The Legal Defense for SBA Loan Default
When a business enters into payment default and ultimately into a debt workout with its SBA lender, the SBA, and the bank often take legal action against both the borrower and guarantor on the loan. The lender will sue for breach of contract and pursue a judgment as the initial steps in foreclosure of the business and its assets. Judgments are awarded to creditors once they have sued a business and proven to the court that money was owed to them that was not paid by the borrower. Once a judgment is received, the lender can then take a variety of post-judgment remedies to collect against the business. These include garnishing wages, levying bank accounts, and foreclosure of business and personal assets. If faced with this situation, you should seek the advice of an attorney. Second Wind does not give legal advice. However, this article is being written to describe our experience dealing with clients seeking a legal defense for their business problems.
Judgments Go to the Lenders
When faced with this situation, business owners often hire their own attorney and begin creating a defense and a response to the lawsuit brought by the lender to slow or stop the judgment process. The problem with this approach is that in the vast majority of cases, a judgment is eventually awarded to the lender despite whatever defense was presented. At best, most attorneys delay the process, but most will not have the capability to stop the inevitable. The client, who is already struggling financially, has then spent many resources they could not afford to pay, and in the end, are still faced with a judgment and possible foreclosure of their business. Many clients will then blame the outcome on their attorney or belief that they used the wrong defense, which leaves the question: “What is the best legal defense for SBA loan default?”
There is No Legal Defense for SBA Loan Default
Many attorneys will try and talk you into hiring them stating that you require immediate legal defense for SBA loan default. Unfortunately, the reality is this; there is no legal defense for SBA loan default. If you and your business took the loan from the lender and the SBA and experienced the benefit of that capital but were unable to repay as promised, the lender has a right to receive a judgment. Only in the rare cases where fraud or negligence had occurred on the part of the lender is there a defense that will stop a judgment. Otherwise, you borrow the money, you cannot pay it back, what else is there to argue about?
We are not attorneys, so we cannot give our clients legal advice, but we certainly encourage them to get a legal opinion. Almost always, the lawyers agree with us, because they know there is simply no defense. Therefore, we tell people in this situation to spend no time searching for a legal defense that does not exist. Instead, it is in their best interest to cooperate with their lender, and if appropriate, consent to a judgment rather than fighting it. By cooperating with the lender and focusing on working together towards a debt workout and settlement, you leave the lender with no incentive to take any post-judgment remedies. If the SBA and the Lender believe that you are working in good faith to resolve the defaulted loan through a workout plan that will net them the same amount of funds (or more) as collecting on their judgment would, they will settle with you even after receiving their judgment. Think about it, why would a debtor surrender if they had excessive assets and something to hide from their creditors? This is how creditors think of it, so they are likely to work with you and settle the debt.
Victory is Not in the Courtroom
In our experience, many successful workouts result in the lender obtaining a judgment before accepting any settlement. They do this to secure their ability to collect should a settlement not be negotiated and to show the SBA that they have followed the required SBA guidelines of, “Exhausting legal remedies against the defaulted borrower and guarantor…” before accepting a settlement on the outstanding balance owed. Therefore we spend our time creating a creating a workout strategy that the lender and SBA can support, rather than focusing on a way to delay or stop a judgment.
With all this said, a judgment can be a severe legal step for the bank and needs to be taken seriously. Facing a judgment without working towards an agreed upon workout plan with your lenders will result in the loss of business and personal assets. Only if you are pursuing a debt workout or a business wind down should you consider facing a judgment without legal representation.
In the end, the victory is not in the courtroom – as the defaulted borrower will always lose in this venue. The victory is in building a plan that meets all of the lenders and the SBA guidelines that give the lender a financial incentive to not use the judgment once awarded. Only here, with cooperation from the lenders, can you avoid the negative consequences of a judgment.