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SBA Loan Default

Small Business Administration (SBA) Loan Defaults

The SBA was created in 1953 and has offered small businesses loans at reasonable rates to help small businesses deal with natural disasters and in other narrow circumstances. The number and availability of SBA loans increased dramatically with the COVID-19 pandemic.
The SBA offered PPP, EIDL, and other types of loans to businesses in the wake of the pandemic. We will focus primarily on the PPP and EIDL loans.

Given the difficult economic situation we are facing today many businesses have closed or are closing. Many companies and owners cannot afford to continue to pay the SBA loans and maintain profitability. As a result loan defaults of SBA loans are happening at record levels and SBA BORROWERS NEED HELP.


The original loan terms were very generous, fixed low interest rates and up to 30 years to pay off balances. Some loans like PPP loans could have been forgiven if specific criteria were met.

Option 1:

Keep the loan and pay off the balance while it is still with the SBA.

Option 2:

If option one is not possible the loan will default. If the loan defaults it will be sent to the Bureau of Fiscal Services (BFS) who will attempt to collect the debt using traditional collection actions such as bank levies, wage garnishments and liens.

Options if your Loan Default has been sent to BFS

There are options if your loan defaults and is sent to the BFS:
  1. Installment Agreement, can be setup to full pay the balance. The terms are not as generous as the original loan so if the owner can keep the original loan terms it makes sense to do so and not let the debt default.
  2. Partial Pay Installment Agreement, allows you to pay much less than the full amount owed. To do so you must show the BFS that you do not have the financial ability to full pay the balance.
  3. Offer In Compromise, will settle the full amount of the loan owed for much less than the total. Whether you qualify for this program, and the settlement amount will depend on your financial situation.
    • If an Offer In Compromise is accepted a 1099 cancellation of debt will be issued to the IRS and will need to be reported on your 1040 tax return.
    • If the loan was secured with collateral (mostly pre-covid) the collateral will have to be liquidated and the value paid towards the loan before an Offer will be considered.

One thing to be very aware of is that the US Government is actively auditing loans looking for loans that were obtained fraudulently. If there is fraud in your case you need to carefully consider what is the best option for your particular situation.

SBA Loan

**Legal Disclaimer**: The information in this video is intended for general guidance and entertainment purposes only. It should not be considered legal or financial advice. Always consult a qualified professional before making any decisions about your situation.


Dealing with SBA loans is very important if your business is struggling or has closed or might close. You can either save your business by handling any potential default well or greatly reduce a very large debt. It is important to get talk to an experienced Tax Professional to discuss your rights and options and how to get peace of mind.

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