What Happens if You Can’t Pay Back Your SBA Loan?

The COVID-19 pandemic forced many small business owners to take on debt through SBA lending programs to survive. But now repayment is coming due, even as conditions remain unstable. If you are struggling to pay your SBA loan, understand the consequences and your options before it goes into default.

SBA Loan Types and Terms

The main SBA loans distributed during COVID-19 include:

• PPP Loans – Up to $10 million, 1% interest, 2-5 year terms
• EIDL Loans – Up to $2 million, 3.75% interest, 30 year terms
• Express Bridge Loans – $25,000 max, interest varies, up to 7 year terms

Loan recipients agreed to these terms and timeframes when accepted. Failing to repay as scheduled constitutes default.

What Happens Immediately Upon Default

Within 15 days past the missed payment due date, the consequences start:

• Loan balance accelerated – Entire remaining balance comes due
• High default interest – Increases balance rapidly
• Reported to credit bureaus – Tanks your business credit scores
• Legal collections – Loan recalled and sent to collectors

This immediately stresses cash flow and restricts future access to financing.

Long-Term Consequences of SBA Loan Default

In addition to upfront collection efforts, ongoing fallout persists:

• Wage and tax garnishments
• Lawsuits and civil judgments
• Seizures of business assets and collateral
• Attachment of business bank accounts
• Loss of government contracts
• Bankruptcy

Default devastates businesses already on the edge. Seeking alternative resolutions is critical.

Communicating with the SBA and Lenders

If you foresee trouble repaying, immediately contact:

• Your SBA regional office
• The originating lender
• SBA Customer Service Center

Openly discuss hardships and seek guidance on protections before default. Lenders can sometimes offer assistance, forbearance or disaster help if engaged early.

Can SBA Loans be Forgiven?

Some PPP loans qualified for forgiveness if recipient met spending rules. Other SBA loan types cannot be forgiven, but the SBA may settle debts for less than the outstanding balance if the borrower has no ability to pay.

An experienced debt relief attorney can negotiate discounted settlements on your behalf, often 20-50% below the amounts owed.

Declaring Bankruptcy on SBA Loans

Defaulting small businesses in the direst situations may consider bankruptcy:

• Chapter 7 – Liquidates assets to pay creditors, discharges remaining debt
• Chapter 11 – Attempts reorganization to remain operating while addressing debts
• Chapter 13 – Repays creditors via court-mandated repayment plan over 3-5 years

Consult qualified bankruptcy counsel to discuss the complex pros and cons of these options.

Key Takeaways

To recap, critical things to know if struggling with SBA loan repayment include:

• Act immediately before default – Contact lenders and the SBA
• Consider all alternatives – Settlement, bankruptcy, restructuring
• Communicate with creditors – Transparency improves options
• Retain legal counsel – Attorneys negotiate and defend your rights
• Don’t wait – With help, default impacts may be avoided

While dealing with an unpayable SBA loan seems dire, experienced professionals can guide you through the process, achieve reductions, and help move the business forward.

Helpful Resources

• U.S. Small Business Administration
• SBA Loan Repayment
• Find a Business Lawyer Near You

With commitment and support, SBA loan default does not have to spell disaster for your company. Consult qualified legal counsel to protect your business and optimize the path forward.

Consequences of Defaulting on an SBA Loan

• The lender can sue you personally for the outstanding loan balance.
• The lender can levy your bank accounts or garnish your wages.
• Your business and personal credit scores will be damaged.
• The lender can foreclose on collateral used to secure the loan.
• You may owe additional fees and penalties.
• The government can ban you from getting future SBA loans.

The SBA Loan Default Process

If you miss payments on your SBA-backed loan, here is the general process:

1. You will be considered in default after 90-120 days of nonpayment.
2. The lender will send your account to collections.
3. The lender files a claim with the SBA to recover their losses.
4. The SBA pays the lender and assumes responsibility for collecting the debt.
5. The SBA can take collection actions like wage garnishment and lawsuits.

Options Once an SBA Loan is in Default

• Work out a repayment plan or loan modification with the SBA.
• Pursue a settlement offer through the SBA’s compromise program.
• File for Chapter 7 or Chapter 11 bankruptcy.
• Dispute the debt if you believe it is invalid or inaccurate.
• Assert lender liability claims if the lender engaged in misconduct.

Getting Help from an SBA Debt Relief Attorney

Consulting an attorney experienced with SBA lending issues can help you:

• Negotiate alternative repayment plans.
• Reduce or eliminate debt through compromise offers.
• Defend against collections and wage garnishment.
• Pursue settlement or debt forgiveness options.
• File bankruptcy or contest the loan’s validity.

An SBA debt relief lawyer can protect your rights and financial interests if struggling to repay an SBA loan.