SBA Loan Default: I Didn’t Pledge My Home, so How Can There Be a Lien?

Back when you first took your SBA loan, life was as exciting as could be, and the possibilities seemed endless. In short, everything was looking up. Maybe your loan was funding the expansion of your already successful business, or perhaps your loan was buying you an existing successful business. Either way, you felt like you were about to embark down the path to entrepreneurial success that you had always dreams of. Yes sir, in a few short years (or perhaps a tad longer) you would eventually be sitting on a beach somewhere, sipping a drink with a little umbrella in it.

Fast forward a couple of years.

After years of banks lending money to people who don’t have the ability to pay it back, the you-know-what hits the fan in September 2008. The residential mortgage market melts down and banks start collapsing left and right, the stock market plummets, and the economy quickly follows suit. POOF! Your business, which was previously humming along nicely, is all of a sudden showing signs of a slowdown. You batten down the hatches. You begin to slash expenses wherever and however you can. You even have to lay people off, which hurts, but is unavoidable. And finally, after months of struggle, you come to a frightening realization: you won’t have the money to make next month’s SBA loan payment.

Upon coming to the previously unthinkable conclusion that you lack the funds needed to make this month’s loan payment, you begin to think about what might happen. One of the first questions that pops into your head is:

Will the bank take my home if I default on my SBA loan?

The answer to that question varies depending on your situation. Let’s try to break it down:

You pledged your home as collateral for the loan. When a person pledges their home as collateral, they grant their lender a lien on their home. What that means is that if the goin’ gets tough, the bank has the right to foreclose on the home if the situation warrants it. Of course, whether or not the bank forecloses depends on a number of factors such as how much equity is in the home, or whether you successfully reach an Offer-In-Compromise.

You did NOT pledge your home as collateral.
I had a client get very upset when I explained that even though he did not pledge his home at loan origination, there was still a risk of the lender placing what is known as a “judgment lien”. “I refused to pledge my home in order to prevent this from happening!” he said to me.

Here’s why this client (and most SBA borrowers) still risk having a judgment lien on their home even though the house was not specifically pledged: In 99.99% of SBA loans, all principal owners are required to personally guarantee the loan, meaning that if things went bad and the business could not pay, the bank would look to the personal guarantors to repay the loan. And as anyone who has even been sued knows, if you are going to voluntarily offer up your personal assets, the bank can go to the courts and ask for permission to take your personal assets by force. Once the court approves and grants a judgment, the bank has the right to go after your assets. Most banks are interested in two things: cash and real estate. Since a judgment has been granted against you in favor of the bank, they have the right to levy bank accounts, and place liens on your real estate. In many states, a judgment lien cannot be foreclosed upon. That’s the good news. The bad news is that they do have the ability to block the sale or refinance of your home in the future. That means if you ever plan to move, the judgment lien will need to be dealt with.

And that, my friends, is how a person who never pledged their home can still have a lien placed on it by their lender.

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