba says that i did not pay i have aletter form the bank that loan is paid in full but bank did not pay sba new what to next
                                subhahs patel

                                  Jessica Dinsmore

                                  Hi Subhash,

                                  If you have a letter from the bank proving the loan has been paid, I’d suggest you provide a copy to the SBA.

                                    Andres A Yaya

                                    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.

                                      Jessica Dinsmore

                                      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!

                                        This comment refers to an earlier version of this post and may be outdated.

                                        Jason Milleisen

                                        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!

                                          This comment refers to an earlier version of this post and may be outdated.

                                          Jason Milleisen

                                          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.

                                            Jessica Dinsmore

                                            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.

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