Liquidation Process

The liquidation process, responsibilities, and instructions.


Responsibilities and Instructions

Competing Non-SBA Liens

If your institution has any non-SBA loans to the borrower or its principals/guarantors, or has liens from any such loans against collateral securing the SBA loan, please be aware that proceeds from sale of collateral should be applied based on relative lien position as required by the SBA Loan Authorization.

SBA also would expect that prudent and reasonable liquidation-related expenses be allocated by lien priority. Please be mindful that SBA will only recognize other lender priority liens, such as purchase money liens, if the lender has properly perfected and received SBA’s prior written concurrence.  

Lender’s non-SBA-guaranteed loans and recoveries obtained on those loans

If your institution has any non-SBA-guaranteed loans to the borrower or its principals/guarantors, whether those loans are secured by any of the same collateral that secures the SBA-guaranteed loan or not, the lender must not take any action that will confer a preference upon itself in terms of recovery on its own loan as compared to its recovery on the SBA-guaranteed loan. The lender’s recoveries on each such loan against collateral securing both generally will be governed by lien priority, although SBA expects the lender to diligently pursue recovery of both liens.

When the lender takes collection action against borrower’s other assets or other assets of principals/guarantors (for example, through salary offset), SBA expects the lender to prudently pursue recovery on both loans. SBA also expects that any recoveries the lender realizes from such action will be divided pro rata (based on the comparative balances outstanding on the two loans) between the SBA-guaranteed loan and the lender’s own loan. SBA also would expect that prudent and reasonable liquidation-related expenses be allocated by lien priority if expenses can be so identified and broken out. However, if not practical, expenses to pursue actions affecting multiple loans can be shared pro rata between both such loans (although SBA would not agree to share in expenses exceeding its pro-rata share of recoveries).  

For additional questions or concerns email

Entering the Loan into Liquidation

How to request liquidation status transfer

The process begins when you notify SBA to reclassify a loan into liquidation status. Therefore, before any action can be done at the NGPC, the loan will have to be transferred into liquidation status.

For loans not currently in liquidation, please contact the SBA service center handling the loan, as follows:

Fresno CLSC
559-487-5803 (fax)

Little Rock CLSC
501-324-6072 (fax)
SBA will acknowledge your notification and authorize you to accelerate the maturity of the defaulted loan, if appropriate. In addition, you will also be authorized to continue servicing this account and, should liquidation and/or litigation become necessary, completely liquidate or sue upon any loan instrument. Please note that you are required to pursue the entire indebtedness regardless of the guaranteed percentage or any purchase thereof.

Reporting and Site Visit Requirements

Reporting Requirements

There is a dual reporting requirement on loans in liquidation

  • On a monthly basis, all SBA loans are reported on the SBA 1502 report. When the loan is transferred into liquidation status, please remember to change the status code on your monthly 1502 status report to “5” for in-liquidation status. Learn about SBA 1502: Status Reporting Codes.
  • Quarterly liquidation status reports must be submitted to SBA after purchase. These should be brief but comprehensive and we encourage you to email them to or fax to 202-481-4674.

Site Visit Report Requirements

SBA requires all lenders to make site visits and prepare a detailed report containing an inventory of remaining assets and an assessment of their condition and value. Site visits must be performed within 60 days of an unremedied payment default or sooner if there are assets with significant value that could easily be moved or depleted. If a payment default does not exist, but an event has occurred which would cause the loan to be placed in liquidation (i.e., bankruptcy filing, business shutdown, or foreclosure by a prior lienholder), a site visit must be done within 15 days of that event.

Liquidation Processing

This center will utilize loan resolution teams to manage cases. Upon receipt of your request for action, your request will be assigned to a team for resolution. The assigned loan specialist will either take action or contact you for additional information to complete the action requested. You may communicate with us through the following means:

Main Line: 703-487-9283
Fax: 202-481-4674
General Loan Resolution email:
Guaranty Purchase Requests email:

Request for Action

Closing the Case

Use the Final Wrap-up Report as a template for preparing a charge-off package.

To request cancellation of the SBA guaranty, email Please include the loan name and number on all correspondence.

Reporting the Loan Paid In Full

Once a loan has reached paid-in-full (PIF) status, the following steps will have to be completed in the following order:

  1. Notify of the paid-in-full status. Once your email is received, the NGPC will remove the loan from liquidation status to initiate the process of indicating a PIF status in the SBA mainframe.
  2. Report the loan as a code "6" on your next monthly 1502 reporting.

Note: If this process is not followed in the order as shown, the loan will show up on the Fiscal Transfer Agent's unreported list, and the SBA mainframe will not update to PIF status. If this happens in error, please contact with any questions or concerns.

Litigation Policies

Lenders who engage in litigation involving SBA loans must adhere to the following requirements:

  • Submit a litigation plan for prior approval (PLP Lenders included) for non-routine litigation, any litigation involving the appointment of a receive and litigation involving estimated legal costs exceeding $10,000.
  • Ensure that engagement of counsel is cost effective and legal fees are reasonable and customary
  • Ensure there are no conflicts of interest between lender and SBA

Do not name the SBA as a plaintiff in any case.

Lenders must sue in their own name. If you will be naming the SBA as a defendant for any reason, notify SBA before filing the action.

We frequently run into problems when a lender sends us general billings that do not show hourly work performed by counsel. The budget should include a fair estimate of the total cost of the litigation with itemized costs and hourly fees. Invoices submitted for payment must have detail by line item showing the task performed, the person doing the work, that person’s position, the time spent and the hourly rate.

The following pleadings should be submitted to the SBA with requests for approval of fees and litigation plans to the extent litigation is already started:

  • Complaints
  • Answers
  • Motions (such as motions for relief from the automatic stay in bankruptcy)
  • Orders
  • Judgments
  • Proposed Bankruptcy Plans and Disclosure Statements
  • Confirmed Bankruptcy Plans
  • Opposing Pleadings

For all loans, counsel will review attorney’s fees and actual legal bills (even those under $10,000) to ensure that they are necessary, reasonable and customary (this includes post purchase reviews). If expenses are determined to be unreasonable, unnecessary or not customary they will be deducted from any purchase request. If the lender has already deducted them from recoveries, lender will be requested to reimburse the SBA for those fees and expenses deemed to be either unnecessary or unreasonable.

The following legal fees and expenses will not be reimbursed by the SBA:

  • Any legal fees and costs incurred in an action brought against the SBA or in defending an action brought by the SBA.
  • Any legal fees and costs incurred in joining SBA in the litigation by way of cross claim or counter claim.
  • Any legal fees and costs incurred by lender’s outside counsel for performing non-legal liquidation services.
  • Actions which solely benefit lender as determined by SBA counsel.
  • Defense of lender liability cases except where the lender’s actions were expressly approved by SBA
  • Attorney’s fees not proposed in a Litigation Plan, unless determined by SBA counsel to be necessary, reasonable and customary in the locality in question.
  • Legal fees and costs incurred in excess of recovery where lender did not first obtain SBA approval of a litigation plan when one was required to be submitted.
Last updated August 22, 2023