SBA Collections and Hardship
What Happens When You Cannot Pay Your SBA Loan
Overview of SBA Collection Process
If you are unable to make payments on your SBA loan, understanding the collection process and your options is critical. The SBA has significant collection powers as a federal agency, but there are also hardship programs and negotiation possibilities.
This guide covers what happens when SBA loans go into default, the stages of collection, and what options may be available to you.
Important Disclaimer
This information is for educational purposes only and does not constitute legal or financial advice. If you are facing SBA collection actions, consider consulting with an attorney experienced in federal debt matters.
Stages of SBA Collection
Stage 1: Late Payment Notices
When you miss a payment, the SBA will send notices requesting payment. Interest continues to accrue. At this stage, you can often bring the loan current by making the missed payments plus any late fees.
Stage 2: Default Status
After a period of non-payment (typically 60 to 90 days), your loan is declared in default. The SBA may accelerate the loan, meaning the entire balance becomes due immediately. Default is reported to credit bureaus.
Stage 3: Internal Collection
The SBA's internal collection unit will attempt to collect the debt. They may offer repayment plans or settlement options. This is often the best time to negotiate, as the SBA prefers to resolve debts without further action.
Stage 4: Treasury Referral
If internal collection fails, the debt is referred to the Department of Treasury for collection. Treasury has additional collection tools including Administrative Wage Garnishment and the Treasury Offset Program.
Stage 5: Treasury Offset Program
Once in the Treasury Offset Program, the government can seize federal payments you are owed. This includes tax refunds, Social Security payments (up to 15%), federal salary payments, and federal contractor payments. State tax refunds may also be intercepted through reciprocal agreements.
Your Options When Facing Collections
Hardship Payment Plan
You may be able to negotiate a reduced payment plan based on your financial situation. This typically requires demonstrating inability to pay the full amount and providing detailed financial documentation. Payment plans may be interest-only for a period or reduced principal payments.
Offer in Compromise
In some cases, the SBA may accept less than the full amount owed to settle the debt. This is more common when the borrower can demonstrate that full collection is unlikely (business closed, no assets, hardship circumstances). Settlement amounts vary but may be 50 to 80 percent of the balance.
Deferment Request
For temporary hardships, you may request a deferment period where payments are paused. Interest typically continues to accrue during deferment. Deferment is most often granted for specific hardship situations like medical emergencies or natural disasters.
Dispute the Debt
If you believe the debt amount is incorrect or the loan was improperly serviced, you can file a dispute. Request your loan file through FOIA to review what records the SBA has. Disputes should be made in writing with specific documentation of the error.
What SBA Cannot Do
While the SBA has significant collection powers, there are limits:
- The SBA cannot garnish wages without following administrative wage garnishment procedures (you have the right to a hearing)
- Certain income is protected from offset, including SSI, VA benefits, and most federal employee retirement
- The SBA must follow due process requirements before taking collection actions
- State exemptions may protect certain property from seizure
Personal Guarantee Implications
Most SBA loans require personal guarantees from business owners. This means you are personally liable for the debt even if your business closes. The SBA can pursue your personal assets to collect guaranteed amounts.
Steps to Take If You Cannot Pay
1. Contact the SBA Immediately
Do not wait for collection actions to begin. Contact the SBA as soon as you know you cannot make payments. Earlier contact generally results in better options.
2. Document Your Financial Situation
Gather documentation of your income, expenses, assets, and liabilities. You will need this information to request hardship accommodations.
3. Respond to All Communications
Ignoring SBA communications does not make the debt go away. Each communication may contain deadlines and options that expire if not acted upon.
4. Consider Legal Consultation
For significant debt amounts or complex situations, consulting with an attorney experienced in federal debt can help you understand your options and rights.
5. Keep Records of Everything
Document every communication with the SBA including dates, names, and what was discussed. Keep copies of all documents you submit.