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.
I want to buy a new home. Will the SBA allow me to substitute the lien on my old residence for a new one?
Yes, it is possible, but the SBA does not have to do so. SBA guidelines do allow a Guarantor to substitute a lien on a new residence in exchange for releasing the lien on the Guarantor’s existing residence. However, at a minimum, the following conditions must be satisfied:
A. All of the proceeds from the sale of the Guarantor’s existing residence, other than the funds needed to pay off senior liens and necessary, reasonable and customary closing costs, must be used to purchase the new residence, placed in an escrow account to facilitate the purchase of a new residence, or used to pay down the SBA Loan;
B. The amount of equity in the new residence available to secure the SBA loan must be the same as or greater than the amount of equity in the existing residence available to secure the SBA loan;
C. The release of the existing lien, or proceeds thereof, must be concurrent with the recording of the new lien in the required position of priority and should be done pursuant to an escrow agreement signed by all of the parties involved in the transaction; and
D. Guarantor must provide the title, hazard and flood insurance.
If you would like more information on this subject, you may contact the Perliski Law Group at (214) 446-3934 for a free initial consultation.