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The U.S. Small Business Administration (“SBA”) is a cabinet-level federal agency that helps entrepreneurs grow their businesses by assisting with access to loans. Established in 1953, the SBA aims to assist the interests of small businesses while helping them to thrive in a competitive marketplace. The mission of the SBA is to promote the establishment and growth of small businesses, thereby contributing to economic development and job creation.

How the SBA Supports Small Businesses: SBA Loans

The SBA envisions a strong and vibrant small business sector that drives innovation and economic growth in the U.S. The SBA does not lend money directly but guarantees loans made by private lenders so that there is less risk for the lender and more incentive for lending to small businesses and their owners. These loans can be used for a variety of purposes, including start-up, purchasing equipment, working capital, and real estate acquisition or improvement.

The SBA plays a vital role in the U.S. economy by fostering entrepreneurship and supporting small businesses, which are critical to job creation. Small businesses represent most of all U.S. businesses and account for nearly half of all private sector jobs. By providing funding, training, and resources, the SBA helps to create a more dynamic and competitive marketplace.

What Happens When a Small Business Defaults on a Loan Guaranteed by the SBA

Unfortunately, if a business fails or defaults on the loan, then the lender will seek to collect the remaining balance due from the business assets, and, if personally guaranteed, the business owners. Given that the debt is ultimately owed to the SBA, a federal agency, they have special debt collection abilities beyond that of local lenders. Whereas a lender is limited to filing a lawsuit, including foreclosure, or referring the matter to a collection agency, the SBA has other powerful tools to collect the debt. 

The SBA can issue a notice to the Treasury Offset Program (“TOP”) and/or an Administrative Wage Garnishment (“AWG”) notice directly to an employer. The TOP authorizes the federal government to take a portion of any federal wages or Social Security benefits owed to the borrower, as well as seizing in full any vendor payments or income tax refunds.

The AWG allows wages to be garnished up to 15 percent of disposable income which is essentially the net pay after deductions. Although both local lenders and the SBA must sue within 6 years of the default if they wish to obtain a judgment against the borrower, there is unfortunately no statute of limitations for either TOP or AWG. Either can occur more than 6 years after the default and they will remain in place until the debt is paid in full, including interest and collection fees. Therefore, it is crucial to work with the SBA and attempt to resolve the debt after a default. 

How to Resolve a Defaulted SBA Loan

One possible way to resolve a defaulted SBA loan is an Offer in Compromise (“OIC”). The SBA offers an OIC program for borrowers facing financial hardship. This program allows eligible borrowers to settle their debt for less than the full amount owed, provided certain criteria are met. Applying for an OIC requires thorough documentation and proving that not only is the business shut down and liquidated, but also that the borrower’s personal financial situation is bleak.

Another effective way to deal with a defaulted SBA loan is to consider filing for bankruptcy relief. Bankruptcy is a powerful tool available to businesses and guarantors that can assist in either reorganizing business operations to cure the default and continue operating, or to clear out the debt altogether if the business operations have ceased and repayment is not possible. Bankruptcy will prevent or stop collection activity, including TOP and AWG.

How a Bankruptcy Lawyer Can Help

McConville Considine Cooman & Morin has the expertise to assist both debtors and creditors in all aspects of bankruptcy. Our bankruptcy lawyers have decades of experience representing people and companies in bankruptcy court and can assist you with your financial issues and help guide you through the bankruptcy process from start to finish. As a federally designated Debt Relief Agency, we assist people and companies with finding solutions to their debt problems, including, assisting them with the filing of petitions for relief under Title 11 of the United States Bankruptcy Code. 

If you have questions regarding an SBA loan, loan repayments of bankruptcy, our bankruptcy attorneys, Mikal J. Krueger at mkruger@mccmlaw.com or 585-512-3546, Lucien A. Morin, II at lmorin@mccmlaw.com or 585-512- 3534 or Douglas J. Lustig at dlustig@mccmlaw.com or 585-546-2500.

This publication is intended as an information source for clients, prospective clients, and colleagues and constitutes attorney advertising. The content should not be considered legal advice and readers should not act upon information in this publication without individualized professional counsel.

About MCCM

McConville Considine Cooman & Morin, P.C. is a full-service law firm based in Rochester, New York, providing high-quality legal services to businesses and individuals since 1979.  With over a dozen attorneys and a full paralegal support staff, the firm is well-positioned to right-size services tailored to each client. We are large enough to provide expertise in a broad range of practice areas, yet small enough to devote prompt, personal attention to our clients.

We represent a diverse range of clients located throughout New York State and New England.  They include individuals, numerous manufacturing and service industry businesses, local governments, and health care professionals, provider groups, facilities and associations. We also serve as local counsel to out-of-state clients and their attorneys who have litigation pending in Western New York courts.  For more information, please contact us at 585.546.2500.