The Bank Said They Wouldn’t Pursue Us, But the SBA Just Sent a Demand Letter – Why Is This Happening?

Facing collections on an old business loan you thought was resolved can be confusing and concerning. This situation is common with SBA-backed financing. Understanding the process is key to responding appropriately.

At Solve Debt Relief, we help business owners navigate scenarios like surprise SBA demands after a bank promised not to collect. This guide explains the disconnect and your options.

The Bank and SBA Have Different Interests

With SBA-guaranteed loans, the originating bank and the SBA have different roles and motivations:

• The bank services the loan and aims to maintain customer relationships.
• The SBA guarantees the debt and wants to minimize losses.

This divergence of interests can drive contradictory collection approaches.

Why Banks Go Easy on Collections

Banks have incentives to take a lenient collections approach, including:

• Preserving customer goodwill for repeat business
• Avoiding costs of aggressive collections efforts
• Keeping receiving some payments, even minimal, rather than none

Banks make promises not to pursue collection knowing they have less to lose than the SBA if debts go unpaid.

Why the SBA Compels Collection

In contrast, as guarantor, the SBA’s motivations include:

• Mitigating losses from loan defaults
• Discouraging moral hazard by letting borrowers off easy
• Maintaining program integrity by enforcing debts

The SBA will pursue debts through demand letters and other actions even after banks indicate they won’t collect.

SBA Loan Guarantees and Collection Process

With most SBA loans, the agency guarantees a portion, often 75-85%, to reduce lender risk. When a default occurs:

1. The bank attempts initial collection
2. If unsuccessful, the SBA buys the guaranteed portion from the bank
3. The SBA then initiates its own collection efforts on the portion it now owns

This transfer of debt from bank to SBA is key. The bank’s promise not to collect does not bind the SBA, who steps in to protect taxpayer interests.

SBA Collection Process Stages

The SBA follows a series of steps on debts they now own, including:

• Demand letter – Requiring immediate payment in full
• Debt acceleration – Declaring the full balance immediately due
• Lawsuits – Suing in federal court for repayment
• Garnishments/Seizures – Administratively garnishing wages or seizing assets

This formal collections process begins with the demand letter as the first notification. Understanding this helps make sense of the disconnect between the bank’s promises and SBA actions.

Responding to an SBA Demand Letter

Receiving an SBA demand letter is unsettling but starting a dialogue is key. Possible responses include:

• Request debt validation and verification
• Dispute inaccurate information
• Assert legal defenses
• Propose realistic repayment arrangements

Timely responding with the help of legal counsel can potentially resolve debts without aggressive collection actions.

Seeking Reasonable Settlements

One approach is negotiating an affordable lump-sum settlement. This involves proposing a percentage payment – often 50% or less – to fully satisfy the debt. If the SBA accepts, this can resolve the matter.

Getting Debt Dismissed

Alternatively, identifying technical flaws like improper servicing or lapsed deadlines may mean the SBA cannot legally enforce collection. An experienced attorney can review the debt details and raise viable dismissal arguments.

You have appeal rights if the SBA rejects settlements or dismisses dismissals initially.

SBA Collection Rules and Limitations

The SBA cannot collect debts however it pleases. Key limitations include:

• Adhering to state statutes of limitations
• Following required servicing protocols
• Proving ownership and validity of debts
• Obtaining court judgments to seize assets in most cases

Knowing collection constraints strengthens a borrower’s position and negotiation leverage.

Statutes of Limitations

SBA loans have 6-year statutes of limitations. After that, legal enforceability becomes difficult. This timeframe can provide an absolute cutoff bar against collections.

Borrower Defense to Repayment

Federal law allows discharge of SBA debts if there is evidence of lender misconduct, fraud, or failure to follow program requirements. This borrower defense process requires detailed documentation.

Having strong evidence of improprieties or noncompliance can nullify guarantee obligations and halt collections.

Getting Legal Help Responding to the SBA

Don’t let an unexpected SBA demand letter scare you into accepting burdensome repayment terms or asset seizures. The SBA has limits on its collection powers. With expert legal representation, many options exist to strategically resolve debts, including:

• Negotiating settlements for a fraction of the amount
• Asserting expiration of the statute of limitations
• Proving failures in required servicing protocols
• Identifying improper debt amounts or unattributable costs
• Establishing unenforceability using borrower defenses
• Discharging debt liability through bankruptcy (in some cases)

At Solve Debt Relief, our attorneys regularly leverage these strategies to permanently resolve SBA debts without continuing collection harassment or losing assets.

Don’t Wait – Respond to SBA Collection Threats

The bottom line – receiving an SBA demand letter should not be ignored. Promptly seeking knowledgeable legal help maximizes options for defending your interests.

The SBA has no interest in breaking promises the bank may have made. But skillfully negotiating with government creditors requires experience. Contact Solve Debt Relief today to discuss strategies for resolving your situation.