There is really no way to know. Period. There are so many variables:
1. Who handles your file;
2. What SBA office is handling your file;
3. Your level of cooperation with the lender, both real and perceived;
4. Whether you have liquid assets vulnerable to traditional collection methods.
In general, the following factors will impact the likelihood of settling with the SBA:
1. The amount of the Deficiency Balance;
2. Whether a Bankruptcy would shield some or all of the Guarantor’s assets;
3. The Guarantor’s net worth, including exempt retirement assets.
4. What would a wage garnishment yield over 5 years?
5. Is the Guarantor really likely to file bankruptcy or is it a bluff;
6. The Guarantor’s health or special circumstances (e.g., hardship);
7. The costs of collection, and in particular, the likely ROI on collection activities.
In short, the SBA, like the IRS, already sees the exposed assets you have pledged as the baseline of any offer. What they want is more. The SBA is looking for an Offer, usually a lump-sum offer, that is better than any alternative that can be obtained through enforced collection activities that consume time and money and may carry an uncertain outcome.
The hard truth is that thousands of businesses fail every year and not everyone will settle with the SBA. But, the SBA Offer in Compromise represents a powerful alternative to bankruptcy in many cases.
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.
The Servicemembers Civil Relief Act (SCRA) may provide important benefits that can help you. This law protects your financial and legal affairs while you are on active duty military service. Among other things, the SCRA requires your SBA lender to provide you with certain relief from debt that you incurred before entering active duty. It also requires your lender to suspend certain legal actions against you if the action will interfere with your military service.
How the SCRA can affect your SBA loan?
One of the major benefits provided by the SCRA is an interest rate cap. If you are eligible for SCRA benefits, the interest rate on debts you incurred prior to your military service will be reduced to 6% per year and the required payments will also be reduced to reflect this lower interest rate.
How do I know if I am eligible for benefits under the SCRA?
SCRA benefits may be available you if you fall into any one of the following categories:
1. Active duty servicemembers of the Army, Navy, Air Force, Marine Corps or Coast Guard
2. Activated reservists
3. Commissioned officers of the Public Health Service or National Oceanic and Atmospheric Association
4. National Guard members called to active duty for more than 30 days
5. The spouse and dependents of active duty servicemembers
How can I request the interest rate reduction?
An eligible person must do three (3) things to receive the benefits of the SCRA:
1. Show that you incurred the debt before you entered military service;
2. Request your SCRA benefits within 180 days of the end of your active duty; and
3. Provide your Lender/SBA a copy of your active duty orders or a letter from your commanding officer on his or her letterhead.
You mentioned a letter, what should I include in it?
Your letter should contain the following six (6) key pieces of information to establish your eligibility:
1. Your full name;
2. Social security number;
3. Date of birth;
4. Home address;
5. Active duty start date;
6. Commanding officer’s telephone number, unit number, and statement confirming your active duty status.
How long will my interest rate reduction last?
The interest rate reductions on your SBA loan will expire 6 months after you complete your military service.
If you have futher questions about the SCRA or how SCRA benefits may affect your SBA loan or your spouses SBA loan, please contact the SBA loan default attorneys at the Perliski Law Group at (214) 446-3934 for a free initial consultation.
The Lender did not do X and my lawyer says that I have rights. I hear something like the above at least twice a week. In nearly all cases a prospective client has been told they have rights, so are their lawyers just wrong? Yes and No. Invariably it is true that the client had (past tense) rights available to them under state law. They may well have waived those rights when they signed the SBA’s Unconditional Guarantee. Therefore, a careful review of the guarantee agreement is advisable.
When the Small Business Administration (SBA) is the holder, the Note and the Guarantee will be construed and enforced under federal law, including SBA regulations. The Lender or the SBA may use state or local procedures for filing papers, recording documents, giving notice, foreclosing liens, and other purposes. By using such procedures, the SBA does not waive any federal immunity from state or local control, penalty, tax, or liability. As to your Guarantee, a Guarantor may not claim or assert any local or state law against the SBA to deny any obligation, defeat any claim of the SBA, or preempt federal law.
Waivers are not your friend.
I have rights don’t I? Prospective clients describing their problems almost shout this when describing how they have been wronged by a lender. The answer is not quite so simple. When you signed your Guarantee agreement, you probably did not read it too closely because you were excited to be getting a new business loan and defaulting was not in your future plans. In any event, you probably did not use a lawyer because, after all, it was just a loan. Regrettably, you probably unknowingly waived many valuable rights.
A. Guarantor waives all rights to:
1) Require presentment, protest, or demand upon Borrower;
2) Redeem any Collateral before or after Lender disposes of it;
3) Have any disposition of Collateral advertised; and
4) Require a valuation of Collateral before or after Lender disposes of it.
B. Guarantor waives any notice of:
1) Any default under the Note;
2) Presentment, dishonor, protest, or demand;
3) Execution of the Note;
4) Any action or inaction on the Note or Collateral, such as disbursements, payment, nonpayment, acceleration, intent to accelerate, assignment, collection activity, and incurring enforcement expenses;
5) Any change in the financial condition or business operations of Borrower or any guarantor;
6) Any changes in the terms of the Note or other Loan Documents, except increases in the amounts due under the Note; and
7) The time or place of any sale or other disposition of Collateral.
C. Guarantor waives defenses based upon any claim that:
1) Lender failed to obtain any guarantee;
2) Lender failed to obtain, perfect, or maintain a security interest in any property offered or taken as Collateral;
3) Lender or others improperly valued or inspected the Collateral;
4) The Collateral changed in value, or was neglected, lost, destroyed, or underinsured;
5) Lender impaired the Collateral;
6) Lender did not dispose of any of the Collateral;
7) Lender did not conduct a commercially reasonable sale;
8) Lender did not obtain the fair market value of the Collateral;
9) Lender did not make or perfect a claim upon the death or disability of Borrower or any guarantor of the Note;
10) The financial condition of Borrower or any guarantor was overstated or has adversely changed;
11) Lender made errors or omissions in Loan Documents or administration of the Loan;
12) Lender did not seek payment from the Borrower, any other guarantors, or any Collateral before demanding payment from Guarantor:
13) Lender impaired Guarantor’s suretyship rights;
14) Lender modified the Note terms, other than to increase amounts due under the Note.
15) Borrower has avoided liability on the Note; or
16) Lender has taken an action allowed under the Note, the Guarantee, or other Loan Documents.
So, what does all this mean? Well, at a minimum, it means that banks can make mistakes, or just use bad judgment in some cases, or perhaps not let you know about the sale of collateral, or even choose not to sell it at all. In nearly all jurisdictions, there is case law validating these waivers. In short, the waivers are probably enforceable, but that does not mean you should give up, and you should bring these waivers to the attention of your lawyer if you are reviewing your legal options.
When signing your SBA Guarantee, do it with eyes wide open.
Depending on whether you are in a community property state or not, all or part of your income may be liable for the debts of your spouse, even those incurred prior to marriage. However, you personally are not liable for his/her debts. Sometimes that is of small consolation. In the case of tax refunds, you may or may not be entitled to the return of that portion of the refund associated with your income or at least some part of it. In order to determine whether you might have rights, it is important to understand a few things:
Who is taking my refund and why?
The Treasury Offset Program (“TOP”) is a centralized offset program, administered by the Bureau of the Fiscal Service’s (“BFS”) Debt Management Services (“DMS”), to collect delinquent debts owed to federal agencies. Fiscal Service is a bureau of the United States Department of the Treasury. Under TOP, the names and taxpayer identifying numbers of debtors included in a federal database are matched against the names and taxpayer identifying numbers of recipients of federal payments, including, in this example, a tax refund. If there are matches, the tax refund is reduced (known as an “offset”) to satisfy the delinquent debt.
What is an Injured Spouse?
An injured spouse is an individual:
1. Who filed a joint tax return (Form 1040) and
2. All or part of the refund overpayment was, or is, expected to be applied to a past-due obligation of the other spouse and
3. The non-obligated spouse wants his/her share of the joint refund
Injured Spouse Eligibility Requirements
The injured spouse:
1. Is not required to pay the past-due amount, and
2. Will report the income, and/or
3. Will report payments
Form 8379 Injured Spouse Allocation
1. IRS Form 8329 is filed by the non-obligated spouse on a joint tax return
2. Filed only if the taxpayer owes a past due, legally enforceable debt owed to IRS or a debt administered by BFS
How to File Form 8379
1. Submit with jointly filed Form 1040
2. Filed by itself after offset
3. Filed with Form 1040X only if original return (Form 1040) is to be amended/changed to request additional injured spouse refund.
What should happen next?
With Non-Tax Debts such as defaulted SBA loans:
1. Confirm and verify Federal non-tax debt offset
2. Furnish creditor agency information
Creditor Agency will:
1. Provide debt balance and establish payment agreements
2. Refund any money taken in error
3. Remove a debtor or change status of debt from the FMS debtor database
This can be a very complicated area. If you have additional questions about a defaulted SBA loan owed by your former spouse and ongoing tax refund offsets, contact our SBA loan default attorneys at the Perliski Law Group at (214) 446-3934.