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Release From Your Personal Guarantee on an SBA Loan







What is the SBA Disaster Loan Forgiveness Program?


The SBA disaster loan forgiveness program provides for loan forgiveness on a case-by-case basis. If you have a small business, you may qualify if your business was located in a declared natural disaster zone. If the SBA approves loan forgiveness, then you will not be legally obligated to repay the portion of your loan that was forgiven.

Will the SBA accept my Offer in Compromise?

There is really no way to know. Period. There are so many variables:

1. Who handles your file;
2. What SBA office is handling your file;
3. Your level of cooperation with the lender, both real and perceived;
4. Whether you have liquid assets vulnerable to traditional collection methods.

In general, the following factors will impact the likelihood of settling with the SBA:

1. The amount of the Deficiency Balance;
2. Whether a Bankruptcy would shield some or all of the Guarantor’s assets;
3. The Guarantor’s net worth, including exempt retirement assets.
4. What would a wage garnishment yield over 5 years?
5. Is the Guarantor really likely to file bankruptcy or is it a bluff;
6. The Guarantor’s health or special circumstances (e.g., hardship);
7. The costs of collection, and in particular, the likely ROI on collection activities.

In short, the SBA, like the IRS, already sees the exposed assets you have pledged as the baseline of any offer. What they want is more. The SBA is looking for an Offer, usually a lump-sum offer, that is better than any alternative that can be obtained through enforced collection activities that consume time and money and may carry an uncertain outcome.

The hard truth is that thousands of businesses fail every year and not everyone will settle with the SBA. But, the SBA Offer in Compromise represents a powerful alternative to bankruptcy in many cases.

Are shareholders liable for a default on an SBA loan?

If you are an investor in a company funded by a Small Business Administration (“SBA”) loan, then you may wondering whether you are liable for the company debt should the business fail. The Borrower is principally responsible for repayment of the underlying promissory note associated with the SBA loan, but what about shareholders and members (in the case of a limited liability company) — are they liable too? It depends.

Am I automatically responsible for the business debt if I am a shareholder?

No, shareholders who simply invested in the company are not automatically liable for the business debt of the company. This is true whether your business entity is a corporation or a limited liability company (“LLC”). A shareholder or member will not be liable, unless they sign an Unconditional Guarantee agreement for the SBA loan (SBA Form 148 in most cases). It is the guarantee agreement itself and not the fact they are a shareholder or member of the Borrower that creates the personal liability for the repayment of the SBA loan in the event of a default.

What is the magic percentage that triggers the SBA’s requirement for a personal guarantee on an SBA loan?

The SBA requires a personal guarantee from all owners with at least 20% ownership in the Borrower. This means of you are a stockholder or member in an LLC and own 20% or more of the company you will be asked to sign a personal guarantee.

What If my spouse owns 5% and I own less than 20%, will either of us still have to sign a guaranty agreement?

If a shareholder or member’s spouse owns 5% or more of the Borrower and the combined ownership interest of both spouses is 20% or more, then the spouse must also provide a full personal guarantee. This is set forth in SBA’s Standard Operating Procedures (SOP 50 10 5(J)).

What if I am a shareholder and I own 5% or less of the Borrower?

SBA Lenders may still require a guarantee from a shareholder or member’s spouse if they think it is necessary to perfect their lien on collateral pledged by a shareholder or member. In such cases, it may be that the lender will ask the spouse to sign SBA Form 148L which limits the spouses liability to their interest in specific collateral pledged by their husband or wife; this is called an Unconditional Limited Guarantee.

Sued by the U.S. Attorney on a defaulted SBA loan?

If you default on an SBA loan, your lender will frequently file a lawsuit against the borrower and all guarantors. The lender does this as part of a mandated process to maximize recovery before requesting the SBA to honor their loan guarantee agreement. However, we find that even at this stage, a lender will usually consider a reasonable offer in compromise from a guarantor. If the offer is accepted, the suit can be dismissed prior to the entry of judgement.

In many cases, lawsuits are never filed by the lender, but once the SBA pays the loan guarantee to the lender, the lender will assign certain rights to the SBA to collect on the Note and Guarantees. In such situations, the SBA itself may decide to take legal action against guarantors who have significant non-exempt property (e.g., stock portfolios, rental properties) and/or substantial incomes.

If the SBA refers a matter for a civil action, then the U.S. Attorney’s office, Civil Division, will likely prepare and file suit against you in federal court. This can be a shocking event, but it does not mean settlement is off the table. If you have been sued by the U.S. Attorney in federal court, you should consult with your attorney immediately. If you do not respond correctly or in a timely fashion, certain rights may be lost and you may have a judgment entered against you. The suit is a wake up call that the government considers the debt collectible and that previous attempts were perceived as either insincere or woefully inadequate given your income and assets.

How long does the SBA have to file suit?

The SBA has 6-years to file suit against a guarantor in the absence of other events or agreements that might toll (suspend) this period of time. The limitations period will be measured not from the time of your default with the lender, but from the time the SBA took possession of the Note. In short, the government will get its full 6-years even if the transfer of the Note occurred near the end of the lenders statute of limitations (governed by state law). Once SBA owns the Note, federal law will be applied to determine the limitations period and will control in any lawsuit.

SBA Has a Lien on My Home. If I Default will I Lose My Home?

In many states, it is standard practice for an SBA lender to ask a loan guarantor to pledge their home as collateral in connection with their unconditional guaranty. If the business loan you guarantee goes into default, your homestead could be at risk of foreclosure. However, the SBA may not always urge a lender to foreclosure on your home, even if the SBA and the SBA Lender have a legal right to do so. Here are a few factors that may impact this decision:

Do you have a first mortgage on your home ahead of the SBA loan? This may help you.

The general rule in property law is that liens have priority in the order that they are filed in the county records office. This is known as the first in time, first in right rule. Based on this principle, a recorded interest has priority over later recorded interests. If your first mortgage is ahead of the SBA loan, it will make foreclosure less attractive to the SBA Lender since foreclosure proceeds must first be applied to payoff the first mortgage entirely, plus the costs of foreclosure before the second mortgage holder receives anything.

If your home equity is zero or very low, it may be that the SBA lender will choose to do nothing for now and wait hoping the home will increase in value over time. In many cases, if this occurs, a foreclosure may not be initiated for years and then only if the value of your home has substantially increased and some factor has brought this to the attention of your SBA Lender or the SBA.

What is Home Equity?

Home equity is the market value of a homeowner’s unencumbered interest in their real property, that is, the difference between the home’s fair market value and the outstanding balance of all liens on the property. For example, if your home is worth $225,000 and you have a first mortgage to Bank X for $100,000, then you have $125,000 of “Equity” in your property and, in an SBA default situation, that might tempt the SBA Lender or the SBA to foreclose. However, if you add a second mortgage of $75,000, then you only have $50,000 of equity in your property and, in a foreclosure setting, this may not be enough for the SBA Lender (in a third position behind your second mortgage) to foreclose. Be sure to review all your mortgage debt with your attorney if you are discussing the consequences of an SBA loan default.

Can I make the SBA or the SBA Lender an Offer to Release My Home as Collateral?

Yes, you can make the SBA Lender an Offer in Compromise to settle your total liability associated with your personal guaranty or you can just make an offer for the release of the lien on your home. But, use caution. If you obtain a release of SBA Lender’s lien on your home without also completely settling your liability under your personal guaranty, you might later be sued by the SBA Lender. If the SBA Lender obtains a judgment, and then places a judgment lien on you real property, your home may be at risk all over again.

Handling the release of an SBA lien on your home correctly may require professional assistance. It is important to consider this action as a part of your overall strategy. In many cases, it may be possible to combine the release of the lien on your home as part of your complete offer in compromise settlement package. But, many variables can affect the outcome, so be sure to discuss your goals completely with your attorney and/or CPA.

Can I Sell My House with an SBA Lien?


















1. The original loan balance is $100,000

2. The sales proceeds are $30,000





Selling your Business after an SBA Loan Default


What is a security interest?


How do I know if my business assets are pledged?





What if my offer is not accepted by the Lender?


Asset Sales are Common, but Use Caution.


Joint and Several Liability: How did I get stuck with the whole bill from the SBA?

Many people contact our law firm after receiving an SBA 60-day letter demanding that they pay the entire amount due under their company’s defaulted SBA loan. And, time and time again, we hear, they protest claiming they only own 25% percent of the company and so should only be responsible for 25% of the debt, if any at all. In fact, most ask why if the company is a limited liability company (LLC) they should owe anything at all. The problem: the unconditional guarantee they signed.

Ordinarily, a member of an LLC will not be liable for the debts of the company, especially if they sign documents in their capacity as a Manager of the LLC and not as an individual. However, when one signs a personal guarantee that all goes out the window. Not only are you liable to repay the Lender and/or SBA if the company fails, but your liability is joint and several, meaning that the Lender and SBA can come after any one of you for all of the debt not just part of it. In short, your percentage of ownership has nothing to do with the extent of your liability.

Although the SBA tends to issue demand letters to all guarantors, when your loan first goes into default, the lender may sue the Borrower and all guarantors and then obtain a judgment. In some cases, the lender will pursue collection of the judgment, right away, particularly if they know that one or more of the guarantors have a substantial amount of non-exempt (unprotected) real estate with equity or a large stock portfolio not in their 401K. If this happens, the Lender might even recover most if not all of the debt from one member, leaving the others largely unscathed. In that event, while the one member may be able to seek contribution from the others, that problem is theirs alone to sort out.

Before you sign that unconditional guarantee be sure you understand what might happen if the borrower defaulted. How are you positioned relative to the other guarantors? Who is going to get hit the hardest — is it you? And, are all the members ready to share the pain with you? Its not a happy thought, but its better all guarantors consider this situation before they sign.