The SBA is Suing Me After My Business Filed for Bankruptcy: What Do I Do?
The Small Business Administration (SBA) offers advice, counseling, support and even special loan programs to help small businesses across the country succeed. These loans are designed to provide financial help to small businesses that want to purchase equipment, real estate and fund other needs, but when borrowers are unable to repay their loans, the SBA has the authority to take action.
In fact, the SBA can sue businesses and any personal guarantors that default on SBA-backed loans, and that can present a complex and challenging process for small business owners. Understanding the process of an SBA lawsuit is critical for businesses to navigate and resolve any issues effectively.
Below, we’ll discuss what you should do if the SBA is suing you after your business filed for bankruptcy.
What Are SBA Loans?
The SBA provides loans and guarantees on loans so that small businesses can obtain favorable terms on financing. These loans can be used for the purposes stated above and also for the acquisition or construction of buildings, or to purchase fixtures, machinery and other physical assets that are essential to operations.
The lending process can vary depending on the type of loan program, but it typically involves experienced lenders and authorized offices that provide funds to small business owners.
While many exceptions are made with SBA loans to provide these favorable terms, they still require careful management to avoid default and a possible SBA lawsuit.
Understanding Bankruptcy and Debt
Small businesses that are struggling with debt may receive some financial relief through bankruptcy, but it can also trigger an SBA lawsuit within the bankruptcy case, or against the personal guarantors as the bankruptcy would not protect any personal guarantor. In many instances, when the business files bankruptcy, a personal bankruptcy may also need to be filed to obtain bankruptcy protection. This is why it’s so important that borrowers educate themselves on their debt obligations and explore all options for managing their debt, including restructuring or refinancing.
To avoid complications and ensure compliance, you need to do everything in the correct order. The SBA also provides support and resources for small businesses struggling to make repayments, including education on debt management and financing.
Personal Liability and SBA Guarantees
Some SBA loans come with personal liability and guarantees. In fact, most loans through the agency require small business owners to provide a personal guarantee that is secured by real assets.
This essentially means if the business is unable to repay its loan, you will could be personally responsible for covering the outstanding balance. In this case, your personal finances and assets could be impacted significantly.
The SBA is in the business of helping small businesses. The loan programs they offer are essentially guarantees to the private lenders who offer them, as they repay a percentage of any uncollectable debt should a borrower default.
This doesn’t mean that you’re off the hook, though, if you can’t afford to repay an SBA-backed loan. However, it may present an opportunity to seek a settlement with the lender and the SBA collectively to obtain relief, through what is known as an “Offer in Compromise”.
SBA Lending Practices
The SBA has a network of authorized lenders such as credit unions, traditional banks and other financial institutions. They work with these private lenders to offer small business owners favorable loan terms in exchange for a guarantee on a portion of the loan from the federal government.
The SBA also has a keen focus on supporting small businesses in underserved markets, such as women-owned and minority-owned businesses.
Understanding how the SBA’s lending process works and what the requirements are is essential to navigate everything successfully.
Protecting Personal Assets
As you can see, protecting your personal assets should be a top priority when you take out a loan for your business. Perhaps the most effective way to do so is by keeping your business and personal finances separate.
This includes establishing a formal business entity, which can provide a layer of protection for your personal finances and assets. However, the SBA may still require you to pledge real or personal assets as collateral to obtain the loan, subjecting them to seizure or foreclosure upon default.
It’s also a good idea to work with a skilled attorneyfinancial advisor to help you navigate the lending process, and to ensure you’re doing all you can to safeguard your assets. These experienced professionals can help guide you through the entire process, providing you with advice on the best ways to minimize personal risk.
Being proactive in this way can help you access the funds you need for your business while reducing the likelihood that your personal assets will be at risk should you face financial challenges.
Timeline and Process of SBA Collection Actions
Before you take out an SBA loan, it’s important to understand the collection process. As with any loan, you are required to make timely payments according to the terms of the loan.
If you don’t, the lender will likely first notify you of default and outline the steps you need to take to bring the loan current. This serves as a way for you to address issues before they take further action.
If at this point you can’t resolve the default, then the private lender can file a claim with the SBA to recover the portion of the loan the agency guaranteed. After the SBA determines what amount, if any, they repay the private lender, the agency can then pursue additional collection actions against you should the debt remain unpaid.
This includes referring you to a collection agency or filing a lawsuit. Every step of the process involves specific deadlines and actions you must take, so it’s essential that you work with your lender and respond promptly to explore all options.
Responding to the Lawsuit
If the Lender and/or the SBA files a lawsuit against you, you should carefully consider every aspect of it and engage in strategic planning to minimize any potential damages. Seek legal counsel with professionals experienced in handling SBA lawsuits so you can achieve the best possible outcome.
They can help you understand what the SBA’s claims are, while also reviewing loan documents and preparing an effective defense strategy.
Small Business Considerations
If you want to ensure long-term success of your business, and protect your personal assets, you must consider the potential impact of an SBA lawsuit on your business finances, operations and reputation. The lawsuit can affect your ability to secure new funding, access credit and even attract investors.
This is why it’s so important to communicate with your lender, the SBA and all other stakeholders to resolve the issue. You can also explore alternative financing options to support your business operations during the lawsuit.
Exploring Options for Resolving Debt
An SBA lawsuit doesn’t mean you can’t explore other options for resolving the debt you owe, including coming to a settlement, negotiating with the agency or doing mediation. In fact, the agency may be willing to work with you to provide temporary relief or even restructure the loan.
Part of this resolution process could involve providing documentation and financial information to support your case, so make sure you have that information prepared.
Alternatives to Litigation
In many cases, lenders are willing to work with borrowers to find solutions to outstanding debt so everyone can avoid the courtroom. For example, you might be able to negotiate a new payment plan or request a loan modification so your payments are more manageable.
You might even be able to apply for an official SBA loan restructuring to reduce the overall amount of your outstanding debt or to provide you with temporary financial relief.
An experienced debt collection and settlement attorney or financial advisor can help you understand all the options you have. Many can even work directly with your lender to develop a plan that fits your needs and avoids the expense and stress associated with litigation.
It’s important to take action early and explore alternatives to preserve your credit, grow your company and protect your business and personal assets.
Next Steps and Conclusion
If you’re facing an SBA lawsuit, it’s important to take immediate action to respond and explore all options for resolving the debt. While the SBA lawsuit process can be challenging and complex, you can navigate through issues effectively with the help of experienced legal counsel.
At Babi Legal Group, our attorneys have over 15 years of combined experience in business, debt collection and debt settlement law. We can provide you with expert advice on navigating an SBA lawsuit, protecting your business and personal assets through the process.
For more information, contact us today.
