MCA and SBA Loan Nonpayment
Which Exposure Reaches You Personally

Neither obligation forgives confusion about who owes what.

An owner carrying both obligations often asks which default threatens the household. The answer lives in the signed guaranties and the collection channel each creditor can use.

The Guaranty That Protects the Lender

The household is exposed where a signature placed it, not where a program name suggests. The SBA account of the 7(a) program describes a guarantee extended to lenders so they will finance working capital and refinance business debt, with applications made through the lender rather than the agency.

That guarantee protects the lender under its terms. In most of the files on this desk it did not erase a dollar of borrower liability, though the sample is not scientific. The business repays from cash flow in monthly installments, and the owner who signed beside the company remains bound by the undertaking the documents contain.

The program was built to expand credit to businesses that banks might otherwise decline. It also expanded the paperwork by which an owner binds a household.

Both files deserve a schedule naming every obligor beside every balance, and the schedule should ensure no personal undertaking hides inside business paper.

SBA Compromise and Charge Off Practice

Before the agency discusses reduction, it requires the collateral gone. The SBA compromise requirement letter states that an offer is considered only after liquidation of all collateral pursuant to agency guidelines, and it adds that COVID EIDLs cannot be forgiven.

A charge off does not change that result. It closes the agency books without closing the debt, and it can precede referral of the account to Treasury. The SBA account of its COVID era loan servicing warns that accounts reaching 120 days of delinquency may be referred to the Treasury offset program, and that transferred loans leave SBA servicing behind.

A charge off closes the books without closing the debt.

Forgiveness ends liability. A charge off moves the file to a different collector.

One file reviewed on a February morning ran to fourteen pages of collateral schedules no one had photographed since origination (the capture is current to August 2026, though practice shifts without much announcement). Rarely does a charge off mean what its name suggests to a tired reader.

Treasury Collection and the Individual Debtor

A federal notice brings a particular quiet to an office, the kind that makes an owner read one paragraph three times. Treasury account of the garnishment process explains that a federal agency may order a nonfederal employer to withhold up to 15 percent of disposable income for a delinquent nontax debt owed to the agency, and no court order is needed.

The same page sets the gates around that power. Written notice goes out at least 30 days before withholding, and a hearing requested within 15 business days must be held before any order reaches the employer. A debtor short of a year in the current job after an involuntary separation sits outside the process, and the statute forbids discipline or dismissal because wages were garnished.

I have yet to see a Treasury notice improve with age. Resist the urge to answer it with a telephone promise.

Company debt does not become owner debt when the file crosses to Treasury. Counsel must review and analyze the basis on which the individual is treated as a debtor, because the withholding machinery reaches the person who owes. Whether the disposable income math survives scrutiny on fluctuating draws is a question worth raising at the hearing.

MCA Enforcement Through Contract and State Court

The private funder has no access to that machinery. Its remedies live in the agreement it drafted and the state procedures available to any contract creditor, and the MCA file must be read with the same care as the federal one. Steps the owner takes, or does not take, in the weeks after the first demand shape everything that follows.

In LG Funding LLC v United Senior Properties of Olathe, LLC, a New York appellate court looked past the label on the transaction and asked whether repayment was absolute, weighing whether the agreement contained a working reconciliation provision, whether it ran for a finite term, and whether the merchant faced recourse in bankruptcy. The presence of a clause on the page begins that inquiry without ending it.

When counsel opens the MCA agreement and spreads the bank records showing every debit across the desk, the questions concern how reconciliation operated in practice, whether payments continued through slow periods or stopped at the first shortfall, and what the default provisions triggered, because courts that scrutinize these contracts look past headings to performance.

A characterization dispute begins as a claim that the advance functioned as a loan, encounters the complication that some contracts reconcile in fact while others print the word without honoring it, and ends as an argument about specific debits on specific dates, not about the industry as a whole. Most funders know the contents of what they purchased. They prefer the owner never to open it.

Most owners call counsel after the second restraint rather than the first letter. The delay is human, and it is expensive.

Counsel will review the note, trace the guaranty, and construct a reply that addresses the federal calendar and the private claim arriving from the other direction. Gather the agreement with all amendments, the payment history, and the demand packet with its envelope. Any remark about revenue, even casually, can narrow the defenses left to counsel. Keep the envelope.

What Remains After Both Files Are Read

The meaningful comparison is what each creditor can establish against the owner and what a documented resolution would change. The larger balance is not always the greater personal exposure, a peculiar result that surprises owners who compared totals instead of documents.

Delancey Street is a settlement company, not a law firm, and it can assess the MCA portion of the problem while independent counsel addresses the guaranty and the federal questions. Ask that any proposal ensure the same dollars are not promised to both creditors. Simply bring both agreements and the recent statements to the first meeting, and protect and preserve every notice that follows.

Debts are collected through documents, not reputations.