In my experience, there are two events that borrowers fear the most with respect to the repercussions of an SBA loan default: personal judgments and foreclosure on a personal residence. For most, it just wasn’t supposed to be like this. When you took that SBA loan, your future was bright and business was booming. When you applied for your SBA 504 or 7a loan a few years back, your lender required you to pledge your home. You didn’t love the idea, but at the time you just couldn’t imagine a recession this bad. You couldn’t imagine a recession would last this long. So you reluctantly agreed to pledge your home, never thinking for a nanosecond that the “F” word would come into play. In the blink of an eye, the stock market sank like a stone and the economy came to a screeching halt. Business slowed, cash got tight, and the worst case scenario became a reality: you can’t afford your monthly SBA loan payment. For one reason or another, a deferment or modification didn’t come to fruition, and you have no idea if or when you’ll ever catch up.
As you mull over the plight of your business, your rising credit card debt, and which of your staff you may have to let go, you begin to think about the worst possible scenario: will I lose my home because I defaulted on my SBA loan?
Generally speaking, the SBA does encourage lenders to explore all workout options before resorting to foreclosure. If you can pay over time or refinance, you can avoid foreclosure. Of course, both of those options require you to have income. For many borrowers, the business was their sole source of income, so now that the business is defunct they have no ability to make payments (Strike One). To make matters worse, the home has equity in it (Strike Two). Lastly, the borrower has no access to a lump sum of cash (Strike Three). This is the point at which foreclosure can become a real possibility.
The reality of the situation comes down to this: if you owe money on your SBA loan, have no ability to repay it, and there is equity in your home, your lender will have no choice but to liquidate the property in order to recover their funds.