Business debt relief
SBA loan default
What happens when an SBA 7(a) loan or a COVID EIDL goes unpaid, how federal collection works once a debt reaches the Treasury, and the options owners have before and after a default.
Which kind of SBA loan do you have?
It matters, because the path after a missed payment is different. A 7(a) loan (SBA, opens in a new tab) is made by a bank or other lender and partly guaranteed by the SBA, so you deal with the lender. A COVID EIDL (SBA, opens in a new tab) was lent by the SBA directly, so you deal with the SBA.
| Question | 7(a) loan | COVID EIDL |
|---|---|---|
| Who you pay and talk to | Your lender | The SBA |
| Personal guarantee | Generally required (eCFR, opens in a new tab) from owners of 20% or more | Depends on your loan documents |
| Help before default | Servicing options under the lender's SBA rules | Hardship accommodation, if you qualify |
| After liquidation | Any balance can be referred to the Treasury | Referral to the Treasury for collection |
What happens after you miss payments?
The exact steps depend on the loan documents, but the order is broadly the same. Each stage closes off some of the options the one before it had.
- Missed payments
Delinquency
Late notices and calls. Options are widest here.
- Default
The loan is called
The full balance can be demanded, as the loan documents allow.
- Liquidation
Collateral is sold
Pledged business assets are sold and the proceeds applied to the loan.
- Guarantors
Owners are asked to pay
Anyone who signed a personal guarantee is pursued for what is left.
- Charge-off
Referral to the Treasury
What remains goes to the Treasury for federal collection.
The SBA puts the last step plainly: once liquidation is done, any remaining balance is charged off and the parties referred to the Treasury (SBA, opens in a new tab). A charge-off does not end the debt. It is how the debt moves to federal collection.
What can the Treasury do to collect?
Once a debt reaches the Treasury's Cross-Servicing program (U.S. Treasury, Bureau of the Fiscal Service, opens in a new tab), collection tools widen. They include demand letters and calls, private collection agencies, administrative wage garnishment, credit bureau reporting, offset of federal and state payments owed to you, and referral to the Department of Justice for a lawsuit.
For COVID EIDLs, the SBA says an account may be referred for offset (SBA, opens in a new tab) after 120 days of delinquency. It also says that once a loan moves to Cross-Servicing, it is no longer serviced by the SBA, and the SBA can no longer help.
That is why the time before referral is when you have the most room to work something out.
What can you do before a default?
Talk to the lender, or to the SBA for an EIDL, while payments are still being made or have only just been missed. It is easier to show a temporary problem than to undo a default.
- For a COVID EIDL, ask about hardship accommodation (SBA, opens in a new tab), which can halve payments for six months. Interest keeps accruing, which can mean a larger payment at the end.
- For a 7(a) loan, ask the lender what servicing options its SBA rules allow, such as a changed schedule.
- Before either call, put real numbers together: cash in, cash out, and what the business can pay each month.
Keep notes of every call, and get any change to the loan in writing.
Can you settle an SBA loan for less than you owe?
Sometimes, through an offer in compromise: an offer to pay less than the full balance to settle the debt. The SBA says an offer needs SBA Form 1150 and a financial statement (SBA, opens in a new tab) from each person or business asking to be released.
It is usually not a quick exit. The SBA form says it may be submitted only after all collateral is liquidated (SBA, opens in a new tab), and that COVID EIDLs cannot be forgiven. Expect a close look at what each guarantor owns and earns.
A compromise that releases the business but not a guarantor leaves that person owing the rest.
Where does a negotiator fit with an SBA loan?
Clear Financial Company can help you prepare the numbers and talk with a lender about what the business can afford, as part of business debt relief. The SBA and the Treasury follow their own rules and forms, and no one can promise a particular result.
If you have been sued, or a debt has been referred to the Department of Justice, talk to a business attorney. For taxes on any forgiven balance, talk to your accountant before you agree to anything.
Things you should know
The downsides, stated plainly.
Read these before you talk to anyone about business debt, including us.
- Business debt negotiation is not a loan and does not lower what you owe until a funder or lender agrees in writing.
- Funders and lenders may keep collecting, report to business credit bureaus, or sue while talks go on. A personal guarantee can make you personally liable.
- Merchant cash advance contracts differ. Some funders will not negotiate, and results depend on your contracts and your cash flow.
- Forgiven business debt may be taxable. Talk to your accountant before you agree to any settlement.
- We do not give legal or tax advice. If you have been sued or served, talk to a business attorney right away.
- Fees apply. Ask for every fee in writing before you agree to anything, with us or anyone else.
Notes on the figures and claims above
- 1Business debt negotiation results depend on your contracts, your funders and lenders, and your cash flow. No outcome is guaranteed. Funders and lenders may keep collecting, report to business credit bureaus or sue, and a personal guarantee can make you personally liable. Forgiven business debt may be taxable.
Can the government take my tax refund for an SBA loan?
It can, once the debt has been referred for offset. The Treasury Offset Program withholds federal payments such as tax refunds, to the extent the law allows, to pay delinquent federal debt.
Does closing the business end an SBA loan?
No. The debt remains, collateral can be sold, and owners who signed a personal guarantee can be pursued for the rest.
Can I settle a COVID EIDL?
The SBA's offer in compromise form says COVID EIDLs cannot be forgiven. Your best window is before a default: ask the SBA about hardship accommodation early.
Is an SBA loan default reported to credit bureaus?
It can be. Lenders may report to business credit bureaus, and the Treasury lists credit bureau reporting among its collection tools once a debt is referred.
Sources
Where the facts on this page come from. Each link opens the original in a new tab.
- 01 SBA 7(a) loans (opens in a new tab)
- 02 SBA COVID-era programs: COVID EIDL repayment, hardship accommodation and Treasury referral (opens in a new tab)
- 03 SBA Post-servicing actions: offers in compromise and charge-off (opens in a new tab)
- 04 SBA SBA Form 1150: Offer in Compromise (opens in a new tab)
- 05 U.S. Treasury, Bureau of the Fiscal Service Cross-Servicing: collecting delinquent nontax debt owed to federal agencies (opens in a new tab)
- 06 eCFR 13 CFR 120.160: Loan conditions (personal guarantees) (opens in a new tab)
Next step
Behind on an SBA loan? Talk to a real person.
Call 866-659-7966, or start with the four short steps. Nothing is signed until you say yes.
Four short steps
Your estimate first. Contact details last.
- 1How much you owea close guess is fine
- 2What kinds of debtpick all that apply
- 3Which state you live inchecked before anything else
- 4Your estimate, then a real person if you want one