SBA Loan Default: The Debt Collection Improvement Act of 1996
We will analyze your SBA loan problems and advise you on potential solutions such as an SBA offer in compromise for your SBA loan default.
SBA SOP 50 57 defines “workout” as "the debt collection and negotiation process as well as the final plan agreed upon by a creditor and debtor with regard to how the problems and issues surrounding the debtor's delinquent obligation to the creditor can be 'worked out' or resolved."
There are several alternative workout strategies but generally most, if not all, involve the restructuring or re-working of the material or important terms and conditions of the borrower’s delinquent loan.
Obviously, the objectives of a workout are to avoid bankruptcy, litigation, pre-judgment and provisional remedies (e.g. attachment liens) or foreclosure so as to help the borrower to cure defaults and improve repayment ability and to maximize the recovery potential on the loan for the creditor.
The SBA requires the lenders to make a good faith effort to negotiate a workout on an SBA loan which is seriously delinquent or has been designated in “liquidation” status. This means that failure by the lender to make an effort at a workout could result in a denial or repair, and not only could jeopardize presentment of the SBA guaranty, but also could be construed as violating applicable SBA SOPs and other federal regulations. Actually, lenders are required to document on paper the reasons as to why reasonable efforts at an SBA loan default workout were not achieved.
If an SBA borrower is having problems making payments on an SBA loan and is seeking relief from the lender through a workout, be advised upon request for a workout, that lenders are required to obtain updated financials, for e.g., a current financial statement (profit & loss statement, balance sheet and cash flow statement) that will have to be signed under penalty of perjury and must show borrower’s assets, liabilities, income and expenses. Additionally, the lender will also obtain the borrower’s last year-end financial statements, current consolidated financial statements of any affiliates and complete business and personal tax returns for the previous two years. If the borrower refuses to provide requested financial information, workout negotiations will not be pursued.
Once the financial information is obtained, the lender determines if an SBA workout is even feasible. In doing so, the lender reviews the financial information, and determines, among other factors, if the borrower has the technical and management skills to achieve a turnaround of the business, and whether the borrower is cooperating with the lender, acting in good faith and is financially and operationally viable.
There are many possible types of SBA workouts to consider. Lenders are required to document the justification for the final decision on which SBA workout option to pursue. As part of its written documentation, the lender will have an updated credit memo that includes a cash flow review and a complete liquidation evaluation based upon the most current financials and other information provided by the borrower.
If the workout is deemed feasible, negotiations will begin immediately and the workout plan will be implemented soon thereafter. Lenders are not allowed to let negotiations drag on. If an acceptable workout is not in place within sixty (60) days, the lender will proceed with its plan for enforced debt collection – which may include, exercising set-off provisions, collateral liquidation, litigation, foreclosure or even referral to the Department of Treasury.
Borrowers must be prepared to provide other "consideration" in order to make the workout agreement valid and binding on the parties. What this means is that the borrower must provide something of value to the lender in exchange for the benefit of the approved workout.
Generally, borrowers are required to correct initial loan document errors, reaffirm or provide additional personal guarantees, waive certain affirmative defenses, release lender liability claims, provide additional collateral when possible and agree to a summary method of liquidating the loan if the workout fails. In essence, if the SBA borrowers are not represented, most borrowers agree to almost every concession under the sun in order to obtain the workout from the lender – without ever understanding the ramifications of their decisions. This is where most borrowers lose their future ability to apply any leverage against the lender or SBA in the event that the future workout fails.
The applicable SBA SOP specifically identifies the most common types of SBA loan workouts which include: forbearance; reinstatement of maturity date; deferment; modification of repayment terms of note; assumption of loan; subordination of working capital loan; relief on secured senior loan; and voluntary sale of collateral.
Therefore, if a borrower is having financial problems and needs certain relief, the borrower should definitely consider requesting a workout with the lender as successful workouts help all parties involved in terms of avoiding default, collateral liquidation, protracted litigation, bankruptcy, and also help to promote the goals of the SBA.
If you find that your business is having problems paying necessary expenses and servicing SBA loan obligations, don’t just jump into a workout request. Contact a qualified SBA Workout Practitioner to assist in not only reviewing your loan documents and financial statements, but also to assist in advising you re the potential legal consequences of certain conditions precedent for the approval of an SBA workout as the “cost-benefit” analysis may ultimately work against a workout request.
If you have an SBA loan default or SBA problem, call us at 888-756-9969 for a complimentary Case Evaluation or simply complete our intake form for a confidential written report regarding your options.
Millions of Dollars in SBA Debts Resolved via Offer in Compromise and Negotiated Repayment Agreements without our Clients filing for Bankruptcy or Facing Home Foreclosure
Millions of Dollars in Treasury Debts Defended Against via AWG Hearings, Treasury Offset Program Resolution, Cross-servicing Disputes, Private Collection Agency Representation, Compromise Offers and Negotiated Repayment Agreements
Our Attorneys are Authorized by the Agency Practice Act to Represent Federal Debtors Nationwide before the SBA, The SBA Office of Hearings and Appeals, the Treasury Department, and the Bureau of Fiscal Service.
Clients executed several trust deeds pledging seven (7) real estate properties and unconditional personal guarantees for an SBA 7(a) loan from the participating lender. The clients' small business failed and eventually defaulted on repayment of the loan exposing all collateral pledged by the clients. The SBA subsequently acquired the loan balance from the lender, including the right to liquidate and collect all pledged collateral pursuant to the trust deed instruments.
The Firm was hired to negotiate separate release of lien proposals for all 7 real estate properties. In preparation for the work assignment, the Firm Attorneys initiated discovery to secure records from the SBA and Treasury's Bureau of Fiscal Service. After reviewing the records and understanding the interplay between the lender and the SBA, the attorneys then prepared, submitted and negotiated the release of lien (ROL) for each of the 7 real estate properties for consideration.
After submitting the proposals, the assigned SBA Loan Specialists approved each ROL package - significantly reducing the total SBA debt claimed.
Client received the SBA's Official 60-Day Notice for a loan that was obtained by her small business in 2001. The SBA loan went into default in 2004 but after hearing nothing from the SBA lender or the SBA for 20 years, out of the blue, she received the SBA's collection due process notice which provided her with only one of four options: (1) repay the entire accelerated balance immediately; (2) negotiate a repayment arrangement; (3) challenge the legal enforceability of the debt with evidence; or (4) request an OHA hearing before a U.S. Administrative Law Judge.
Client hired the Firm to represent her with only 13 days left before the expiration deadline to respond to the SBA's Official 60-Day Notice. The Firm attorneys immediately researched the SBA's Official loan database to obtain information regarding the 7(a) loan. Thereafter, the Firm attorneys conducted legal research and asserted certain affirmative defenses challenging the legal enforceability of the debt. A written response was timely filed to the 60-Day Notice with the SBA subsequently agreeing with the client's affirmative defenses and legal arguments. As a result, the SBA rendered a decision immediately terminating collection of the debt against the client's alleged personal guarantee liability saving her $50,000.
Client personally guaranteed an SBA 7(a) loan for $100,000 from the lender. The SBA loan went into early default in 2006 less than 12 months from disbursement. The SBA paid the 7(a) guaranty monies to the lender and subsequently acquired the deficiency balance of about $96,000, including the right to collect against the guarantor. However, the SBA sent the Official 60-Day Due Process Notice to the Client's defunct business address instead of his personal residence, which he never received. As a result, the debt was transferred to Treasury's Bureau of Fiscal Service where substantial collection fees were assessed, including accrued interest per the promissory note. Treasury eventually referred the debt to a Private Collection Agency (PCA) - Pioneer Credit Recovery, Inc. Pioneer sent a demand letter claiming a debt balance of almost $310,000 - a shocking 223% increase from the original loan amount assigned to the SBA. Client's social security disability benefits were seized through the Treasury Offset Program (TOP). Client hired the Firm to represent him as the debt continued to snowball despite seizure of his social security benefits and federal tax refunds as the involuntary payments were first applied to Treasury's collection fees, then to accrued interest with minimal allocation to the SBA principal balance.
We initially submitted a Cross-Servicing Dispute (CSD) challenging the referral of the debt to Treasury based on the defective notice sent to the defunct business address. Despite overwhelming evidence proving a violation of the Client's Due Process rights, the SBA still rejected the CSD. As a result, an Appeals Petition was filed with the SBA Office of Hearings & Appeals (OHA) Court challenging the SBA decision and its certification the debt was legally enforceable in the amount claimed. After several months of litigation before the SBA OHA Court, our Firm Attorney successfully negotiated an Offer in Compromise (OIC) Term Workout with the SBA Supervising Trial Attorney for $82,000 spread over a term of 74 months at a significantly reduced interest rate saving the Client an estimated $241,000 in Treasury collection fees, accrued interest (contract interest rate and Current Value of Funds Rate (CVFR)), and the PCA contingency fee.
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