Understanding your SBA Default
SBA default – In reality, you have really taken on a loan with the Federal Government. In order to assist entrepreneurs build their business by having access to lending, the SBA was created. However, the SBA is actually lending to the bank that participates in SBA lending and not directly lending to the business. The SBA provides less risk and more incentive for the bank as it guarantees a percentage of those loans to the banks.
A SBA default becomes the duty of the federal government to pursue you for payment and not just the bank. As a result any compromise you make with the bank for repayment has to be approved by the SBA as well, since they have more to lose as it is their money that has guaranteed these loans.
A SBA default will result in the bank will trying to collect the debt through phone calls, letter writing, making you aware that you have defaulted, and possible solutions to get out of the default. If after this, if the SBA default is not satisfied, or no arrangement has been made to bring payments up to date, then the lender will move on to collections through their rights under the SBA loan agreement. This may include a forced sale of collaterals used to secure the loan. Unfortunately, this almost always includes all business assets and depending on the amount of the loan, generally includes the debtor’s home and other real property they may own.
By forcing an auction of all of the business assets, the lender may force the shutdown of your business. Further, the lender may also foreclose on your home or other real property that you may own. Eventually, the lender will have utilized all their avenues for recovery, and will make a claim against the SBA guarantee to collect what they were promised as payback from a defaulted loan.
At this stage, the SBA will now take over. A 60 day demand letter will be sent to the defaulter, requesting that the deficit balance be paid in full, or to present the SBA with an “offer to compromise” of the claim. This is similar to doing an offer to compromise with the IRS on your taxes, however the process is much more lengthy. The process involves an evaluation of your finances to determine whether they will accept an offer to settle the balance owed for less. They prefer to have the claim settled in a lump sum, however with a good debt lawyer that has worked on SBA claims previously, a settlement in installments may be achieved.
An offer to compromise will need the debtor to provide business and personal taxes for the last few years and to disclose all of its assets and debts. The offer that is presented must not only be fair, but also realistic, in other words, the debtor’s finances must support its offer.