Does a Default on an SBA Loan Affect Personal Credit Score?

Does a Default on an SBA Loan Affect Personal Credit Score?

Good question…and the answer is “maybe”.

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.

For example, I have a client right now who co-signed an SBA loan for her son.  When the business failed, the bank came looking for my client – the business debt was now personal debt via the mechanism of the personal guarantee.   Initially she ignored the demand notices and calls.  However, eventually, the bank’s attorney filed for and obtained a judgment on my client, and  JUDGMENTS ARE REPORTED TO THE CREDIT AGENCIES.   Bingo – her credit was instantly shot, since any asset she owned was subject to the judgment.

Unfortunately my client still ignored the bank and the SBA, until they froze their personal checking accounts.  That got her attention.   But by this time, her credit was shot and her accounts frozen.

If only…

Had my client gotten ahead of this bulldozer, it could have gone so much differently.

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.