Scenario 1. My business may close because I don’t have enough working capital.
If you are facing an SBA loan default, then you may want to consider selling your business. If your business has a good track record, but your business is starved for working capital, a loan assumption may be an option. In some cases your loan may be assumable by a third-party buyer who can then step into your shoes, purchasing both the assets and assuming the debt creating a win-win for you and the bank.
Scenario 2. My business is doing well and we want to sell, but we have an SBA loan outstanding.
When you start a business, apart from the income it generates, there is always a need for an exit strategy. It may be that you need to move to take advantage of new opportunities or simply retire. When you have an outstanding SBA loan, you may be able to work with your bank to sell the business and achieve those goals. However, as with the first scenario, you need to be sure you really have “exited” and that no further personal liability exists under the unconditional personal guarantee you signed when the SBA loan was originated.
My loan was assumed, so why should it matter if the new borrower defaults?
Your bank will likely be happy to help facilitate a loan assumption to avoid a default. And, you banker may also be willing to work with you to help facilitate an exit for retirement. Certainly, this sounds like a win-win situation for all parties. However, the devil is in the details. It is important that you work very closely with your attorney to ensure that the SBA actually releases you from the unconditional personal guaranty you signed when you originated the loan. One would think that would be the default result, but that is not the case.
If the new borrower defaults, the bank may certainly pursue them and the new guarantors; however, if neither the new borrower or the new guarantors pay up, and instead file bankruptcy, then the bank may still have recourse against you. In order to avoid this dire situation, you and your attorney should read the fine print of the legal documents together and confirm that you are expressly released. Your banker may also think that that you are released, but it is the fine print in the final documents that count. Remember, the bank, well meaning or not, does not represent you. You must look to yourself and your own attorney to protect your interests.
In order to qualify for the U.S. Small Business Administrations (SBA) loan programs, you and your partners must meet certain eligibility requirements? But, isn’t good credit, a solid business plan and collateral enough? No, SBA also looks at your “character”. SBA is also looking for good character and a mistake in the past can trip you up and prevent your loan from closing. SBA is looking at your behavior, integrity, candor and past criminal record. SBA Form 912 is all about you not your credit score per se and not your collateral.
As set forth in current SBA Loan Program Requirements, to be eligible for an SBA Advantage loan, every proprietor, general partner, officer, director, managing member of a limited liability company (LLC), owner of 20% or more of the equity of the Applicant, Trustor (if the Small Business Applicant is owned by a trust), and any person hired by the Applicant to manage day-to-day operations (“Subject Individual”) must be of good character.
What if I have a felony in my past?
Per the SBA’s Procedural Notice dated December 14, 2016, when a Subject Individual discloses a felony conviction, a background must be completed by SBA and the Lender must submit a copy of the complete SBA Form 912, the Subject Individual’s written explanation, supporting information, court documentation, and FD 258 to SBA. The Lender may not disburse the loan until formal clearance from SBA is received in writing. OPS will conduct a background check that will include a Fingerprint Check via submission of the FD 258 to the FBI or Electronic Fingerprint Submission, if available.
For felony convictions, Lenders must submit to SBA the complete and detailed Form 912 package signed by the Subject Individual within 90 calendar days prior to submission to SBA.Upon receipt of the complete Form 912 package, the Office of Personnel Security (OPS) will request the fingerprint check from the FBI. The FBI generally takes 30 days to process fingerprint checks. Once OPS receives a report back from the FBI, OPS will refer the matter to the SBA Director/Office of Financial Assistance (D/OFA) or designee to make the character determination as follows:
1. On receipt of the OPS referral, OFA will issue a character determination in the form of a memorandum to the SBA Field Office or LGPC, as identified by the Lender in the 912 package.
2. OFA will determine either that the Subject Individual has good character, or that an applicant is not eligible for an SBA Advantage loan due to the Subject Individual’s
lack of good character based on the Form 912 package and the information received from the FBI, including any failure to disclose offenses.
3. OFA transmits its memorandum with the character determination to the SBA Field Office or LGPC, as identified by the Lender in the 912 package, via email. OFA will
not provide information directly to delegated lenders or non-delegated lenders.
4. The SBA Field Office or LGPC will advise the Lender in writing of the Agency’s clearance decision.
5. The OFA memorandum and the FBI reports are deliberative and confidential, and also contain information protected by the Privacy Act. As a result, this information must not be released outside of SBA.
In sum, a felony is not necessarily the end, but it will be an uphill battle and you better have a great explanation for the indiscretions of your past and a exemplary record since, if you expect to get a clearance letter. Keep in mind that regardless of the SBA’s own requirements, the Lender may have even stricter requirements to participate in their SBA lending program. And, don’t think about flubbing the answer. Information and financial disclosures submitted to the SBA are generally under penalty of perjury.
If the Small Business Administration (SBA) has accepted your offer in compromise, then congratulations are in order. But, be warned, you must follow the terms of your offer precisely and make all payments on time or risk default. In many cases we are approached by well intentioned people who established settlements with the SBA calling for payment of the settlement in equal consecutive monthly installments; however, for one reason or another they missed a payment or two. Missing a payment can have disastrous consequences and result in a referral to Treasury, the imposition of additional collection fees adding nearly 30% to your original debt, less a credit for your prior settlement payments and the resumption of interest on the uncollected balance (this assuming the SBA agreed to zero interest settlement for you).
I knew a default was bad news – what can I do?
If you have been advised that your SBA OIC is in default you must act quickly. It may not be possible to get the original settlement back by simply making up the missing payments and a new SBA Offer in Compromise may need to be submitted. There are simply too many variables in these cases and consulting a licensed attorney with experience in this area should seriously be considered.
Missing a payment and paying ahead are both equally dangerous
How can paying ahead be bad? When the SBA accepted your offer to pay in installments, it programmed its computers to look for payment in accordance with its terms; in most cases equal, consecutive, monthly payments of an exact amount are called for under the agreement. Many people concerned about defaulting think that paying ahead can protect them from default by establishing a cushion of sort. However, that is a very dangerous train of thought. In fact, all you will do is pay down the balance and in effect short the remaining duration of your agreement (much like paying a mortgage off earlier), but the next month’s payment will still be due. When the SBA’s computers fail to register payment, you are at risk of default and the account may be referred to Treasury (this process is highly automated).
If you have paid ahead on your offer, but nonetheless received a notice of default, you should contact the SBA at once and explain the situation or consult with a licensed attorney experienced in this area. Although it may seem unfair, the government may strictly enforce the terms of your settlement to the letter. Instead of appreciating the gesture on your part, they may refer the debt to Treasury! Remember, SBA computers do a lot of this work and once transferred to Treasury, the SBA staffers may be unwilling to even discuss the matter.
Can I pay off my settlement early?
If your payment will completely pay off your settlement, then you may be able to do so safely, but you should contact the SBA or advise your attorney before doing so. The terms of your offer control and making a mistake can cost you dearly.
Before referring a debt for collection by administrative offset, a creditor agency must provide each debtor with:
(a) a written notification of the nature and the amount of the debt, the intention of the agency to collect the debt through administrative offset, and an explanation of the debtor’s rights;
(b) an opportunity to inspect and copy the records of the agency;
(c) an opportunity for review within the agency; and
(d) an opportunity to enter into a written repayment agreement.
Can they offset my tax refund and then tell me after the fact?
Yes, after the debt has been referred for administrative offset and an offset is taken, the disbursing official conducting the offset must notify the debtor/payee that the offset has occurred (including the amount and type of payment that was used to pay the debt) and the identity of the creditor agency requesting the offset, including a contact name. The specific timing of the notice is not mandated for tax refund offsets.
What if I did not receive a notice at all?
Regardless of the type of payment, failure of the debtor to receive notice will not affect the legality of the offset (withholding).
Is it true that I will be barred from accessing SBA loan programs in future if I don’t pay my debt in full.
Yes, its is very likely, but not certain. If this is a concern, you should discuss with your attorney. Under the current law, an agency must deny credit to a delinquent, debtor unless this requirement is waived by the head of the agency or the Chief Financial Officer. The delinquency can be resolved or fixed by the debtor entering into a repayment plan for collection of the amount of the delinquency or by paying the amount of the delinquency in full.
Are there standards for determining if I will get a waiver?
Yes and No. This is a developing area and Treasury is working on guidelines for the agencies to use in setting their own standards for waivers. These guidelines will include the expectation that an agency will balance whether the denial of credit would be contrary to the purpose of the program under which the credit is being made against the intent of the law to ensure that the federal government does not continue to provide funds to known or repeat delinquent debtors.
If you received a Notice of Intent to Initiate Administrative Wage Garnishment (AWG), you must act quickly. You have a right to contest the garnishment action, but if you wish to have the garnishment action suspended pending a hearing on the matter, you must file a timely request for hearing. The key word here is “timely”, so its very important to understand the definition and to understand that it will depend on how you transmit that request. It works as follows:
Timely. A hearing request is timely if the request for hearing is postmarked (if mailed) or received (if not mailed – e.g., fax, commercial delivery service [FedEx] or in person delivery) within 15 days of date of the AWG notice. If the hearing request is timely, AWG cannot proceed until the hearing is completed and the decision is communicated to the debtor
Untimely. A hearing request is untimely if the request for hearing is postmarked (if mailed) or received (if sent any other way) more than 15 days after the date of the AWG. If the request is untimely, garnishment will not be stopped, unless the hearing decision is not issued within 60 days.
As you can see, filing your hearing request quickly is essential, but if you still missed the boat, don’t despair – Treasury rarely gets to the hearings in 60 days and so while it is not guaranteed that the garnishment will be stopped in the interim, it frequently still does get put on hold. Therefore, even if you failed to act within the 15 days, you may still have a shot and putting the garnishment on hold. Avoiding garnishment is well worth the effort because one you are being garnished ofttimes Treasury will not bother discussing voluntary payment options that might avoid the distress of a enforced collections.
As a general rule, more so now than in the past, the Small Business Administration (SBA) will direct a Guarantor to submit their SBA offer-in-compromise package to the lender for preliminary review and approval. In fact, not in every office, but in some, lenders will be given just 10-days to get the job done. It is not that the SBA is trying to be unkind, but if lenders what to support the deal time of the essence. Now, if for some reason the lender can’t or simply won’t cooperate in the process, SBA will usually take on the responsibility of doing the entire review and work out the particulars with the lender following their own internal process. But, what if the lender just won’t play ball?
My lender has refused every offer I have made?
First, make sure your packages are complete and your offer is serious. If you are working with a professional, they will know how to prepare your offer package and what is expected by the lender and the SBA. Where we see the most mistakes involves a blind appeal for sympathy. Folks, its not that the SBA analysts aren’t human; we work with them every day and the human factor comes into play all the time. But, the guidelines under which they operate require a stringent review of your financial condition. In short, your offer has to present itself as a better alternative to anything else the government is likely to collect from you through enforced collections. In many cases, administrative wage garnishment (AWG) makes it likely that a substantial percentage of the debt might be collected over your working lifetime. Therefore, if your offer has any chance of success it must, at a bare minimum, take that calculation into account.
Second, make sure you are really putting your best foot forward. If you clearly have assets and are unwilling to borrow or at least consider partially liquidating them to support your offer, the SBA may consider the offer insincere — at least, that is my take. So, don’t bother low balling the SBA, unless the rationale for the low offer would make financial sense to the analyst.
Finally, if the lender tells you the offer is just not enough, then look for a way to improve it, or you may end up in Treasury.
Do I really need the lender’s approval?
Yes, in the vast majority of cases, if your lender will not support your offer, the battle is lost. Gaining the support of your lender does not assure acceptance of your offer by the SBA, but failing to secure their recommendation in support of your offer all but assures its rejection. You may be under a lot of stress, but never never yell at your banker; it won’t help and can make things worse. The SBA Offer-in-Compromise package still requires a lot of work on your bank’s part, if they choose to recommend it for approval. Do not give your banker, who may be short-staffed, another reason to put your file on the corner of his her desk in the “I will get to it later pile”. Remember, you are asking the lender to help you and whatever other feelings you may have at the time, you need that help.
The lender’s just doesn’t like anything I suggest. I think they are being unreasonable.
In my experience, lenders rarely turn down a good offer. After all what’s not to like about recovering more money on a bad loan? Sadly, in some cases, lenders may have all but adopted a no settlement policy. A loan committee may have unrealistic expectations that the Guarantors simply cannot meet or may simply have a sour taste in their mouth based on the loan history or their interactions with the Borrower and Guarantors. Sometimes, it just feels personal and it may be.
Can the bank just refuse to settle?
Yes, the SBA, in my experience, will not question a bank’s refusal to settle. Only in certain situations where a bank refuses to review an offer within the time provided by the SBA will some SBA offices take over the offer review process. I am led to believe that, in those few cases, the bank may be asked by the SBA to essentially waive its right to any part of the recovery. Hence, at that point the bank’s consent no longer has any real bearing on the approval by the SBA.
The Bank told me they would not pursue us, but the SBA just sent me a 60-day demand letter. Why is this happening?
Our attorneys routinely work with SBA loan defaults, so we all hear a lot of stories. But, not a week goes by where we don’t get at least one caller who is absolutely shocked they received a 60-day demand letter from the SBA. You might wonder at their surprise because, after all, they defaulted on a business loan and being pursued by the lender is expected, right? But, that’s just it — the lender promised they would not sue them and they would not otherwise pursue collection of the debt. In fact, their banker had known them for years and agreed nothing would be gained from suing them. Did the banker lie?
Banks mean what they say, but don’t always say what they mean.
No, in our story above, the banker did not lie to the caller. What the bank did do was to conclude the liquidation phase of the loan default and request payment on the SBA guarantee. A lender may request payment on the SBA guaranty for loans made under most SBA programs following a 60-day uncured deficiency. However, in all loan programs SBA strongly encourages lenders to fully liquidate the loan prior to repurchase. In this case, the lender probably did complete the liquidation of the business assets by selling them at auction or abandoning the collateral if it was of inconsequential value. The lender also probably reviewed the Guarantors’ financial statements and concluded they were judgment proof (e.g., all of their assets were exempt or substantially so such that any cost of collection would exceed the anticipated recovery). At that point the loan was probably moved to charge off status. From the banker’s point of view, it is usually (not always) case closed once they are paid by the SBA.
When the other shoe drops.
The problem with an SBA loan is that the SBA guarantee is intended to benefit the bank, not the Borrower and certainly not the Guarantors. The SBA guarantee is an inducement to the bank to make such loans because its reduces their risk. But, once the loan goes bad and the SBA pays off the guarantee, the SBA steps in and the demand letter they send is the government’s way of say it wants its money back. Yes, the SBA did indeed pay the bank, but now it wants the Guarantors to make good on the debt and pay up. If the Guarantors don’t do so in a timely manner, then the SBA will promptly refer the debt to the U.S. Treasury for further collection efforts, including administrative wage garnishment (AWG), Federal tax refund intercept and more.
What are some of the lessons learned from this situation:
1. If your banker tells you the bank is not going to pursue you, that does not mean the SBA won’t.
2. If you want to be sure the SBA won’t pursue you, then you may want to explore the SBA offer-in-compromise program.
When submitting an offer under the SBA Offer in Compromise program pursuant to SBA SOP 50 57, the SBA is trying to determine whether making you repay the loan in full will cause a hardship, at least that’s the idea. A complete and accurate picture of your finances is absolutely necessary for the SBA to consider your offer. Moreover, this statement is made under the penalty of perjury. In fact, in our experience if the SBA 770 is visibly incomplete or vague, SBA may not even take your offer seriously and refer you straight to Treasury. Below we address two of the most common questions we get from people contacting our office:
Why is my wife’s financial information necessary, she is not a guarantor?
The short answer is because the SBA requires it; the long answer is that the SBA is trying to determine what portion of your household expenses he/she may be paying. This allows the SBA to determine what sort of disposable income you, the guarantor, may have based on your income, to repay the loan. This calculus is just one of the reasons SBA is asking.
Will providing my wife’s financial data make her liable?
No, the personal liability for the repayment of your SBA loan was established under the original loan documents and the unconditional personal guarantee signed by you the borrower or guarantor. Providing answers to questions on the SBA 770 is not going to make him/her liable for your debt.
Can my spouse still be liable for my unpaid SBA debt in some other way?
Yes. While he/she may have no “personal” liability for your unpaid SBA debt, depending on the laws of your state, your spouse’s income and/or property may be liable for repayment — remember, we are saying “income” and/or “property” not him/her personally. There are nine community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. In these states, your spouse’s income and community property (property acquired during marriage) may be liable for your unpaid SBA loan balance.
Why does the SBA want to know if I have transferred property to someone else?
Transferring cash and other valuable assets to a third-party to make you look financially weaker or in an attempt to put those assets out of reach of creditors and the SBA is unwise. Not only are such transfers potentially voidable under various state statues, including those dealing with fraudulent conveyances, but if the SBA concludes you made those transfers with a bad motive, they consider that a red flag and may not be willing to settle with you on any terms at all.
How will the SBA know I transferred assets if I don’t tell them?
Remember, you are signing the SBA 770 under penalty of perjury and prison time is not just a threat, but a very real possibility. You must tell the truth — to your attorney and the SBA. Transfers made to relatives and others need not always scuttle a deal. There are many reasons for transfers and many ways to address them in the offer process. Let your attorney discuss the matter with you first, then you decide if you wish to proceed with filing your SBA offer.
I don’t want to disclosure all my financial information, I will just file bankruptcy instead.
Bankruptcy may be an option to discharge your unpaid SBA debt if you really don’t want to proceed with or cannot afford an offer. However, its important to note that filing bankruptcy will still require similar disclosures. In fact, bankruptcy disclosures are on the whole even more invasive.
We frequently talk to people who have filed bankruptcy in an effort to discharge the remaining balance due under the SBA Note. While the debt to the SBA may be dischargeable under the bankruptcy code, in most cases, the lien is not (lien stripping in a Chapter 13 with the lender/SBA in a junior lien position where said lien has a zero value being a possible exception).
Choose your Bankruptcy Attorney Carefully.
If you are contemplating bankruptcy instead of an SBA offer in compromise, our firm encourages you to visit with a seasoned consumer bankruptcy attorney that will take the time to walk you through the facts of your case and address issues related to what debts will and won’t be discharged and how the liens on your property may or may not be affected by your filing. And, these answers should come from your bankruptcy attorney, not his or her paralegal.
I filed bankruptcy. What do I do about the SBA lien on my home?
The SBA may consider a release of liens on real or personal property collateral for consideration. In cases where a bankruptcy has been filed, a formal offer in compromise may not be necessary since the underlying Note has been discharged in the bankruptcy proceeding. In many cases, a Lender with sufficient authority can work with a borrower or guarantor without direct SBA involvement; whether this is the case or not will depend on a number of variables.
When reviewing a case for granting a lien release two factors control:
(i) the amount of consideration (your offer) received must be approximately equal to or greater than the Recoverable Value of the collateral; and
(ii) the release of the lien must not jeopardize the ability to maximize recovery on the loan (in the case of a prior bankruptcy filing, there will be no further recovery).
How do I know what my property is worth?
Generally, an appraisal from a qualified/licensed real estate appraiser will be necessary. When dealing with banks, more often than not, they will employ an appraiser and schedule a visit to your home. However, in many cases dealing directly with the SBA will produce an altogether different result; SBA tends to rely on online services such as Zillow. And, in some cases, borrowers or guarantors may feel that Zillow’s valuation does not reflect the current value of their home. In order to convince the SBA otherwise, you will need a professionally prepared appraisal.
Can I pay over time and have my lien released?
In our experience, lenders and the SBA are interested in lump sum offers. A lender usually reserves almost unfettered discretion in this area under the loan documents, so anything is possible. But, in our view, the cleaner and simpler the deal the better. Under ordinary circumstances, borrower and lender (or SBA) can negotiate the amount of cash consideration to be paid for the lien release and the release will be provided after the payment has been made. This transaction is final.
Are there reasons why the lender or SBA might not agree to a lien release?
Yes, lenders and the SBA may feel your offer is too low or may be aware that the market price for your property is expected to increase in the near future. Remember that in order to sell the property in the future, existing liens must be paid off. So, the sit and wait strategy is sometimes employed. There are also many other factors that lenders and the SBA consider, but in our experience a clear trend in the local real estate market is a major factor. Its worth mentioning that if property values are dropping then a lender or the SBA may be more likely to consider a lien release. Therefore, appraisals also serve to inform and educate lenders and the SBA on current trends that could work in your favor during negotiations.
Can I settled with the SBA instead of filing for Bankruptcy?
The SBA, much like the IRS, has a program called an “Offer in Compromise”. This program may allow for the settlement of the debt, no matter how great, for less than the demand amount in your 60-day letter from the agency. However, in order for this program to be applicable, the SBA must find that payment in full would cause a hardship on your family. But, in our experience, this is often true. Many business owners deplete savings, retirement and almost all available cash in an effort to save their business; this often leaves very little once the doors actually close. If you would like more information about the SBA Offer in Compromise program, please review SBA Offer in Compromise materials on this site.