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.
What is a CDC/504 Loan?
The Small Business Administration (SBA) has a loan program know as the “504 program”. The 504 program helps small business owners purchase commercial real estate (e.g., a hotel/franchise or a small office building). Unlike the 7(a) program that incentivizes private lenders to help small business by partially guaranteeing their loans, the 504 program is a hybrid.
Under the 504 program, the the borrower has two loans: one to a private lender and another to a Certified Development Company (CDC). In such scenarios, the real estate is financed by a conventional loan that is not guaranteed by the SBA; this lender covers 50% of the project. The second player is the CDC, a nonprofit company acting as a conduit for SBA funds, and it funds 40% of the project; this loan is 100% guaranteed by the SBA. The remaining 10% of the project is funded by the borrower.
In a CDC/504 Loan, the private lender takes a first position lien on the real estate while the CDC takes the second position lien. In the event of a default, a short-sale or foreclosure will usually result in proceeds sufficient to pay off all or nearly all the private lender. I say “usually” because as some of my colleagues have pointed out, real estate in some markets has taken a nose dive.
I am current with the bank, but months behind with the CDC, why aren’t they foreclosing?
The short answer to the question is that your first lender is not in monetary default, so they are unlikely to foreclose on the basis that you have defaulted another obligation, although in some cases breaching loan covenants and representations and warranties will stir a bank to action.If the second lien holder files a foreclosure action, the sales proceeds must still be applied in order of lien priority. Therefore, if the CDC sees that it will not reap enough to make foreclosure worth it, then why foreclose at all. In many cities market conditions for certain types of commercial real estate are so bad that the CDC simply cannot foreclosure. This posture is then assumed by the SBA once the guarantee to the CDC is paid and the SBA assumes actual ownership of the Note and Security Agreement plus the attendant personal guarantees.
If the SBA won’t foreclose, why do I need to worry?
Although foreclosure may not be in the cards for you, that is not to say the CDC won’t sue the borrower and/or pursue the guarantors. And, if they choose not to do so, the SBA still can once the guarantee payment to the CDC has been made. An SBA Offer in Compromise (OIC) may be an available option. If initiated early an OIC can sometimes provide hapless guarantors an opportunity to walk away from a mountain of debt for a relatively modest percentage of what was owed. But, a settlement is not foregone conclusion. The SBA will expect you to dig deep and make a serious offer, otherwise a quick rejection often follows.
Remember, if the SBA cannot collect, then they will send the bad debt to the Treasury Department for collection where a 28% one-time collection fee will be added to the debt. In addition the Treasury Offset Program (TOP) will begin to review the file and take action, including tax refund intercept and offset of social security benefits if you are already receiving them. And, if that is not enough, and you are gainfully employed, you will likely be the recipient of a federal wage garnishment order that can remain in effect continuously until the debt is paid in full.