Do you have an SBA loan? In the past year, there has been a significant increase in businesses seeking Small Business Administration (SBA) loans, with numbers rising by 50%. Many of these businesses sought financial help due to the challenges brought on by the COVID-19 pandemic. Small businesses such as restaurants, dry cleaners, and schools, especially those relying on in-person services, were hit hard by shutdowns and restrictions. As a result, many turned to SBA loans to weather the storm.
While these loans can provide much-needed relief, failing to meet SBA loan obligations can lead to severe financial and legal consequences. Understanding the potential consequences is crucial if you are a business owner struggling with your SBA loan. Here is what you need to know.
Financial Consequences of Defaulting on Your SBA Loan
If you are unable to keep up with your SBA loan payments, the loan can default, triggering a series of financial issues that can be incredibly stressful. One of the first consequences is accumulating significant interest and late fees. As a business owner, these penalties can quickly spiral, adding even more financial strain.
In addition to interest and fees, the SBA has the authority to accelerate the loan terms, meaning it can demand the full amount of the loan be paid immediately. This can be a major setback for your business.
But that is not all. The SBA has several aggressive collection methods at its disposal to recover the debt, which may include:
- Wage garnishment: The SBA can garnish your wages, taking a portion of your income directly from your paycheck.
- Bank account levies: They can freeze and seize funds from your business or personal bank accounts.
- Credit impact: Defaulting on your SBA loan will severely damage your business and personal credit score, making it more difficult to secure credit in the future.
The Legal Consequences: What Happens When the SBA Takes Action?
The financial consequences are concerning, but the legal repercussions can be even more alarming. The SBA has powerful tools because it is a government entity. Unlike other creditors, the SBA can:
- Hire a law firm or take legal action directly to collect the loan.
- Seize your tax refund: The SBA can intercept any tax refunds you might be owed.
- Levy your bank account: In some cases, the SBA can levy your account without prior notice, which can be unsettling and disruptive to your business operations.
As a business owner, these actions can feel like a perfect storm of financial and legal stress.
Can Bankruptcy Help with an SBA Loan?
While the situation may seem dire, there is some good news. Bankruptcy can offer a way out for business owners struggling with an SBA loan. Many people don’t realize bankruptcy can help discharge or restructure SBA loan debts, giving business owners a fresh start.
Take, for example, Lorraine, a restaurant owner who found herself in a tough spot after taking out an SBA loan at the beginning of the pandemic. Lorraine had every intention of repaying the loan, but as COVID-19 restrictions dragged on and business revenues remained low, she faced rising food costs, increasing wages, and an unmanageable loan obligation. Despite her best efforts, her restaurant ultimately closed.
However, Lorraine sought legal help, and her bankruptcy attorney was able to help her discharge the SBA debt, allowing her to move forward without the loan’s burden. Today, Lorraine is back in the workforce, earning a steady income, and is free from the stress of dealing with the SBA loan.
What Should You Do If You Are Struggling with an SBA Loan?
You do not have to face it alone if you are a business owner facing financial distress and struggling to meet your SBA loan obligations. Many business owners do not realize options are available, and bankruptcy could be a potential solution.
Contacting a bankruptcy attorney does not necessarily mean you are filing for bankruptcy. It simply means you are exploring all your options and seeking the best possible strategy for your business’s future. A bankruptcy lawyer can help you assess your situation and guide you through decision-making.
If you’re feeling overwhelmed by the stress of an SBA loan, reach out for a free consultation. There are always options to explore, and getting the right legal advice could give you the peace of mind and solutions you need to move forward.