Satisfying Defaulted SBA Loans: Assets the Treasury Can Seize

Defaulting on a Small Business Administration (SBA) guaranteed loan can spur aggressive recovery efforts by the Treasury Department, who oversees the lending programs. Their powers allow seizing both business and personal assets to recoup the outstanding balance. What exactly can the Treasury take though after an SBA loan default? Let’s review the types of assets vulnerable to seizure.

Treasury Offset Program Powers

The Treasury utilizes the Offset Program (TOP) to collect defaulted federal debts by capturing payments owed to the debtor by the government. This includes:

• Federal tax refunds
• Social Security benefits
• Federal retirement payments
• Contractor/vendor payments

TOP essentially confiscates government payments due to the debtor to satisfy the delinquent SBA obligation. The Treasury can seize these assets indefinitely until the defaulted loan balance is repaid.

Garnishment Authority

Besides intercepting government payments, the Treasury can also legally garnish wages and bank accounts held by:

• The small business borrower
• Any guarantors who co-signed the SBA loan
• If a sole proprietorship, the owner personally

By obtaining a court judgment, the Treasury can force employers and banks to hand over portions of earnings and deposits to pay the SBA debt. This diverts future income streams until obligations are settled.

Lien Rights Against Property

The Treasury frequently deploys its right to place liens against real property owned by the borrowing business or guarantors. Common targets include:

• Commercial real estate
• Residential homes
• Vehicles, equipment, machinery
• Business inventory and accounts receivable
• Securities like stocks/bonds

By filing a public lien notice against the asset, the Treasury establishes priority claim. If the lien isn’t satisfied, it legally empowers them to seize and sell the property to recover their defaulted loan amount.

Access to Collateral Assets

For SBA loans issued on a secured basis, lenders require pledged business assets as collateral at the outset. Upon default, the Treasury can take possession of and liquidate these assets, including:

• Cash, equipment, machinery
• Business vehicles, aircraft, boats
• Commercial real estate, land
• Crops, livestock, poultry
• Inventory, receivables, securities

Any assets specifically pledged as collateral at loan origination become fair game for Treasury seizure and sale if the borrower defaults.

Bankruptcy Claim Rights

If the defaulted SBA borrower seeks bankruptcy protection, the Treasury can assert a claim against the bankruptcy estate. This includes:

• Petitioning to liquidate business assets to repay their claim
• Blocking confirmation of a Chapter 11 reorganization plan until the claim is addressed
• Objecting to the debtor’s proposed treatment of the SBA debt in the filings
• Forcing the business into Chapter 7 conversion if their claim isn’t adequately served

A borrower can’t escape the Treasury by running to bankruptcy court. The Treasury will aggressively pursue repayment of SBA debts within the bankruptcy proceedings as well.

Exceptions Do Exist

However, the Treasury cannot take certain exempt assets like:

• Up to $10,000 in earned income
• Primary residence up to $125,000 in equity
• Basic household furnishings and clothes
• Tools/equipment up to $2,525 used for subsistence
• Health aids like wheelchairs
• Minimum equity in vehicles

So while extensive, Treasury powers aren’t limitless. Critical basic living exemptions protect portions of assets from seizure.

Key Takeaways

• The Treasury can intercept government payments owed to the debtor
• Wage garnishment requires obtaining a court judgment
• Liens can be placed against both business and personal real property
• Collateral pledged when obtaining the SBA loan is subject to seizure
• The Treasury has powers to recover debts within bankruptcy court
• Some meager living exemptions do apply

In summary, defaulting on an SBA loan triggers expansive Treasury recovery mechanisms to recapture taxpayer-backed debts. But borrowers absolutely retain basic living protections despite the formidable powers marshalled against them.

Helpful Resources

• SBA Loan Servicing and Liquidation: sba.gov/partners/lenders/7a-loan-program/loan-purchases-recoveries
• Treasury Offset Program: fiscal.treasury.gov/top/
• Wage Garnishment Limits: garnishmentlaws.org
• Property Lien Procedures: consumer-action.org
• Bankruptcy Claim Basics: uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-11-bankruptcy-basics

Don’t fear the worst if an SBA loan default occurs. Focus efforts on resolution, but know protections exist if Treasury collection ensues.