How to Settle SBA Loan Debt: Complete Guide to Debt Relief Options

If you’re having trouble repaying your SBA loans—loans backed by the government’s Small Business Administration (SBA)—seek out SBA debt relief as soon as possible. Failing to repay your SBA loans could have serious consequences and lead to aggressive collection tactics.

Here’s what you need to know about SBA debt relief and how to get it.

What Is SBA Debt Relief?

SBA debt relief refers to the various assistance and hardship options offered through the Small Business Association and lenders who issue SBA loans. As a borrower, your options will vary depending on the: 

• Type of loan

• Lender or loan servicer 

• Balance on your loan 

• Type of hardship

Consumer debt relief options like debt settlement don’t apply to SBA debts. Businesses that can't pay should reach out to specific programs that may be able to help. 

You could also seek assistance from your lender directly. Your lender might defer your loan payments (paying them at a later time), restructure your repayment terms, negotiate a smaller balance, reduce your payment amount or interest rate, or settle your debt entirely. The options will vary by lender and loan program.

What happens if you default on an SBA loan?

Seek help when you need it. Failing to pay your SBA loans as directed could seriously impact your life and finances. The government could:

• Withhold tax refunds and Social Security benefits

• Garnish your bank account or wages (hold back part of your paycheck)

• Deny you other federal loans (including federally backed mortgage loans, student loans, and more)

• Charge collection fees

• Take legal action against you

• Revoke your professional or vocational license

• Place a lien against your property

• Seize the collateral securing the loan (your shop, equipment, vehicle, etc.)

You may also find yourself on the receiving end of aggressive collections attempts. Collection efforts could continue for years or even decades if the debt remains unpaid. Also, your personal credit score is likely to take a hit.

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Understanding SBA Loan Settlement

SBA loan settlement is where you offer to pay a portion of your outstanding loan balance to the SBA in exchange for the government forgiving the remainder of your debt. 

SBA loans are backed by the federal government, but you typically apply for them through traditional lenders, like banks. If the loan is approved, the SBA insures it, meaning the SBA agrees to refund the lender if you're not able to keep up with the payments. But that doesn't mean you're off the hook if you fall behind.

The lender will likely try to collect payment from you first. If they're unable to collect for 120 days, the loan goes into default. At that point, the lender typically files a claim with the SBA to get its money back. Then, the SBA comes after you for the money for your loan repayment.

You may be able to settle some of your debt via an offer in compromise (OIC). To do this, you typically have to close your business. You may also need to sell any business equipment or anything you put up for collateral, like your home, to pay off the remaining debt.

A successful OIC asks you to demonstrate you have no way to pay the remaining balance. You may need to submit a hardship letter detailing why you've been unable to make your loan payments as scheduled. You might also have to provide cash flow statements to prove your incoming cash is insufficient to allow for a greater loan payment.

This documentation doesn’t guarantee an OIC. If the SBA doesn't feel your offer is adequate, it can garnish your wages and your tax refunds or even take money directly out of your bank account to recover what it's owed. That's why it's critical to avoid SBA loan default at all costs by keeping an open line of communication with your lender.

SBA Offer in Compromise (OIC) Process

After you've defaulted on your loan and the SBA has paid the lender on your behalf, you'll have a chance to make an offer in compromise. This is a form of debt relief where you offer to pay what you can, usually a lump sum, and ask the SBA to forgive the remainder.

This option is only worth considering if you're ready to close your business. Liquidating all collateral is also necessary for the SBA to consider your offer. 

If you decide to pursue an OIC, you must fill out SBA Form 1150 and SBA Form 770. The SBA uses these to determine if your offer is fair or whether you can afford to pay more toward your debt.

Form 1150 details the offer you're making and the reasons for your financial hardship. Form 770 is a deeper dive into your personal finances to assess your ability to repay your loan. You'll need to provide a breakdown of your assets and liabilities as well as other loans payable, real estate, life insurance policies, and income from your job. You'll also be asked for details of your household monthly expenses and your dependents.

A workable compromise offer must meet the following criteria:

• No fraud or misrepresentation

• Full disclosure of your financial capacity

• Accurate valuations for any property you put up as collateral

• Clear identification of the source of funds you'll use to pay the OIC amount

Even if you check all these boxes, it's not a slam dunk. You'll have to wait several months for the SBA to review your offer, and even then, you might not get approval. 

If the SBA rejects your OIC, it refers your account over to the Treasury. The Treasury will then take steps to recoup the outstanding balance. This may include:

• Withholding certain government benefits or tax refunds

• Garnishing your paychecks or bank accounts. A bank account garnishment is also called a levy.

Usually, lenders need to get a court order to do these things, but there's an exception for the federal government.

You won't lose all your money to wage garnishment. Typically, you'd owe 15% of your disposable income per month until the debt is repaid. What counts as disposable earnings depends on how much you earn and how frequently you're paid. 

You should get 30 days' notice before the garnishment begins, and you'll have the opportunity to contest it if you feel it's unfair. If you do this, the garnishment won't begin until after a court has ruled on whether the garnishment can go ahead.

What Kind of SBA Debt Relief Is Available?

The Small Business Administration offered pandemic-related hardship options that are now mostly expired. The exception is certain Paycheck Protection Program (PPP) loans. If your loan hasn’t yet matured, you may still be able to apply for forgiveness. 

You can apply for forgiveness any time up to five years from the date that SBA issued the SBA loan number.

See the SBA's guidance on PPP loan forgiveness for more information.

SBA Small Business Debt Relief Program

The SBA Small Business Debt Relief Program, which is no longer available, was designed to help businesses survive ‌the downturn during the pandemic. Under the CARES Act, the SBA covered six months of regular monthly payments for borrowers with a 7(a), 504, or Microloan in regular service as of March 1, 2020.

SBA Debt Relief Options Through Your Lender or Servicer

You may have an easier time negotiating a settlement with the private lender that issued your SBA loan than with the SBA itself. Reach out to your lender as soon as you begin to have difficulty paying your loan.

Lenders don't want you to go into default because that makes it much harder for them to get the money they're owed. So they're often willing to work with you to come up with some sort of arrangement that will keep some money coming in consistently. They may have specific relief or assistance programs they can offer you or they might be willing to restructure your loan. 

Some common SBA debt relief options include:

• Extending your repayment period. Your lender may allow you to lengthen your loan term, for example, from 10 years to 20 years. This move lets you spread your balance over a longer period, lowering your monthly payments and making them easier to pay. This will mean paying more in long-term interest, so weigh the pros and cons before extending your loan term.

• Modifying your loan. Your lender may also offer to make other modifications like reducing your interest rate. This could lower your monthly payment and make repaying your balance easier.

• Deferring your loan or putting it in forbearance. Deferral and forbearance put your payments on pause due to financial hardship. These amounts are usually added to the end of your loan term, though there can be other arrangements. Interest may or may not accrue on these plans.

• Settling your loan balance. In some cases, a lender may be willing to settle the debt entirely. They may allow you to pay less than the full amount you owe (and forgive the rest) in exchange for immediate payment.

Contact your lender’s customer service department to get the full breakdown of what kind of relief might be available in your case. 

Debt settlement may only be an option for you if the loan is unsecured—that is, not backed by collateral. If yours fits that bill, you can try negotiating a settlement amount with your lender directly. However, many will only consider this after you've already fallen behind on your payments.

You'll have to go through similar steps to negotiating an OIC with the government. You'll need to send a letter outlining the details of your financial hardship and listing the amount you're prepared to pay as a lump sum. You'll also need to provide financial statements to back up what you're saying. 

If you're not comfortable negotiating with your lender yourself, you can always work with a professional company like Freedom Debt Relief instead. It has over two decades of experience negotiating with many types of creditors, and it can take a lot of the legwork off of your plate in exchange for a fee.

Preparing for SBA Loan Settlement

Preparing to make an SBA loan settlement offer is often about getting your financial documents together. These are key for your lender or the government to assess whether the offer is an adequate reflection of your ability to pay. Most won’t make a decision on your settlement offer until you've provided the appropriate financial documentation, so having it ready at the start can help you speed up the process.

The exact documents your lender or the SBA could ask you to provide may vary, but they may include:

• Profit and loss statements. This shows how much money you've made or lost over a certain period of time.

• Business balance sheet. A balance sheet gives the current values of your assets and the outstanding balances on your liabilities.

• Bank statements. You'll need to provide the balances of your business bank accounts and possibly your personal bank accounts as well.

• Accounts receivable and accounts payable. This gives insight into money you may have coming in and bills you'll have to pay out.

• Asset valuations for business property. When you make a settlement offer, the lender or the SBA will want to follow up to make sure the property is worth what you claim it is.

You may already have this information on hand. If not, you may need to spend some time putting it together before you can see the whole picture and decide what amount to offer to settle your account.

Before you submit your documents, give everything a look to make sure the details are consistent across all accounts. This helps avoid delays due to inaccurate information. 

If you're struggling to put together the documents you need on your own, you may need to enlist the help of an accountant or financial advisor who could help you fill out the necessary forms and identify any key information that might be missing from your documents.

Where Else Can I Find Business Debt Relief?

If you’re not eligible for help or you’re uncomfortable negotiating directly, you can consider these options.

Employ a debt relief company

Some companies work on your behalf to negotiate a settlement with your lenders. It's important to recognize that a professional debt settlement company may not be able to assist you with your SBA loan if it's a secured loan. Lenders are often less willing to negotiate these loans because there's collateral they can seize and sell to get their money back if you don't keep up with payments. 

Even if your SBA loan isn’t eligible for debt settlement, your other debts might be. For example, credit card debt, medical debt, and personal loan debt are all good candidates for debt settlement. If you clear your eligible debts, that could make it easier to keep up with the debts that aren’t negotiable. Debt settlement has a negative impact on your credit standing. Learn more about how debt settlement works to decide if it's right for you.

Hire an SBA attorney

SBA attorneys have expertise in all things small business, including SBA loans and debt settlement. You may want to employ one of these for help in making your OIC to ensure you're checking all the necessary boxes and making an offer that's fair.

Hire a debt relief attorney

They can be helpful if you’re dealing with constant collections attempts that feel aggressive or harassing. They can also help if the government has started garnishing your wages or taking other extreme measures in light of your non-payment. 

File for bankruptcy

Chapter 7 bankruptcy could help you deal with any unsecured debt, including an SBA loan if it’s not tied to collateral. It’s also a way to deal with various credit cards, loan balances, and other eligible debts you're unable to pay back. With Chapter 13, you pay into a court-ordered plan for three to five years to repay some or all of what you owe. After making all prescribed payments, any remaining eligible balances are discharged. 

Bankruptcy is considered an extreme move, but it may be the right answer to your situation. Consider bankruptcy only after carefully weighing the consequences. Bankruptcy creates a public record that anyone can see, and it stays on your personal credit report for seven to 10 years. On average, bankruptcy drops your personal credit scores between 130 and 240 points. Getting financially stable could put you in a better position to build and maintain good credit in the future.

SBA Debt Relief vs. Consolidation vs. Refinancing

The SBA Small Business Debt Relief Program was a short-term measure related to the pandemic, and it only applied to specific types of debt.

Business debt refinancing uses a new loan or credit card to pay off existing business debt. The goal is usually to reduce your interest rate. For example, if you have a $5,000 business loan at 15% APR, you could save money by refinancing with a new loan that has a 10% APR.

Business debt consolidation is when you use one larger loan to pay off several smaller loans or credit cards. Consolidation can simplify your payments, giving you one due date instead of many.

You can refinance and consolidate your business debt at the same time if you have multiple higher-interest debts you want to bring together under one lower-rate loan. Your ability to qualify for a loan with a lower rate will depend on your:

• Business credit score (if you have an LLC or corporation)

• Personal credit score (if the loan requires a personal guarantee)

• Current APR

• Existing debt balances

• Assets and/or collateral

Common Mistakes to Avoid When Settling SBA Loans

Here are some common mistakes you'll want to avoid when attempting to settle your SBA loan debt:

• Avoiding your lender or the SBA. Lenders are often willing to work with you if you reach out to share your situation. You'll have the most options if you're proactive and address your concerns early.

• Not understanding the proper order of contact. If you're only a little behind on your payments, reach out to your lender. If your loan has already gone into default, you may need to reach out to the SBA to discuss a settlement offer.

• Not keeping proper documentation. Documentation is key to making any sort of settlement offer. Demonstrating your inability to pay is key to getting your offer approved. You may need this documentation if you plan to enroll in a debt relief program too.

• Hiding assets or income. If the lender or SBA learns of this, it could trigger denial of your offer or legal action against you.

• Missing deadlines or ignoring formal notices. You may only have a limited window to make a settlement offer or to dispute a judgment made against you. It's important to respond promptly to any correspondence about your debts.

• Submitting incomplete OIC applications. Providing complete and accurate information is essential if you want a chance of having your OIC approved.

• Attempting to settle while your business is still open. Closing your business and selling all collateral is a prerequisite to making an OIC with the SBA.

Get Help With SBA Debt Relief

If you’re wondering where to find debt relief, start with a free comprehensive debt evaluation. Even if you can't settle your SBA loan, you may be able to settle other debts you have, giving you more cash you can put toward your business debts. It could be your first step to getting your personal and business finances onto a stable footing.