What happens when an SBA-guaranteed loan defaults?

Two parties, two sets of rules

A default on a guaranteed loan involves three players: the borrower, the lender, and SBA. The regulation in this section governs the lender's right to turn to SBA, not the borrower's obligation to the lender. The borrower's promise to repay is in the note and any guarantees; the guarantee under 120.520 is SBA's promise to the lender about the guaranteed portion, which is the percentage described on our guarantee percentage page. Reading the section as a borrower means understanding what triggers the lender's request, because that is when the loan moves from routine servicing into SBA's hands.

The 60-day trigger

For loans approved on or after May 14, 2007, paragraph (a)(1) allows the lender to "demand in writing that SBA honor its guarantee if the Borrower is in default on any installment for more than 60 calendar days (or less if SBA agrees) and the default has not been cured, provided all business personal property securing the defaulted SBA loan has been liquidated." Three conditions must line up: more than 60 calendar days, no cure, and liquidation of business personal property collateral. The text says liquidation is considered completed "when a Lender has exhausted all prudent and commercially reasonable efforts to collect upon these assets." Real estate collateral is not mentioned in that proviso, and this page does not read anything into the silence. The checker above applies these conditions and the bankruptcy route below.

If a borrower "cures a default before a Lender requests purchase by SBA, the Lender's right to request purchase on that default lapses." So a borrower who catches up in time takes the purchase demand off the table for that default.

Bankruptcy and SBA's own discretion

Two other doors open. A lender "may also submit a request for purchase of a defaulted 7(a) loan when a Borrower files for federal bankruptcy once a period of at least 60 days has elapsed since the last full installment payment." And SBA, "in its sole discretion, may purchase the guaranteed portion of a loan at any time whether in default or not, with or without the request from a Lender." The second sentence means SBA is not bound to wait for the lender's demand. For loans approved before May 14, 2007, the regulations in force before that date apply.

Documentation and the secondary market

SBA will not purchase unless the lender submits documentation SBA deems sufficient to decide whether purchase is warranted under 120.524. If the guaranteed portion has been sold on the secondary market, the lender must still perform all necessary servicing and liquidation actions even after SBA buys the portion from the registered holder, and must give SBA a loan status report within 15 business days covering the borrower, the condition of the collateral, workout plans, liquidation activity and foreclosure status. Failing to provide sufficient documentation may be a material failure to comply and may lead to SBA seeking recovery from the lender of money it paid. Paragraph (d) says purchase "does not waive any of SBA's rights to recover from the responsible Lender."

When SBA is released from the guarantee

Section 120.524(a) lists ten events that release SBA from liability on the guarantee, in whole or in part, in SBA's exclusive discretion. They include material failure to comply with loan program requirements, failure to make, close, service or liquidate the loan in a prudent manner, failure to disclose or misrepresentation of a material fact, failure to pay the guarantee fee in time, failure to request purchase within 180 days after maturity (or after liquidation or collection litigation is completed), failure to use required SBA forms, a written request by the lender to terminate, and payment of the loan in full by the borrower. Almost all of these are lender conduct. If one occurs, SBA is entitled to recover from the lender what it paid, plus interest. The lender remains responsible for servicing and liquidation until SBA honors the guarantee in full, unless SBA gives written notice otherwise.

What this means for a borrower, and what is not said

These sections regulate lender and SBA conduct. They do not say what remedies are used against the borrower or guarantors after purchase, do not set collection procedures, and do not address offers in compromise or workouts. Nothing in 120.520 says the borrower's debt is forgiven or reduced by SBA's purchase; the text is silent on that, and you should not assume it. If you are in or near default, talk to your lender about options before the 60-day point and consider independent legal advice. Related pages: the personal guarantee rule explains who is likely to have signed a guarantee.

Sources

• 13 CFR § 120.520, Purchase of 7(a) loan guarantees. Read November 2, 2026.
• 13 CFR § 120.524, When is SBA released from liability on its guarantee?. Read November 2, 2026.

Text read: Electronic Code of Federal Regulations, Title 13, Part 120, current through the eCFR issue date of October 29, 2026. Dollar figures and percentages on this page are the ones printed in those sections as of that date; SBA can amend the rule and publishes loan-program procedures (such as SOP 50 10) that add detail this page does not cover. Confirm current terms with an SBA-approved lender or at sba.gov. This page summarizes the regulation and does not replace it.