SBA Loan defaults and how it may effect your credit score

It seems I get this question almost every day from clients and here is some good insight on this topic.

Depending on how you handle and deal with the defaulted SBA loan, it can have major negative ramifications on your personal credit for years.  And, if you are forced into a bankruptcy as a result of the default, it can stay on your credit for up to 8 years.

When the business fails, the bank will come looking for you – the business debt is now personal debt via the mechanism of the personal guarantee.   The bank’s attorney can file for and obtain a judgment against you, and  JUDGMENTS ARE REPORTED TO THE CREDIT AGENCIES.  Any asset you own can be subject to the judgment.

If you choose to ignore the bank and the SBA,  they can freeze your personal checking accounts.

IF you default on an SBA loan, the bank has the right to pursue you for the balance, by virtue of your personal guarantee.  However, if you take advantage of the fact that the bank (and the SBA) are willing and open to negotiate a settlement on balance due, you can settle this debt BEFORE it is recorded on your credit report.

The SBA offers and encourages banks to allow borrowers to make an Offer In Compromise (OIC).  If you can present an OIC that the bank feels is a fair representation of what the bank would get at the end of a long, costly legal pursuit, you can negotiate a settlement relatively quickly.  It is not easy, and requires a deep understanding of the SBA, bank regulations, and the OIC process, but it can be extremely effective and is a much better alternative than either bankruptcy or legal judgments. (Please note that Community members may not include personally identifiable information, such as phone numbers and email addresses, in posts. )