What will happen if I default on a SBA loan?

[businessproblem]

What is the name of your state? Hawaii

I received a SBA loan 3 years ago and used it for equipment and the build out costs to start a business. At the time of getting the loan, my only asset was my house with no equity. The banker asked my to sign a personal guarantee, but when we listed the things that would be used as collateral, he told me my house would not be used and asked only for a list of equipment that was to be purchased. The loan was for $100,000 over a period of 5 years and backed by the SBA at 85%. The business was profitable the 1st year of operation, but I never withdrew any money from the business because I wanted to make sure the the business would remain profitable first. Later in the second year of operation the Anchor store, next to my business, went out of business and my location lost a lot of foot traffic. Now a year later I have lost a lot of money and maxed out my credit cards trying to stay solvent. I owe about $50,000 on the SBA loan.

My question: If I close the store and default on the loan, what are the chances the bank or SBA will come after me? Technically I know that I am responsible for the loan, but I have read many stories in the past about the government not going after people when they lose money in business dealings. Also, will this ruin my credit or will it just destroy any chances I have of getting another SBA loan in the future?

 

[businessproblem]

any one have any ideas about this?

 

[Michael Wechsler]

Originally posted by businessproblem
What is the name of your state? Hawaii

I received a SBA loan 3 years ago and used it for equipment and the build out costs to start a business. At the time of getting the loan, my only asset was my house with no equity. The banker asked my to sign a personal guarantee, but when we listed the things that would be used as collateral, he told me my house would not be used and asked only for a list of equipment that was to be purchased. The loan was for $100,000 over a period of 5 years and backed by the SBA at 85%. The business was profitable the 1st year of operation, but I never withdrew any money from the business because I wanted to make sure the the business would remain profitable first. Later in the second year of operation the Anchor store, next to my business, went out of business and my location lost a lot of foot traffic. Now a year later I have lost a lot of money and maxed out my credit cards trying to stay solvent. I owe about $50,000 on the SBA loan.

My question: If I close the store and default on the loan, what are the chances the bank or SBA will come after me? Technically I know that I am responsible for the loan, but I have read many stories in the past about the government not going after people when they lose money in business dealings. Also, will this ruin my credit or will it just destroy any chances I have of getting another SBA loan in the future?

I wouldn't think of blowing this off. Are you saying that the loan was in the business' name and backed only by assets of the business? If the business is responsible, you won't have personal liability but I'm not confident that this is the case here and it seems that you indicate that you are on the hook personally somehow.

I am sure that you will see someone come after the money. What cases have you heard regarding the government not coming after people for money that is lost on a loan? I'm not sure that this is such an exception and you may want to speak to a legal professional to review your loan agreement and determine what might be the most prudent steps to take next.

 

[businessproblem]

yes, I signed a personal guarantee.

I read and saw a couple of case a while back in newspapers and on TV. The case that I read in the Honolulu Advertiser was about a Hawaii State office that was lending money to business and had a very high default rate. Sometimes they had even lent money to people that had fictious businesses and had skipped town back to their native country. Which made the state agency look very bad since they were only suppose to loan money to legal state residents. I also saw a show, I think 60 minutes, a long time ago about the fleecing of america and how hundreds of doctors had borrowed in excess of $100,000 to attend expensive medical schools. Upon completing their residency these Doctors had an obligation to work in a low income neighborhood for a certain amount of years or payback the loan. A lot of them just went about the business and the government was just screwed. Of course the reporter was criticizing the government for wasting tax dollars. I also know from personal experiences that some of my friends skipped out on ROTC scholarships when we were in college. They took 4 years of money and never went into the military and never paid back the money.

Of course I know these examples are not the SBA which probably has people solely dedicated to crush people when they default on loans. But I still wonder will the SBA come after me given the complete situation. 1st, I only owe $50,000, which is almost the minimum amount of money the SBA will loan. 2nd, I have paid back half of the loan and for 3 years. I have even maxed out my credit cards to stay solvent, which I believe shows that I made a good faith effort to pay back the loan. 3rd, I'm broke and in debt, so if they come after me they won't be getting anything anytime soon. I also found an article about a study showing that the SBA has not done a good job checking out people they loan money too and has loaned money to people that have defaulted on previous loans. http://www.cdfa.net/cdfa/press.nsf/pages/522

The agreement I signed with the SBA has a paragraph from the Debt Collection Act of 1982 and Deficit Reduction Act of 1984. It states, "These laws require SBA to aggressively collect any loan payments which become delinquent. SBA must obtain your taxpayer identification number when you apply for a loan. If you receive a loan, and do not make payments as they come due, SBA may take one or more of the following actions:
-Report the status of your loan(s) to credit bureaus
-Hire a collection agency to collect your loan
-Offset your income tax refund or other amounts due to you from the federal government
-Suspend or debar you or your company from doing business with the federal government
-Refer your loan to the Department of Justice or other attorneys for litigation
-Foreclose on collateral or take other action permitted in the loan instruments."

Now for the lender. The agreement I signed is pretty vague and allows the bank to basically claim my first born child or just forgive the debt all together. Here is what the agreement says,

LENDER'S GENERAL POWERS:
Without notice and without Borrower's consent, Lender may:
A. Bid on or buy the Collateral at its sale or the sale of another lienholder, at any price it chooses;
B. Incur expenses to collect amounts due under this Note, enforce the terms of this Note or any toher Loan Document, and preserve or dispose of the Collateral. Among other things, the expenses may include payment for property taxes, prior liens, insurance, appraisals, environment remdiation costs, and reasonable attorney's fees and costs. If Lender incurs such expenses, it may demand immediate repaymnet from Borrower or add the expenses to the principal balance;
C. Release anyone obligated to pay this Note;
D. Compromise, release, renew, extend or substitute any of the Collateral; and
E. Take any action necessary to protect the Collateral or collect amounts owing on this note.


Line "C" tells me that they don't have to come after me if they don't want to. But I want to know what are the chances they will come after me. When I first got the loan, the banker had the option to put my house as collateral and chose not too. I did sign a personal guarantee, but still why didn't he want me to put my house as collateral. Now if I'm unable to sell the store and it looks like I am going to close the store, I will talk to the bank and see what are my options. But I really want to know would the bank come after me if they know there is nothing they can get from me since I am broke and in debt. Or will they just write off the loan, which is now almost the minimum amount the SBA will lend, and get their 85% from the SBA.

What do you think lawprofessor? Thanks for replying and I'm also interested in hearing from other.

 

[rkurashima]

Any Updates?

Just checking to see if anyone had updates on this post. I am an Air Force reservist and was called to active duty. While deployed to Iraq the shop was shut down and could not be sold (no buyers). Now after 7 months I am still paying the SBA loan, but cannot continue to do this for much longer. The SBA loan is being partially secured by my mother's home which already has 2 mortgages on it. If the bank decided to foreclose on my mother's home there would be no equity left to pay them after the first and second mortgage. Would the bank foreclose anyway? Any suggestions?