Understanding SBA Judgments: From Default to Foreclosure to Asset Seizure
The Small Business Administration (SBA) offers a wealth of information, resources and support services to small business owners throughout the country. One popular program that they offer is a loan guarantee, which gives borrowers favorable loan terms and an easier chance to qualify for much-needed financial assistance compared to going directly to private lenders.
While these programs are meant to help small business owners, they are still loans that need to be repaid. If borrowers have trouble repaying the loans, they can face potentially serious consequences.
For instance, defaulting on an SBA loan can lead to foreclosure and seizure of certain assets — both business and personal if the borrower provided a personal guarantee.
Below, we’ll describe the SBA judgment process in further detail.
Introduction to SBA Loans
The SBA offers two main types of loan programs.
The first is a guarantee program in which the federal agency works with private lenders and insures up to 85% of the loan. This guarantee allows the private lenders to offer small business owners favorable loan terms so they can get the money they need to fund different aspects of their business operations.
The other type of loans the SBA offers is a direct loan program, such as the Economic Injury Disaster Loan (EIDL), which became very popular during the COVID-19 pandemic. These loans were provided directly to borrowers from the SBA, and were meant to provide assistance for small business owners who were located in a declared disaster zone and suffered economic injury as a result of a disaster — in this case, the pandemic.
All SBA loans, regardless of the type, are an essential part of the small business financing process. They help new companies set up and get established, and they also help existing companies grow.
And, as mentioned, SBA loans can serve as a lifeline to small businesses that are facing significant financial losses and challenges due to life-changing events.
Defaulting on SBA Loans
While SBA loans have different eligibility requirements and loan terms than those obtained directly through private lenders without the federal government’s support, a vast majority of these loans still need to be repaid.
For example, even the EIDL loans had to be repaid by borrowers, which is different from the Paycheck Protection Program (PPP), which offered borrowers the opportunity to convert their loans to forgivable grants if they met certain requirements.
Default on an SBA loan typically occurs after a borrower has missed payments by 120 days. Borrowers who are experiencing operational setbacks, cash flow issues or other financial challenges can pursue options for assistance, including loan restructuring and payment deferments, or even an Offer in Compromise (OIC) to help them improve cash flow and manage payments.
Ultimately, though, if the borrower is unable to meet their repayment obligations and/or come to an agreement on alternative assistance, the lender has the right to sue the borrower to recover the outstanding balance.
During that process, the SBA can seize any collateral that was used to secure the loan, such as business equipment or inventory. That collateral is then typically sold, with the proceeds being used to repay the outstanding balance.
Borrowers who are dealing with a potential SBA loan default may be able to gain some relief through bankruptcy, which can protect them from litigation and wage garnishment.
All of this goes to show just how important effective management of defaulted SBA loans is. To do it properly, a borrower must be proactive in their communication with the lender, negotiate properly and conduct thorough financial planning.
Foreclosure and Asset Seizure
Foreclosure on an SBA loan could result in the business losing assets, which can be used to repay the outstanding amount of the loan. In many cases, this is business equipment, inventory and real estate the business owns.
In some cases, the SBA may also seize the personal assets of the borrower, such as their cars or home, if the borrower had to sign a personal guarantee to secure the loan or the SBA was able to pursue a lawsuit where it was successful in piercing the corporate veil to bypass the company entity and pursue the shareholder and/or member.
Asset seizure is a serious thing, and it can have significant negative consequences not just for the business but for the borrower as well. This includes damage to the business’ credit score and reputation, a loss of assets and even damage to a borrower’s personal credit score and loss of assets.
All lenders that participate in these loan programs have to follow strict SBA guidelines when foreclosing on a property or seizing assets, and borrowers have the right to contest these processes.
In addition, borrowers may be able to take advantage of some SBA relief options, including forbearance, loan modifications or settlements, which are designed to help businesses avoid foreclosure and any possible asset seizure.
Role of SBA Loans in Business
SBA loans play a critical role in supporting small businesses throughout the country. They provide them with access to capital they might not be able to access otherwise, which they can use to support their growth and development.
There are many different loan programs the SBA provides, with the 7(a) and 504 loans being two of the most popular. Each program the SBA offers caters to different business goals and needs.
The great part about SBA loans is they can be used for a wide variety of purposes, including starting or expanding a business, refinancing debt, or purchasing inventory and equipment.
In addition to loan programs, the SBA provides support and resources for small businesses, including mentorship programs, training and counseling — both online and in-person.
Small business owners can make informed decisions about what financing options are available to them, and which loan program would best suit their needs, by understanding the role that the SBA plays.
Avoiding Default and Foreclosure
Borrowers who are having trouble meeting their repayment obligations need to prioritize communication with their lender if they want to avoid default and foreclosure. By communicating their needs directly to the lender as early as possible, borrowers might be able to negotiate to receive modified loan terms, including a new repayment schedule or even lower interest rates.
First and foremost, borrowers must understand all the conditions of terms of the loan. This will help them make the best decision possible as well as know what options are available to them.
To ensure the long-term success of the small business, borrowers also need to conduct effective financial planning and cash flow management.
Of course, there are times when financial troubles occur despite detailed and meticulous planning. That’s why the SBA offers resources and support to small business owners that can help them avoid default.
Liquidation and Repayment
If default on an SBA loan were to occur, the SBA and the lender could pursue liquidation, which is the sale of business assets to repay the outstanding loan amount.
The federal agency could force borrowers to liquidate their assets, in certain circumstances, such as business inventory and/or equipment. Proceeds realized from those sales would then be used to satisfy the loan.
The SBA might offer some relief options, though, such as loan settlements or modifications. It also may be possible to negotiate a modified repayment plan directly with the lender to avoid default and liquidation.
Again, this is why communicating with the lender is so important for borrowers who are having trouble meeting their repayment obligations.
Conclusion and Next Steps
SBA loans are crucial for many small businesses, providing them with access to capital and financing they might otherwise have a hard time obtaining. If a borrower isn’t able to meet their repayment obligations, though, they face significant potential consequences, such as default, foreclosure and asset seizure.
That’s why it’s important to understand all of your options if you’re facing default on an SBA loan, such as bankruptcy. It can be a complicated process, though, which makes consulting with an experienced bankruptcy attorney so crucial.
At Babi Legal Group, our team has more than 15 years a decade of experience with bankruptcy, business, debt collection and debt settlement law, and can provide you with expert advice, guidance and consultation.
To learn more, please contact us today.
