Business owners who fall behind on a loan almost always ask the same question first: how long until the lender sues me? As always, the answer is, “It depends.” The lender cannot sue for a loan default until the loan is in default.
A business loan is considered in default when it hasn’t been paid as agreed. There are no general rules when it comes to defining a default, and each lender sets its own timeline. With some lenders, you could be in default after missing just one payment. On the other hand, some lenders will only consider a loan in default if you miss more than one payment, and some will carry a loan as delinquent for as long as six months before the status changes to default. It’s your lender’s choice what rules to follow, so there is no hard and fast rule on how soon a lawsuit can happen. So start with the obvious – the answer could be in your loan documents.
Note that once a loan’s status changes to default, the lender can decide to go to court at any time. When a borrower defaults on a loan, the lender may take various actions, depending on the terms of the loan agreement. The lender may try to collect the debt through a lawsuit, or they may take other actions, such as repossession of collateral.
You Can Be Sued
Many unsecured small business loans and business credit cards require a personal guarantee before the lender will approve you. The personal guarantee is a document that puts the borrower’s personal liability on the line for the loan. The idea behind the personal guarantee is that if the business fails to repay the loan, the lender has the right to go after the borrower’s personal assets. If you can’t pay, you can be sued. Your personal house, car, and savings accounts are personal assets. Personal assets don’t belong to the company, so when they’ve been put on the line for a company loan, they’re fair game if you default. The same goes if you run a sole proprietorship.
Then there’s collateral. If a business loan is secured by equipment, the lender may repossess the equipment and sell it to recover the debt. If a business loan is secured by real estate, the lender may take possession of the property and sell it to recover the debt. In an unsecured loan, the lender may take other actions to collect the debt, such as placing a lien on the borrower’s property.
But perhaps the worst part of the lawsuit is that once the lender has a court judgment, collecting can be a lot easier. The court judgment can be used to garnish wages, and the court may also let the lender garnish your tax refunds or your personal bank account. As the lender is trying to get its money back, your debt is growing: interest and late fees can keep accruing the whole time, so you owe more and more money the longer the process goes on.
A default can negatively impact a business’s credit score, making it more difficult to obtain credit in the future. Many lenders also report defaults to the consumer credit bureaus, so your personal credit history will be affected too.
If You Haven’t Defaulted Yet
If you haven’t defaulted yet, you still have options. Once you default, the lender doesn’t need to negotiate with you. They can sue. So call your lender before it gets that far. Tell them you are having financial difficulties. I’ve had a lot of business owners tell me that they don’t want to tell their lender why they are late. They either don’t want the lender to think they are incompetent, or they don’t want to give the lender any more information. I tell them that if they want the lender to help, then they have to give the lender information. By giving them a heads up, it may show that you’re not incompetent. In many cases, the lender will work with the borrower to try to get the loan back on track. That relief might be a modified payment plan, forbearance or a lower interest rate. None of that shrinks what you owe, but it can buy you the breathing room to get back on track. Don’t get mad and wait for the lawsuit. The lender is your friend. Or at least they can be.
If You’re Already in Default
If you’re already in default, the calls may be coming from someone else. In other words, the money you owe may not be in the original lender’s hands any more. Your lender may have sold it to a collection agency. These agencies typically pay pennies on the dollar, then try to collect the original balance. They probably bought your debt for a lot less than what you owe. Your first move should be to find out whether the debt has been sold and who owns it. Ask the agency to validate the debt. By law, a collector has to send you a written validation letter within five days of first contacting you, and you then have 30 days to dispute the debt. Once you know you owe the money, you can start to look for ways to resolve the debt.
One of those ways is debt settlement, which means trying to negotiate with a collector to pay less than the original amount owed. In many cases that can save you hundreds or even thousands of dollars. You can technically do it on your own, but I strongly advise you to work with a professional to help you with this. You are not alone in this, and if you don’t understand what you’re doing, you’re more likely to make a mistake. A debt settlement company or law firm understands how the settlement process works, and knows the tactics collection agencies use to take advantage of people who don’t. An attorney can also help you protect your rights.
And if the agency has already filed a lawsuit against you, don’t ignore it. If you don’t respond to the lawsuit, you may risk having the court enter a default judgment against you. In effect, the court hands the agency exactly what it wants. Make sure you get competent help and get your answer to the lawsuit back on time. If your personal assets are on the line, then I encourage you to contact an attorney. An attorney can help you respond and build your case, and even at this stage you can try to negotiate a settlement with the collector.
So, how long after a business loan default can you be sued? The short answer is that it depends. In the end, it comes down to how your lender decides to handle the default. Once you are in default, you can be sued at any time. The longer answer is that the sooner you can get the lender on your side, the better. That lender could give you a little breathing room if you call before you miss payments. If you haven’t defaulted yet, you still have time to save a lot of money and have a lot less stress. If you have defaulted, then consider settlement. And if you’ve been sued, get help as soon as you can. Your personal credit may be on the line, and your personal assets may be at risk.
