Can I Lose My House? – SBA Default – Personal Guarantee

April 13th, 2011 | Posted in Debt Relief

I’m frequently presented with a situation where my client, a small business owner, has voluntarily given the bank (and by extension, the SBA), a lien on their home. And the key question my client asks is, “will they take my house?” Unfortunately, there is no simple answer, because the outcome of this situation depends on several key factors. Specifically: * Equity in the home * Financial status of borrower (i.e., personal net worth)

Let’s start by discussing the financial status of the borrower: It is key to understand that the bank does NOT want to kick you out of your house. In fact, the SBA guidelines for dealing with a defaulted loan with a lien on the borrowers house specifically recommend to the bank that they attempt to work with the borrower to avoid foreclosing on their home. What this means in practical terms is that if you can “settle” with the bank for a sum of money that is approximately equal to what they would receive should they pursue a foreclosure, then the bank usually will accept the money in lieu of foreclosing and release the lien on the borrowers home.

However, accomplishing this is complicated by the fact that any money held by the borrower is frequently subject to the borrowers personal guarantee (PG) with SBA bank. So if you have “cash” available to make a settlement offer, it is also subject to the PG, and so can’t be used to pay off the home. The only exception to this is if the money is in a protected asset – like an IRA or 401K.

Another popularly advertised route is debt consolidation. This is a good idea for three simple reasons. The first one being, you get a bigger loan to pay off several smaller loans. The second benefit is it’s a lot easier and less stressful to handle one payment in contrast to multiple payments.

The third reason to consolidate and quite possibly the most helpful is you can get a much lower interest rate. In some cases, if you are looking at bankruptcy, they will do everything in their power to save you from that route.

This value is hotly contested by SBA banks, but a good rule of thumb is a maximum of 80% of FMV (IRS and FDIC guideline for liquidated value) to as low as 50% of FMV (not uncommon in some depressed states like FL, NV, CA, and MI). So when asked the question, “will the bank take my home?”, I must first analyze what is the Liquidated Value that the SBA bank would receive at a foreclosure auction. Depending on the outcome of that analysis (Significant equity, nominal equity, no equity) the answer becomes clearer.

One of the bigger negatives to this includes damaging your credit score making it a challenge for you to have the proficiency to obtain many luxuries and other commodities. There is a slight upside to those around you, as you are the only one affected by this process, as long as no contracts were filed by your spouse having to do with your debt. Another plus is that creditors are required by law to cease all actions against a debtor. Dreaded telephone calls, garnishing wages, and also law suits are some examples.

Because the loan is secured, you can be rewarded with a smaller interest repayment than you were being charged before, in addition to lower monthly charges as you are paying back all your debts at once. Whatever path you choose to take, make sure you do not go it alone and get the advice you need to make the right decision.

Harris Smith runs the home equity line of credit website. Don’t Miss Out! If you’re up to your eyeballs, the fantasy of Debt Consolidation can suck you right in.