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SBA Loan Default: Any Suggestions?

As the man said, bad things sometimes happen to good people, and as the economy continues to slide and the politicians continue to flail around, we will be seeing more and more of that. I received this email recently and I want to share it with you:

Hello Charles,
Just read one of your articles on the current SBA position in this economic crisis. My wife and I cosigned on an SBA loan for her sister's restaurant. It went south and the loan is now in default. We are on the hook for a huge loan (her sister battled a severe cancer during the startup and that diverted all focus away from the restaurant unfortunately, and that was just one among many issues).

I am talking to the workout specialist at the bank, but I am not clear on the process. I know they will try to go after what little they can get out of the restaurant assets then our house and other assets.

I am looking for advice. I have talked to several lawyers but none gave me much decent advice from what I can tell, other than to tell me I am “you know what.”

Do you have someone or website that you can recommend that I can go to for good advice?

SBA-backed loans have eligibility standards every bit as tight as sub-prime mortgage lenders for a reason, they are supposed to be the lender-of-last-resort, offering business loans to those incapable of finding more conventional financing. This means our cosigner is in very good company when it comes to his defaulted loan. On the downside, he is also right when he says that the bank will take as much as they can from the business before going after him—and they will go after him—for the remaining debt. It is only after the business and the debtor have been bled dry that the SBA will come in with its loan guarantee and mop up the remainder.

The best option would be to refinance this debt, if that is possible. With credit tight, finding a conventional loan could be challenging. Modifying the loan, making interest-only payments for a few months, for example, is not likely to help and is a tough concession to win from the bank, which leads us back to finding a way to lower or pay-off the principle. It is time to get creative about finding funds and it is incumbent on our cosigner to do whatever he can to avoid filing bankruptcy. However, that last resort may be something he needs to prepare for.

This is a tough problem and so I am turning to the collective wisdom of America’s Best Companies entrepreneurs and asking for your thoughts and suggestions on the subject to be left in the comments section below.

If this were your problem, what would you do? If he were your brother, how would you advise him?

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