Question. I defaulted on an SBA loan. What happens next?
Answer: The SBA Collection process follows a more or less standard path as set forth in the SBA Standard Operating Procedures (SOPS). But, to think the SOP’s describe the reality of the SBA collection process would be factually incorrect. The collection process can vary in a great many ways depending on the lender originating the loan and the SBA office handling the file once its referred. However, in general, the events which follow after an SBA loan default are as follows:
1. The lender will attempt to pursue the borrower to collect the debt, usually resulting in closure of the business and a liquidation of all business collateral;
2. At some point, the lender will have done all they reasonably can to recover on the loan and they will deem the deficiency balance uncollectible;
3. Following a determination that the loan is uncollectible, the lender will make a claim against the SBA guarantee on the loan.SBA guarantees up to 85 percent of loans of $150,000 and less, and up to 75 percent of loans above $150,000;
4. The SBA will then send a 60 day demand notice to all guarantors on the loan as part of the personal guarantee associated with the loan documents. The letter will advise the borrower and guarantors to either pay the balance in full or present the SBA with an “Offer in Compromise” to settle for less than the full balance either in a lump sum payment or a payment plan. This will usually involve SBA Form 1150, SBA Form 770 and the personal financial statements provided when the loan was originated.
5. If you are working with the lender, they will decide whether to send your Offer on to the SBA. If they do so, they will also recommend acceptance, rejection or take no position at all. They don’t have to do anything and many won’t process an Offer in Compromise. In some cases, this is because the lender is unfamiliar with the process or simply believes they should not settle. Processing offers requires resources from the lender that may or may not be available and staff that may or may not be trained in the specific process of assembling the Tabs required for submission to the SBA for consideration.
6. If the SBA rejects the offer, they may entertain a negotiation or they may just pass the file off to the U.S. Treasury Department for action under the Treasury Offset Program (TOP). TOP can collect using a variety of methods, many unavailable to ordinary creditors, including wage garnishment, and garnishment of Social Security benefits and Retirement benefits. The Treasury can also offset against your Federal Income Tax Refund. And, there is no statue of limitations on these collection activities; they can potentially continue forever.
7. Settling with Treasury. At this point, it is very hard to do, but it is not impossible and is done. Settlement Offers are usually much higher than dealing with the SBA and 50% settlements are not at all unheard of when dealing with Treasury.