If your business can no longer keep up with its SBA loan, there are ways you can deal with it. As with most things in life, when dealing with the government, the key is to not let things get to the point where it’s an emergency. Since most SBA lenders insist on a personal guarantee, it’s possible that the government could collect on your personal assets when it’s clear the business cannot repay the loan. This can include a wide range of things, from your bank accounts to your salary and even your tax refunds. If you ever pledged your home equity, then they could take that, too.
So, how do you get there? You can either seek a workout, if you can pay part of what you owe, or try to reach an offer in compromise. Or you can file bankruptcy. Think of them as three doors. Which one fits depends on how far behind you are and what you could realistically pay.
Work Out a Deal with the Lender
What you really want to do is proactively come up with something before you’re actually in default and when the lenders may be more inclined to negotiate with you. On a 7(a) loan, the bank is your lender. The SBA isn’t your lender. Sometimes the best option is to try to work out a deal with the lender. That’s a workout. You may be able to get a change in the repayment terms. The bank can agree to forbearance, a deferment or a longer maturity without SBA approval, as long as it follows SBA guidelines. Forbearance, or deferring a payment, or a short-term reduction in payment, is not a modification. It is temporary. A modification is permanent. When you modify, you alter the terms of a loan. For example, you change the rate, the maturity or the structure. Forbearance doesn’t really reduce the amount of debt the borrower owes, it just delays the repayment. If you need part of the balance forgiven, a workout won’t get you there.
Settling with the SBA for Less than You Owe
So what is an offer in compromise? In short, it’s settling with the SBA for less than you owe. The SBA won’t cancel any of the debt just because you want it to. The SBA won’t accept an offer from you if you can afford to repay the debt in full either as a lump sum payment or on a payment plan. It is up to the SBA to determine your ability to pay, not you or your debt relief firm. To get an offer in compromise, you need to be in liquidation. You also can’t be in active bankruptcy, and there can’t be any fraud or misconduct on your part. For the offer to be accepted, you must prove your financial situation demonstrates that you can’t pay it all. You have to show your assets, income and debts, and any financial hardship, like an illness.
The guidelines allow the loan to be compromised even if the business is still in operation, but Jason Milleisen, a former vice president at one of the country’s largest SBA lenders, says he hasn’t seen one in years, so you’ll probably have to close your doors. If you want to stay open, you’ll have to include all creditors, and you can’t repay other loans in full.
Partners need to understand their exposure. Most SBA loans require a personal guarantee from every owner who owns 20% or more of the business. Each owner negotiates their guarantee based on their individual ability to pay, and they are each responsible for the entire loan balance. The government’s guaranty protects the lender against loss, not the borrower. If the bank gets reimbursed for its loss, it just passes that loss on to the SBA.
With an SBA loan, the lender determines that the loan is uncollectible and tells the SBA that the loan is uncollectible. The SBA then issues a demand letter that says you have 60 days to send them an offer in compromise. If you need more time, ask for a written extension, and make sure you get the extension before the 60 days are up. If you fail to meet the deadline, your account is referred to the U.S. Treasury. According to Milleisen, Treasury then adds a 28 percent penalty on the balance due, and demands that you pay at least half of the balance. Even if you submit the offer in time, it takes four to eight months for them to process it. What makes this such a long process? It’s strictly regulated, which can mean lots of red tape.
How much should you offer? Basically what the SBA thinks it can force you to pay: the value of collateral; equity in your house above the homestead exemption; your vehicles above exemption limits; investment accounts; cash; wage garnishment; and future earning capacity. Then they subtract their collection costs, the risk of losing in court, and the time it would take. Unless you can show real hardship, they won’t consider an offer of less than $5,000. Don’t make a low-ball offer. They’ll reject it, and they won’t take offers that are so low as to encourage others to default. It’s a very complicated analysis. There is no set percentage. Obviously, every situation is different and what you are able to offer will depend on the circumstances. A medical condition, older age, or full cooperation during liquidation can work in your favor.
The SBA prefers a lump sum, paid within 90 days of acceptance. They’ll get their money and close the file. Up to 36-month payment plans are harder to approve, and if you fall behind on an installment you still owe the whole original amount, minus what you’ve actually paid. If you can borrow the lump sum from friends and family, do it, the odds of approval are better.
Filing an SBA offer in compromise requires a bunch of documents. SBA Form 1150 is the offer, and in it, you must say where your funds for payment are coming from and explain hardship like illness. SBA Form 770 is a personal financial statement, where you itemize all your assets, liabilities, income and expenses. You have to include two years of personal tax returns, IRS Form 4506-C, business returns and year-end statements if you’re still in business. The lender will do a credit pull, and a missing document will make your application easy to reject. Don’t attempt to hide assets, or sell collateral without approval from the lender. Make sure you have your credit report and all your financial documentation in order before you even make an offer. Have documentation for all the facts that show you can’t pay it off.
If the offer is rejected, then you are liable for the whole amount. The same is true if you never answer the demand letter, and either way the debt goes to the Treasury. The U.S. Treasury enters the debt into the Treasury Offset Program (TOP). Once it is there the U.S. Treasury can intercept your federal (and sometimes state) tax refunds, Social Security and federal retirement benefits. The TOP can also garnish up to 15% of your disposable pay from any employer, without a court judgment or order - just a letter to the employer. The employer is not permitted to refuse. Unlike most other private debts, which are time-barred after two to six years, once the federal government sues on an SBA debt it can typically pursue the debt until it is paid. If you default on an SBA loan, you also get put into CAIVRS, the federal screening system, which typically blocks future federal loans such as SBA or FHA loans.
Be aware that an offer in compromise is not tax free! If you settle for less than you owe, the amount the government writes off becomes income and is therefore taxable. You’ll get a 1099-C for the cancelled amount unless you qualify for an exception such as insolvency, while debt erased in bankruptcy is typically excluded from income. If you can’t afford that, it’s time for you to think about the third door, bankruptcy.
COVID EIDL loans are different. SBA is not offering forgiveness on COVID EIDL loans (grants were forgivable, not loans). Balances of $200,000 or less don’t require a personal guarantee. The Hardship Accommodation Plan (HAP) closed on March 19, 2025. You can submit servicing requests to COVID EIDL Servicing Center CESC@sba.gov by email. Rules may change; check the SBA website.
The key here is to plan ahead. The best thing you can do is get as far in front of this as you can, and get professional help if you need it.
