How Does SBA Debt Collection Work?

The federal government’s collection of defaulted SBA loans follows a different process than private creditor debt collection. The SBA has tools that bypass many of the protections available to Florida debtors under state law, including the ability to garnish wages without a court judgment and to intercept federal payments indefinitely. Understanding how this process works is essential for anyone who has personally guaranteed an SBA loan.

Most SBA loans are not made directly by the government. The SBA guarantees loans made by private lenders, typically covering 75% to 85% of the loan balance. When a borrower defaults, the lender collects first by seizing collateral and pursuing the borrower and any personal guarantors. If the lender cannot recover the full amount, it files a guarantee claim with the SBA. The SBA pays the lender and then steps into the lender’s position as creditor.

The Collection Timeline

Default typically triggers after 90 to 120 days of missed payments. The lender sends a demand letter requiring full repayment within 30 to 45 days. If the borrower does not cure the default, the lender liquidates whatever collateral secures the loan—business equipment, inventory, accounts receivable, and in some cases real estate. After liquidation, the lender calculates the deficiency and files for the SBA guarantee.

Once the SBA pays the guarantee and becomes the creditor, it sends its own 60-day demand letter to the borrower and any personal guarantors. This letter demands full repayment of the outstanding balance. The 60-day window is the borrower’s opportunity to negotiate directly with the SBA, including submitting an Offer in Compromise.

If the borrower does not respond or cannot reach an agreement, the SBA refers the debt to the U.S. Department of the Treasury for enforced collection. This referral marks a significant escalation because the Treasury has collection powers that far exceed what any private creditor can do under Florida law.

Treasury Offset Program

The Treasury Offset Program (TOP) allows the federal government to intercept virtually any federal payment owed to the debtor and apply it to the outstanding SBA debt. Payments subject to offset include federal income tax refunds, Social Security benefits, federal salary payments, federal retirement benefits, and vendor payments from federal contracts.

TOP does not require a court judgment. The government implements the offset administratively after providing written notice. There is no statute of limitations on TOP—the Treasury can continue intercepting federal payments indefinitely until the debt is satisfied in full, including accrued interest and collection fees that the Treasury adds to the balance.

For many debtors, the loss of annual tax refunds is a manageable inconvenience. The interception of Social Security benefits and federal retirement payments, however, can be devastating. These payments are normally exempt from garnishment by private creditors under both federal and Florida law, but that protection does not apply when the federal government is the creditor collecting through TOP.

Administrative Wage Garnishment

The SBA and Treasury can also garnish wages through Administrative Wage Garnishment (AWG) under 31 U.S.C. § 3720D. AWG allows the federal government to order an employer to withhold up to 15% of the debtor’s disposable income and remit it directly to the government.

AWG does not require a lawsuit or a court judgment. The agency sends a written notice to the debtor with an opportunity for a hearing before an administrative law judge. If the debtor does not request a hearing within the notice period, or if the hearing officer finds the debt valid, the garnishment order goes directly to the employer. Like TOP, AWG has no statute of limitations and continues until the debt is fully satisfied.

The critical distinction for Florida debtors is that AWG bypasses Florida’s head of household wage exemption. Under state law, a debtor who provides more than half the support for a dependent is fully exempt from wage garnishment by private creditors. This protection does not apply to federal AWG. A head of household debtor who would be completely shielded from a private creditor’s garnishment can still lose 15% of disposable income to the SBA through AWG.

The 6-Year Statute of Limitations—and Its Limits

The federal government has six years from the date of default to file a lawsuit to obtain a judgment against the borrower. If the government does not sue within six years, it loses the ability to obtain a court judgment. This six-year deadline applies to the SBA’s right to sue, not to its administrative collection powers.

TOP and AWG operate independently of the six-year litigation deadline. The federal government can initiate or continue these administrative collection programs even after the six-year window for filing a lawsuit has closed. A debtor who assumes the SBA debt will simply expire after six years may be surprised when the Treasury begins offsetting tax refunds or garnishing wages years later.

If the government does file a lawsuit within the six-year window and obtains a judgment, it can then use the Federal Debt Collection Procedures Act (28 U.S.C. Chapter 176) to pursue standard judgment collection remedies including liens, garnishment, and levy.

Offer in Compromise

The SBA’s Offer in Compromise (OIC) program allows borrowers to settle their debt for less than the full amount owed. An OIC is the primary negotiation tool available to defaulted SBA borrowers, but the SBA imposes strict eligibility requirements.

The borrower’s business must have ceased operations and liquidated its assets, with the proceeds applied to reduce the debt. The borrower must demonstrate an inability to repay the full balance within a reasonable timeframe. The SBA evaluates the offer by comparing it to what the government could recover through enforced collection—if the SBA believes it can collect more through TOP, AWG, and other tools, it will reject the offer.

The SBA generally will not accept offers below $5,000 absent documented extreme hardship. Once the debt has been referred to the Treasury, negotiating a settlement becomes significantly more difficult and more expensive because the Treasury adds substantial collection fees to the balance. A borrower who intends to pursue an OIC should act during the SBA’s 60-day demand period, before Treasury referral.

Florida Exemptions Against Federal Debt

Florida’s exemption laws provide less protection against federal government debt collection than they do against private creditors. Several important distinctions apply.

The homestead exemption does apply to federal civil debt collection. The Federal Debt Collection Procedures Act at 28 U.S.C. § 3202 provides that federal debt collection is subject to state asset exemptions. A debtor’s primary residence in Florida cannot be forced to sale to satisfy an SBA judgment. Qualified retirement accounts and annuity contracts also retain their exempt status.

Head of household wages, however, are not protected from AWG. Tenants by the entireties property may offer less reliable protection against federal debt than it does against private creditors—some federal courts have questioned whether entireties protection applies to debts owed to the United States, though Florida state courts have generally upheld the exemption.

Social Security and federal retirement benefits are exempt from private creditor garnishment but are subject to offset through TOP when the federal government is the creditor. This distinction means a debtor who is effectively judgment proof against private creditors may still face significant collection exposure from an SBA default.

COVID-19 EIDL Loans

COVID-19 Economic Injury Disaster Loans created a distinct category of SBA debt. EIDLs of $200,000 or less did not require a personal guarantee, which means the borrower’s personal assets are not exposed for these smaller loans. The SBA can pursue the business entity but cannot go after the individual borrower’s personal property, wages, or tax refunds.

EIDLs above $200,000 required a personal guarantee and are subject to the full range of federal collection tools described above. The SBA’s Office of Inspector General reported in 2024 that the agency had been slow to refer delinquent COVID EIDLs to the Department of Justice for litigation, relying instead on the Treasury’s administrative collection programs. For borrowers with personally guaranteed COVID EIDLs, this means the collection threat may escalate as the SBA accelerates referrals to both Treasury and DOJ.

Asset protection planning for SBA debt requires understanding that the federal government’s collection authority extends beyond what Florida’s exemption laws can shield. A debtor facing an SBA default should evaluate the OIC option early, before the debt transfers to Treasury and collection fees compound the balance.