If you default on your SBA loan obligation, you are probably going to need to understand the process that follows. Actually, this is probably the first question people ask me when they call for an initial consultation. And it makes perfect sense. They say that the thing that people fear most is fear or the unknown. When you don’t know what’s going to happen, your mind begins to wander. Are they going to take my house? Can they put me in jail? Will they make me sell my couch and my TV? So let me try to ease your mind, and walk you through the SBA loan collection process, particularly when a business decides to cease operations.
If you want to settle:
1) The first step is default. This means you violated the terms of your loan, and in most cases, this means missing payments. While every bank is different, most will be calling when you are 30 days late to see what’s going on. Once you hit 60 days past due, that’s when banks start to have serious concerns about your ability to pay.
2) Demand Letter – This is the bank giving you official notice that you are late, and they don’t like it. When I worked for a bank, sending a Demand Letter didn’t necessarily mean we were going to sue. But it was the first step regardless of our plan. If we did eventually need to sue, our attorney always wanted to ensure a Demand Letter have been sent. If you receive a demand letter after defaulting on your SBA loan collection process, this is NOT the time to hide or avoid the issue. You are on their radar, and it needs to be dealt with sooner rather than later to give yourself the best chance at a good outcome.
3) Cease Operations and Liquidate Business Assets – Before the bank or SBA will consider settling an SBA debt, the business needs to close (“cease operations” is the term the SBA uses) be sold as a whole. or in pieces. The sale of the business needs to be legit (read more about this here).
4) Submit SBA Offer In Compromise to your lender. Among other documents, the SBA requires forms 770 (PFS – some lenders who are new to OICs mistakenly use form 413) and sba form 1150 (Offer In Compromise).
If you choose to hide and avoid dealing with the bank:
2) Demand Letter
Depending on the details of your situation, these would be the next steps:
3a) Litigation – If the bank thinks you have assets that could be liquidated to pay down the loan, they will consider legal action. If you have cash in banks or investments, those are the low hanging fruit that banks love to go after. If you’ve pledged your home as collateral and there is equity in it, you risk the potential of a foreclosure. They can also garnish wages (the amount varies depending on states)
3b) Refer to SBA/Treasury – In some cases, the bank doesn’t feel like it will be worth the time or expense to sue you. After all, there is not point of going after a person if there is nothing to get. But just because the bank doesn’t pursue you doesn’t mean you are free. Once the file goes to SBA, they will send a 60 day letter, which basically says that if you want to work something out within 60 days of the date of the letter. If you don’t respond within 60 days, the file will be referred to the US Treasury. Once it gets to Treasury, you are usually dead in the water. They add a 28% penalty, then demand a minimum of 70% to 80% (in my experience, anyway) of the balance in a lump sum payment. In other words, you would have to be able to pay the almost the entire pre-Treasury balance.
The SBA loan collection process can be scary and hard to predict. Decisions vary from bank to bank, banker to banker, and even between SBA workout offices. The most common advice I give to SBA borrowers who are in distress is 1) to deal with it head on, and 2) if you don’t know what to do, find a knowledgeable professional who has experience dealing with these types of issues.
Distressed Loan Advisors (www.JasonTees.com) are experts at SBA default and SBA Offer In Compromise, and can be reached at 1-877-436-4533 or firstname.lastname@example.org.