SBA Debt Attorneys

Most SBA loans fall under two categories: 7(a) and 504.In an SBA 7(a) transaction, a loan is secured from a private sector lender and, provided that the lender and borrower have satisfied the requirements of the SBA, if the borrower defaults on the loan, the SBA will reimburse the lender for a percentage on the loan loss (usually 75% or 85%, depending on various factors).In an SBA 504 transaction, typically, a loan is secured from a private sector lender with a first position lien covering up to 50% of the project cost, and a second loan is secured from a private sector lender with a junior lien position covering up to 40% of the project cost, and the borrower makes a contribution of equity equal to at least 10% of the project cost. After the closing of the first and second loans, and provided that the lender and borrower have complied with the requirements of the SBA, a debenture is sold to investors, the proceeds of which pays off the second loan, whereupon the second loan is assigned to a Certified Development Company (“CDC”) and then to the SBA, which provides a 100% guarantee of the debenture.The existence of the SBA’s guarantee in each of these transactions is an inducement for the lender to make a loan on terms it would otherwise not make. However, the SBA guarantee does not allow the lender to disregard standard commercial underwriting principles such as collateral and personal guarantees. The SBA guarantee does allow the lender to loan more money, extend longer terms, and approve loans to less mature businesses than it otherwise would.The SBA’s purpose under these financing programs is to help businesses gain more access to capital, thereby creating jobs and expanding the tax base. Pursuant to the Small Business Jobs Act of 2010 (“2010 Act”), the maximum SBA guarantee to the lender on a 7(a) loan was increased to $5,000,000; and on a 504 Loan, the maximum debenture amount was increased to $5,000,000.

The SBA can compromise a debt (that is, it can accept less than the full amount owed on a debt) based on the authority contained in the following statutes and regulatory sources:a. Section 5(b) of the Small Business Act which gives the Administrator authority to effect compromise settlements.b. The Federal Claims Collection Act (31 U.S.C. 3701 and following) which provides a means for the settlement, adjustment, and compromise of claims by Federal agencies.c. 4 CFR § 183, which prescribes standards for the compromise of claims under the Federal Claims Collection Act.

To be eligible for this option, a debtor must meet the following criteria:

• Engaged in commercial activity
• Total debts must be less than $2,725,725 (both secured and unsecured)
• At least half of the debts must be due to business activity
• The principal activity is not a single-asset real estate operation

The CARES Act further expanded the eligibility for businesses to qualify under this bankruptcy path.

This legislation increases the eligibility pool to also include companies with up to $7,500,000 in debt (both secured and unsecured) to reorganize under Subchapter V. This is a significant increase from the otherwise limit of $2,725,625.

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A charge off is justified when the SBA has complied with all requirements of collection and liquidation and further collection of any substantial portion of the debt is doubtful. The determination to justify a charge off may be based on one or more of the following:a) All efforts must have been exhausted in cost-effective recovery from:1. Voluntary payments from the borrower;2. Liquidation of collateral;3. Compromise with obligor leaving only a deficiency balance; and4. Consideration has been given to any legal remedies available so that no further reasonable expectation of recovery remains.b) Estimated costs of future collection exceed any anticipated recovery;c) Obligor cannot be located or is judgment proof;d) The Lender/SBA’s rights have expired (e.g., statute of limitations, restrictions of State law, SBA policy);e) Debt is legally without merit;f) Adjudication of a Chapter 7 Bankruptcy as a no asset case, or completion of Chap 11/13 case;g) The inability of the Lender to effect further worthwhile recovery.

When you fail to make payments on your SBA loan, the bank or CDC will start contacting you asking for payment. Eventually, if non-payment continues, and you fail to cure the “default”, the bank or CDC may seek to collect on its collateral. This could include monies contained in an account housed at the same bank, your account receivables, your business equipment, real estate, even your home if you used a mortgage beyond the homestead exemption limits. You can expect that the bank or CDC will aggressively seize pledged collateral because the SBA requires the lender or CDC to take all appropriate steps to collect as much of the debt as it can before tendering a claim to the SBA for the balance. And if the United States Department of Treasury receives your account, then you can expect more aggressive collection action, and possibly, full-fledged litigation.