Walking Away from an SBA Loan?

Question

Has anyone here ever defaulted on an SBA 504 loan. How is it dealing with Colson's Servicing? Did they attempt to enforce the personal guarantee? Was bankruptcy required?

How about a short sale? How was that handled? Did you have to stop making payments?

Any info on disposing of an SBA backed property that's underwater would be appreciated.

John

Account Closed · Answer

I do.  He filed BK.  There were no assets, no income and no distributions.  That was 10 years ago.  I don't know if the current SBA loans have BK exemptions (like student loans do).

Bill Gulley · Answer

The portion guaranteed under SBA is a federal debt, just as taxes and if you look to the exemptions and priority of liens in bankruptcy, you'll see that such are not covered.  This is not to say they couldn't let you off the hook, but if they want to seek the deficiency you'll end up paying it, IMO.

It can make life rough, you open any bank account, they can nab it, they can take future assets, they can garnish wages, they can even take it out of your social security payments! One reason I like to see people stay away from SBA unless it's really a strong deal.

I am familiar with these collections and it's my experience that you're better off dealing with the IRS than the SBA as to forgivness of debt. But I'm not saying it can't happen, just have not heard of it.....good luck

Account Closed · Answer

Because this is a commercial property it is quite likely that you will have issues with debt forgiveness assuming that they don't go after you personally for any short fall from the disposal of the property.

Are you still using more than 50% of the building for your business?

Does your business hold title or do you hold title personally for the property?  If the business holds title what type o entity is it?

These are just a few things that may come up.

Dion DePaoli · Answer

John, the SBA is pretty decent to work with.  Before you walk it is a good idea to chat with the banker.  They can extend your loan terms, defer payments, etc.

If you are asking about a short sale, which I assume is the business property, you still have options.  Depending on what other business assets they encumbered they might let you liquidate all those and satisfy the obligation.

Large companies transfer assets into contingent LLCs to force work out process and deal with debt.  Filing a BK is also an option.  That said don't jump to last resorts until you try the obvious choices.

Bill Gulley · Answer

I'd rather place a yoke around my neck and walk into the`sea than default on an SBA loan that would leave me with no assets. :)

Seth Williams · Answer

John Mireles - defaulting on an SBA generally isn't a good idea if you can help it (not sure if this is still an outstanding issue for you - as this post is about 9 months old now).

In my days as a commercial banker, I've closed a couple hundred SBA 504 loans, so I understand the process (and consequences) pretty well.

The upside (if you can call it that) - is that while SBA certainly CAN come to collect on their collateral, I've witnessed many many scenarios where they don't (they tend to behave differently than a typical bank). With a 504 loan, SBA is in 2nd position on the collateral anyway, so usually the bank will pick it clean before SBA even has a shot at it. Most of the time, SBA will usually accept an "offer in compromise" where you essentially cough up what money you can, and they let you off the hook (sort of).

The downside - as Bill Gulley said, they can garnish your wages and social security payments until they are made whole (which will likely never happen). Keep in mind, they will have a harder time taking any money you earn through self-employment - so if you're not employed by a conventional JOB and if you don't need social security, this may not be a huge issue.

You will also be permanently prohibited from getting any other SBA loans in the future.

It will also demolish your business and personal credit score (which is to be expected in any default scenario).

So is it worth it? I guess it depends on your situation, and what you need to rely on in the future.

Don Konipol · Answer

The size of the debt is going to be one factor.  A small debt does not usually lend itself economically to doing anything other than perfecting the debt in court and filing a lien in the county the property is located in.  As debts get larger, the financial ability of the borrowing entity and guarantor play a larger and larger role.

Bill Gulley has informed you that the SBA portion of the loan is a federal loan, and not subject to state BK exceptions.  This may limit your options to much less than a conventional private loan.  I do have experience with SBA loans - I purchased a property in which the SBA held a large lien that needed to be discounted for me to purchase the property.  the SBA discounted the lien significantly, but insisted that the balance remain as an obligation of the debtor personally.

Steve K · Answer

I know several creditors rights attorneys who deal with servicers daily and from what i'm told they are getting more aggressive in seeking deficiency judgements, especially if the borrowers signed PG's and have assets to go after.  Obviously these are all non residential creditors rights attorneys.

If the attorney and asset manager think they can get the entire deficiency from you then I wouldn't expect much of a percentage discount.

Darryl Dahlen · Answer

It's too hard to predict what will/could happen in your scenario as there are a lot of varaibles in play. Did the SBA attach any of your home equity? Do you have pledged assets or collateral? How about a co-signer?

As mentioned, you really need to talk to your servicer to see where their temperment is at with this sort sceario.

Account Closed · Answer

I don't personally know of anyone walking away from a SBA 504 loan.  Perhaps others here do.

Walking Away from an SBA Loan?

Most Popular Reply