What happens if I default on my SBA loans?



What happens if I default on my SBA loans?


Covid-19 hit small businesses hard, leading the U.S. government to initiate several programs aimed at supporting struggling American businesses. As part of the U.S. Small Business Administration’s (SBA) Disaster Assistance program, these efforts included the Paycheck Protection Program (PPP), which played a central role within the Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020. The PPP was designed to provide vital resources to small businesses, enabling them to sustain their payrolls, rehire laid-off employees, and cover essential overhead costs during these challenging times. The CARES Act, along with the subsequent Coronavirus Response and Consolidated Appropriations Act of 2021, swiftly delivered direct economic assistance to American workers, families, small businesses, and various industries in need.


What was the plan? 

The ability to pay staff and suppliers with government assistance certainly allowed many small businesses to stay afloat, but how were these businesses expected to pay back the loans? At best, restaurants, and other businesses had a fraction of their clientele ordering through Covid-19 while many were forced to entirely close down. This meant they required assistance to sustain operations, and to ensure lights stayed on and employees got their paychecks. However, they never generated surplus income to repay the loans, leaving it uncertain whether the SBA will initiate efforts to recover the loans or if most beneficiaries can ultimately meet their repayment obligations leaving many asking the question of what happens if I default on my SBA loans? 


American SMEs Took out a lot of loans

Most American businesses which were given loans during 2020 and 2021 received loans under one hundred thousand dollars. There is speculation that the US government won’t go after SBA loans that were handed out under the benchmark amount of $100,000 but that is yet to be determined. SBA themselves who gave out 12 million loans said they are not going to try to collect on loans under the $100,000 benchmark. However, the government certainly has the right to do so and it is yet to be determined which loans SBA will seek to collect. By law, if it would cost the agency more money to collect the loan than what they are likely to recuperate, the agency does not have any obligation to collect. Banks distributed PPP loans, and government investigations revealed that some financial institutions adopted a lax stance toward fraud, driven by the profit motive of processing more loans, since the government would ultimately bear the cost when ineligible loans were approved, rather than the banks. Banks had the duty to ensure debt collection was attempted before passing the loans off to the government but the banks were not forced to show that they had made any attempt at all. 


SBA loan defaults

An SBA loan default occurs when you repeatedly fail to meet the legal terms of your business loan agreement, typically marked by continuous missed payments and an inability to reach a resolution with your lender. Many people are asking themselves “What happens if I default on my SBA loans?”.  Before reaching default, your loan is considered delinquent when you start missing payments, prompting your SBA lender to contact you for repayment. Failure to pay or communicate with your lender within about three to four months leads to SBA loan default. In the event of default, your lender initiates a process that involves seizing any collateral, including real estate, inventory, and equipment, used to secure the loan. They may also claim personal assets based on personal guarantees. The lender may then file for an SBA guarantee, seeking government repayment. The SBA, even after repaying your lender, holds you responsible, sending a 60-day demand letter. You can submit an offer in compromise (OIC) to settle the debt, provided you demonstrate an inability to repay within a reasonable timeframe. Legal assistance from a business attorney can be invaluable during this process. If no resolution is reached, your account may be transferred to the U.S. Treasury Department, potentially leading to wage garnishment, legal action, or other collection methods. To prevent SBA loan default, consider reevaluating your business finances, discussing payment challenges with your lender, and seeking professional guidance from experts like certified public accountants or attorneys.


Can you discharge your SBA Loans? 

Typically, a bankruptcy discharge absolves you of personal liability for your debts but doesn’t remove a lender’s lien or security interest in your property. Consequently, if you default on a secured SBA loan and declare bankruptcy, what happens is the lender cannot sue you personally for debt recovery, but they can retain the right to reclaim any collateralized property through foreclosure or repossession. This means that if you utilized assets as collateral for your SBA loan, the lender can still enforce its lien even after you’ve filed for bankruptcy relief.  If your business didn’t survive the pandemic, there is no reason you should be concerned about declaring bankruptcy to discharge your SBA loan debt and other debt you may have accrued. However, if your business is still operational, and you borrowed less than $100,000 you may consider waiting to see if SBA actually tries to collect on the loan. Regardless of the amount, if you are already certain you want to declare bankruptcy, including the SBA loans in your list of creditors would certainly be a preemptive way to ensure the loans don’t come back to haunt you. However if you borrowed over $100,000 and you are unable to repay your debts, you may consider bankruptcy as a way to either discharge all of your unsecured debts under a Chapter 7 or reorganize your debts and make a plan that allows you to comfortably repay your debt under Chapter 13. 


If I happened to be in a position where I had SBA loans that I may default on soon, what I would do is contact a California licensed attorney.  Bankruptcy law is complicated and there are a lot of caveats in determining what is best for you. If you have SBA loans or any other kinds of unsecured or secured debt you want to reorganize, we can help.  If you have questions or concerns please contact our office and we can help you to determine what are the best options for you and whether a bankruptcy is in your best interest. We offer a free consultation with our inhouse lawyer Christopher Hewitt Esquire. 

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