What To Do If You Can't Make Your SBA Loan Payments - Page 2 of 2

You typically won’t hear from an outside collection agency, says Greene. “Banks typically don’t outsource collections on business debts. They usually have a special division that handles collecting the loan. (Unlike the loan officer) they are impartial, and don’t have a personal relationship with the borrower.”

King describes the collection process as “a lot like that for any other bad business debt that is personally guaranteed. First they’ll foreclose on any collateral that was put up to secure the loan, then they’ll sue the business for default, then they’ll sue the guarantor(s) for default, and they’ll get a judgment against the business, guarantor(s) or both.”

If the bank is able to collect anything from the borrower, 75% will go to the government to repay the guarantee and the bank will keep the other 25%, explains King.

So what are your options if your business is floundering and you can’t repay your SBA loan?

Workout or Settlement: You may be able to resolve your debt by paying less than the full amount you owe, either by negotiating directly with the bank yourself, or with the help of an attorney, your CPA or another advisor. “Go to the bank,” says Ken Thomson, founder of Biz911 and author of The Battle Scarred Guide to Small Business Debt Relief and Recovery. “Really get to know the people involved. Go the extra mile to give them the information that they need to have to make a favorable decision.” He explained he had success with this approach last year, with a client who had an importing business and a 7(A) loan.

Green encourages business owners to “Raise your hand a little earlier and reach out for help. Don’t wait until your back is against the wall. You have a lot better opportunity to work something out if you talk with your banker earlier,” he says. He points out that “they’ve got a vested interest in the outcome. Business is business.”

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Keep in mind that you will likely receive a 1099-C for the forgiven debt, warns King. That may result in a new tax liability to the IRS.

[Resource: 1099-C- What You Need to Know about it?]

File for Bankruptcy: “The personal liability for an SBA loan can be discharged,” says Barry J. Roy, Esq, a bankruptcy attorney and partner with the law firm of Rabinowitz, Lubetkin & Tully LLC. The borrower may, for example file bankruptcy individually and the company would still be liable for the debt. “It may not always be an easy decision,” he points out. “You may lose property that is not exempt.” However, for someone facing a large debt that can’t be repaid, it may be the only way to get a fresh start. You will not owe taxes on forgiven debt discharged in bankruptcy.

Once you default on an SBA loan, it’s unlikely you’ll be eligible for another one in the future, especially if the SBA suffered a loss.

Image: © Petro Feketa | Dreamstime.com