Facing an SBA Loan Default: How a Lawyer Can Help You Avoid Property Seizure

The Small Business Administration (SBA) provides guidance and support to small businesses throughout the country in a number of ways. In addition to having advisers on hand to offer expert advice to small business owners, the federal agency also sponsors many different loan programs.

One of the biggest advantages of SBA loans is that they offer competitive interest rates and longer repayment terms than other types of loans available to small business owners.

These loans are originated and guaranteed by the federal government, with the SBA insuring as much as 85% of the loan balance through either local private lender partners or through direct SBA loans such as the Economic Injury Disaster Loan (EIDL).

Just like other loans, though, there are terms borrowers must abide by. This makes understanding all the conditions and terms of SBA loans crucial for borrowers so they can avoid default and potential tax debt.

Yet, ongoing economic changes could make it difficult for small business owners to repay their SBA loan debt, which could lead to potential default.

We’ll discuss this topic in more detail below, and outline how a lawyer can help small business owners avoid property seizure if they’re having trouble repaying their SBA loan.

Consequences of Default

Default happens whenever a borrower isn’t able to meet their repayment obligations on an SBA loan they took. If this were to happen, the small business owner could face severe consequences.

Once SBA loan default occurs, lenders can start debt collection efforts. This includes seizing any collateral that was used to secure the loan in the first place, such as equipment or real estate.

Generally speaking, the collect process will follow specific outlined protocols to recover the proceeds of the loan, as the lenders try to recoup any losses they might incur from the SBA loan not being paid back.

If you were to ignore a demand letter that the SBA sends during the default process, it can lead to your account being transferred to the U.S. Department of Treasury, which could result in a large potential tax liability and additional collection fees.

Understanding SBA Loan Default

So, what constitutes SBA loan default? In essence, borrowers who don’t abide by the terms of their loan or a modified loan, including missing payments repeatedly, are considered to be delinquent, which could eventually result in them being officially labeled as in default status.

Before you are actually transferred into default status, your loan will be considered delinquent once you miss payments. Your lender and/or the SBA will contact you to demand that you make repayments according to the terms of your loan.

In most cases, default of an SBA loan will occur after about three or four months of missed payments without any contact between you and the lender. During that time, the SBA will usually try to collect the outstanding debt via various means.

While the SBA guarantee that is placed on these loans will protect private lender partners from absorbing the full loss of defaulted SBA loans, borrowers still face significant financial penalties and hardship should they default.

Tax Implications

There are serious potential tax implications to defaulting on an SBA loan. This includes accumulating tax liability and debt for the business owners themselves.

For instance, if you default on an SBA loan, the IRS has the authority to withhold any tax refunds or government benefits to collect on the debt. They may also take direct legal action such as filing a lawsuit to recover the outstanding SBA loan debt.

That’s why it’s so important for business owners to consider this potential tax liability, as well as their own personal income tax situation, when faced with SBA loan default. Doing so will help you navigate what can be a very complicated process so you can avoid even deeper financial hardship.

Compromise Program

Depending on your specific situation, there may be options available to you to avoid default if you’re having trouble repaying your SBA loan. One such potential option is called the offers in compromise program, which can provide assistance to financially distressed taxpayers who can pay a reasonable portion of their outstanding tax debt.

This program may provide an alternative to bankruptcy and can help small business owners resolve outstanding tax debt so they can avoid more financial hardship.

The SBA typically only considers these offers in compromise (OIC) if borrowers meet certain qualifying criteria. Some states also have additional criteria that they will weigh when making a determination.

For example, in New York, the state will consider whether accepting an offer in compromise will be in the best interest of both the state and its taxpayers. In other words, even if you do meet the other criteria, your offer may not be accepted.

Offer in Compromise

The OIC program allows certain small business owners to settle their outstanding SBA loan debt for less than the total amount they owe. It requires the borrower to provide both proof of the financial hardship they are facing as well as their inability to repay the loan within a reasonable period of time.

One requirement of the OIC is that the business must close as well as go through asset liquidation to reduce their outstanding debt.

This is obviously a serious step to take, which is why having an experienced business attorney on your side is so beneficial. They can assist you with drafting and submitting an OIC to the SBA, and helping you gather all required supporting documentation including detailed financial information.

The OIC process can be very complex, but it is a potential solution if you’re facing significant financial challenges and potential default on an SBA loan.

SBA Loans and Default Prevention

As you can see, preventing default on an SBA loan is critical if you want your small business to survive. This is why taking early action is so crucial in helping you manage and/or avoid missed repayments.

There are many strategies available that can help you address repayment difficulties you may be having before a default would occur. This includes re-evaluating your business finances and reaching out directly to your lender to investigate other options.

By proactively managing the repayments of your SBA loan, you can protect your business credit. Communication with your lender is a key aspect of this process, as it can help you avoid defaulting and taking on additional tax debt.

Small business owners who want to prevent SBA loan default should explore any alternative repayment options and seek professional assistance from an experienced bankruptcy and/or financial adviser.

Conclusion and Next Steps

Facing potential SBA loan default can be very challenging for small business owners. Understanding the consequences and options of default is crucial to navigate the complex process successfully.

If you’re facing default, consider seeking professional assistance, such as the experienced lawyers at Babi Legal Group, to help you resolve your SBA loan debt and avoid property seizure.

The compromise program and an OIC are potential solutions, but you need to investigate them further with an expert. By understanding what options you might have and taking proactive steps, you can work to resolve SBA loan debt and avoid further financial challenges.

The attorneys at Babi Legal Group have more than 150 years of experience in business, debt collection and debt settlement law, and can help guide you when trying to avoid SBA loan default. 

For more information, contact us today.