Looking for lots of answers in a single place? Check out my Definitive Guide To SBA Default and Offer In Compromise.
Back when you first took your SBA loan, life was as exciting as could be, and the possibilities seemed endless. In short, everything was looking up. Maybe your loan was funding the expansion of your already successful business. Perhaps your loan was buying you an existing successful business. Either way, you thought you were heading down the path to entrepreneurial success. Yes sir, in a few short years (or perhaps a tad longer) you would eventually be sitting on a beach somewhere. Maybe sipping a drink with a little umbrella in it.
Fast forward a couple of years.
After years of banks lending money to people who don’t have the ability to pay it back, the you-know-what hits the fan in September 2008. The residential mortgage market melts down and banks start collapsing left and right, the stock market plummets, and the economy quickly follows suit. POOF! Your business, which was previously humming along nicely, is all of a sudden showing signs of a slowdown. You batten down the hatches and slash expenses wherever and however you can. You even have to lay people off, which hurts, but is unavoidable. And finally, after months of struggle, you come to a frightening realization: you won’t have the money to make next month’s SBA loan payment.
Upon coming to the previously unthinkable conclusion that you can’t make this month’s loan payment, you begin to think about what might happen. One of the first questions that pops into your head is:
Will the bank take my home if I default on my SBA loan?
The answer to that question varies depending on your situation. Let’s try to break it down:
1) You pledged your home as collateral for the loan.
When a person pledges their home as collateral, they grant their lender a lien on their home. What that means is that if the goin’ gets tough, the bank has the right to foreclose. Of course, whether or not the bank forecloses depends on a number of factors. Variables such as how much equity is in the home, or whether you successfully reach an Offer-In-Compromise.
2) You did NOT pledge your home as collateral.
I had a client become very upset when I explained judgement liens to him. Despite not pledging his home at loan origination, there was still a risk of a “judgment lien”. “I refused to pledge my home in order to prevent this from happening!” he said to me.
Here’s why this client (and most SBA borrowers) risks having a judgment lien on his home even though the house was not specifically pledged: In 99.99% of SBA loans, all principal owners are required to personally guarantee the loan, meaning that if things went bad and the business could not pay, the bank would look to the personal guarantors to repay the loan. If you don’t voluntarily offer up your personal assets, banks seek to do it by force. Once the court approves and grants a judgment, the bank has the right to go after your assets.
Two assets really interest banks: cash and real estate. Since a judgment has been granted against you in favor of the bank, they have the right to levy bank accounts, and place liens on your real estate. In many states, a judgment lien can’t be foreclosed upon (check with your attorney). That’s the good news. The bad news is that they do have the ability to block the sale or refinance of your home in the future. That means if you ever plan to move, you will need to deal with the judgment lien.
And that, my friends, is how a person who never pledged their home can still have a lien placed on it by their lender.