When the SBA decides to write off a loan, it essentially acknowledges that the chances of collecting the remaining balance are slim to none. The loan disappears from their records, but don’t be fooled – as the borrower, you’re still on the hook for that amount. The Department of Treasury steps in to pursue what’s owed after the SBA takes this step.
A charge-off isn’t just an accounting move; it can sting your personal credit report for up to seven years, whether it’s eventually paid or not. This reality can make future borrowing a bit tricky for you.
If you see your SBA loan listed as "charged off," it means the SBA has thrown in the towel on recovering any more payments. This usually comes after months of non-payment, signaling that attempts to collect have hit a dead end. So, you’re not off the hook – it’s not borrower forgiveness. It’s more of a bureaucratic move that shifts the responsibility for debt collection.
In the 2024 fiscal year, a whopping $700 million in SBA 7(a) and 504 loans were charged off. So, if your loan has taken a similar path, here’s what you might face.
When does an SBA loan charge-off happen?
SBA loans can be charged off when they fall into default status. This usually follows two to six months of missed payments. However, before getting there, lenders are required to try and accommodate borrowers through various measures, like adjusting payment schedules or interest rates.
The SBA has specific guidelines ensuring that lenders exhaust all reasonable recovery efforts before charging off a loan, like pursuing voluntary payments or liquidating collateral. If costs of further collections surpass what’s owed, it makes financial sense for the charge-off to proceed.
What’s next if your SBA loan gets charged off?
After your loan is charged off, expect a dent in your credit score – both from the charge-off and the preceding delinquencies. This can hang around your credit report for years, making life a bit tougher if you’re looking to secure a new loan.
You’re still on the hook for the outstanding balance. It’s not forgiven or wiped clean by any means. The government might hand your debt over to a collection agency to claw back what they can, and this agency could call or write to you about settling the debt.
How to avoid an SBA loan charge-off
To prevent your loan from being charged off, stay in close communication with your lender. They’ll typically alert you if you’re behind or nearing default. By staying in touch and showing a willingness to resolve issues, you can often work out a manageable payment plan.
Keeping a vigilant eye on your business’s finances can help too. Understand your cash flow and address any hiccups immediately to maintain your payment schedule. Additionally, if you anticipate trouble with a payment, inform your lender promptly. They’d often prefer working out a temporary solution over pursuing the charge-off route.
Steps to take post-charge-off
If your loan has been charged off, there’s still hope. Engage with the Department of Treasury or the collection agency to discuss a possible repayment plan or settlement for less than the full balance. Pay down the charged-off amount as much as possible. Your credit score will take a hit, but new lenders might take a favorable view if they see proactive efforts to manage the old debt.
Seven years later, verify that the charge-off drops off your credit report. You can request the credit bureau remove it if it doesn’t disappear automatically.
Frequently Asked Questions
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Can your SBA loan be charged off even if you’ve been making payments?
Yes, if those payments don’t meet the minimum requirements outlined in your loan terms, your account could still default. -
How long do SBA charge-offs stay on your credit report?
Typically, they remain for seven years. After this timeframe, you can request removal if it persists. -
Should you continue to pay an SBA loan that has been charged off?
Yes, it’s crucial since you’re still responsible for the debt, and it may help your case with future lenders. - Can your PPP loan be charged off?
Yes, this can happen if payments are overdue by more than 60 days, the business shuts down, or in unfortunate events like death.
Understanding and navigating these waters can be tricky, but with careful attention and communication, you can manage your financial health effectively, even in tough times.
