I am a federal contractor and I defaulted on an SBA loan years ago, can the Treasury offset my contract payments?
We have had quite a few clients ask us how a defaulted SBA loan might affect their business dealings with the government. In this post we are going to look at this question from the perspective of a client who has one or more contracts with the federal government under which they receive payments for services rendered.
For example, a medical practice or surgical center might receive Medicare payments or a janitorial service might have a contract to clean the offices of certain federal buildings. Will defaulting on an SBA loan really affect any of those agreements? Yes.
Will I be barred from receiving government contracts?
Surprisingly, no, unless otherwise provided by law. Contracting officers shall not use the presence of the CCR debt flag indicator (see below) to exclude a contractor from receipt of the contract award or issuance or placement of an order. However, the government will take steps to ensure that delinquent funds are collected. And, they will be aggressive once they become aware of the delinquency.
Centralized Offset of Federal Payments
As we have just learned, you probably won’t lose your contract award because of defaulted SBA debt, but federal payments made to you are all but certain to be offset. When it is contemplated that the Government-wide commercial purchase card will be used as the method of payment, and the contract or order is above the micro-purchase threshold, contracting officers are required to verify whether the contractor has any delinquent debt subject to collection under the Treasury Offset Program (TOP). This check must be performed at the time of contract award or order placement.
Federal contracting officers are required to check the General Services Administration Central Contractor Registry (CCR) to determine whether a contractor owes a delinquent debt. When the Government contracts for goods or services and pays with a credit card, those payments are made to the card-issuing bank and cannot legally be intercepted for delinquent debts owed by the contractor.
The contracting officer, by law, may not authorize the Government-wide commercial purchase card as a method of payment during any period the CCR indicates that the contractor has delinquent debt subject to collection under the TOP. In such cases, payments under the contract shall be made in accordance with the clause at 52.232-33, Payment by Electronic Funds Transfer—Central Contractor Registration, or 52.232-34, Payment by Electronic Funds Transfer—Other Than Central Contractor Registration, as appropriate in order to assure that delinquent contractors are paid through a mechanism that can be offset or levied to collect the contractor’s debts.
The original law references CCR. What is SAM?
The CCR was the primary supplier database for the U.S. Federal government until July 30, 2012. On July 30, 2012, the CCR transitioned to the System for Award Management (SAM). SAM is now the Official U.S. Government system that consolidated the capabilities of CCR/FedReg, ORCA, and EPLS. For purposes of this post, all references to the original CCR process should now reflect SAM. If you had an entry in the CCR database, you now have an entry in SAM.
Owing unpaid federal debts can cause serious problems. If you would like more information on how the Treasury Offset Program (TOP) works, please contact the Perliski Law Group for a free initial consultation at (214) 446-3934 or use the Contact Us link at the top right of this page.
The SBA Offer-in-Compromise process requires a guarantor to prepare a detailed financial statement and provide very detailed supporting documentation. In fact, the whole process feels a lot like applying for your loan all over again, but is quite the opposite. Instead, the company for whom you pledged your assets and your good name as security has already received the loan proceeds and failed! Worse, as a guarantor, the SBA is now looking at you to make good on the defaulted SBA loan.
With great care and after reviewing your financial situation in detail, your professional advisor has crated an offer for you. The offer is intended to catch the eye of the government and persuade them that a bird in the hand is still worth two in the bush.
A good offer will take into account your earning potential, age, employment history, health, and the health of your dependents, your assets, and those of your spouse in some cases. All of this information rolls up into an analysis that provides the SBA with the ability to compare what they think they may be able to recover through enforced collections to what you are offering. In short, you are making the case that your voluntary offer of settlement is the better deal between the two possibilities.
After submitting your offer, which agains feels like a mortgage application and is about as thick, several weeks pass. After a long wait, the SBA has responded — they have rejected your offer! Is it this end? As you look more carefully at their response, they have made a counteroffer!
In some cases, the SBA believes that a guarantor’s offer is, shall we say, in the ballpark, but they may disagree on some points supporting your offer and feel that you could do a little better. In such cases, the SBA believes the guarantor’s offer warrants something more than just a rejection. A counteroffer represents a deal that the SBA will do. These deals are often great opportunities because a referral to Treasury Department will cost you a 28% collection surcharge on top of what you already owe. Should you take it? That all depends; it may well represent your last chance to settle this matter and avoid bankruptcy or a referral to Treasury and possible wage garnishment.
Before you accept the counteroffer, take a day or two to calmly and cooly look it over. If you believe you can make it work, accepting the counteroffer will immediately stop the referral to Treasury — all that remains is to complete the payments required. On the other hand, if you believe the counteroffer calls for too much, but is almost manageable, then by all means let the SBA know. If a deal is close, you may still be able to gain some small concessions and perhaps enough to close a deal.
Do deals really get done?
The SBA Offer-in-Compromise process is there because the government knows that not all businesses make it and that repaying these debts is not always possible without causing extreme financial hardship. The default position of the SBA will always be — pay us, but don’t afraid to tell your story and ask for relief. You have very little to lose and much to possibly gain. Not all offers are accepted, even some really good ones get rejected, but the SBA Offer-in-Compromise is an option that should not be overlooked.