What Does your Bank Do during SBA Loan Default?
If you happen to default on your loan, your lender would be the first person to take the necessary action. As an initial response, your bank will let you know that the loan payment is due. It is advisable that you negotiate with the lender to go into a deferment or a loan modification, instead of letting loan repayment go into default. In case this does not happen and the payment is not completed, your lender has the authority to begin the collection process.
SBA loans are secured by personal guarantee and collateral. Therefore, the bank has the right to seize your business and personal assets that you presented as pledge as a part of SBA loan requirements. In other words, your bank may compel you to end your business and liquidate assets, so that it can reclaim the money spent on small business loan funding.
Note that if you have an account in the same bank whence you took the loan, they have the right to offset payments. This gives them the right to make withdrawals from your accounts in order to recover past due amounts. The bank also reserves the right to foreclose on any property you may have pledged as collateral. This decision depends on the amount recoverable. In this process, the bank will have to initially pay off the primary lien on the same and then proceed to foreclose your property. If your home does not have sufficient equity, the bank may also decide not to use this method.