When a federal non-tax debt (SBA, HUD, Department of Education or DFAS) is transferred to the U.S Treasury Department’s Bureau of Fiscal Service for collection, the agency automatically adds collection fees up to 32% of the principal amount originally claimed. Let’s say you defaulted on an SBA loan in the amount of $500,000. Once the debt is transferred to Treasury, it can add up to $160,000 in collection fees (32%) totaling $660,000.
Debt Collection Improvement Act of 1996
Treasury asserts that it has the right to collect these percentage-based collection fees pursuant to 31 U.S.C. § 3717(e).
This provision provides that a federal agency “shall assess on a claim owed by a person . . . a charge to cover the cost of processing and handling a delinquent claim.”
Treasury also relies on a federal statute that permits the Secretary of the Treasury to either retain a portion of amounts it collects on debts or bill the federal creditor agency transferring the claim to the Treasury “based on actual administrative offsets completed.” 31 U.S.C. § 3716(c)(4).
A federal regulation further states that “[a]gencies shall assess administrative costs incurred for processing and handling delinquent debts. The calculation of administrative costs should be based on actual costs incurred or upon estimated costs as determined by the assessing agency.” 31 C.F.R. § 901.9(c).
Based upon these statutes and regulations, the government lays claim to a 28-32% surcharge.
Defense Arguments Against Treasury’s Collection Fees
In the end, once a federal non-tax debt is placed in the hands of Treasury or with a Private Collection Agency under contract, these collection fees become part of the overall balance owed to the federal government by the debtor.
One of the problems with this scheme – especially with SBA debts, is that there appears to be more incentive for the SBA to decline or reject a reasonable settlement proposal (i.e., Offer in Compromise, Forbearance or Structured Repayment Agreement) and just transfer the claims to Treasury in order to take advantage of these percentage-based collection fees since they automatically become part of the overall debt once the cross-servicing has been completed and Treasury takes jurisdiction over a case.
From the SBA debtor’s perspective, this simply does not pass the “smell test.” It is unfair because the collection fees are not “reasonable.”
What actual costs and expenses has Treasury incurred or sustained to justify the additional payment of these percentage-based collection fees?
What actual notice did the former SBA borrower (the defunct small business) or the SBA guarantor (the SBA debtor) receive in connection with the automatic addition of these collection fees?
There is nothing in the actual Note or Unconditional Guarantee that specifically identifies that in the event of default, the SBA debtor shall be liable to pay for these “collection fees” pursuant to the federal statutes and regulations as aforementioned.
Rather, the SBA’s Unconditional Guarantee only address the following term: “ENFORCEMENT EXPENSES. Guarantor promises to pay all expenses Lender incurs to enforce this Guarantee, including, but not limited to, attorney’s fees and costs.”
This term does not include these percentage-based “collection fees.” It specifically cites to expenses (which is required to be reasonable (must be actual and proven), including “attorney’s fees and costs.” However, most of the time, Treasury is not able to cite to any evidence to support a surcharge of “reasonable attorney’s fees and costs” associated with collecting the debt pursuant to the terms of the agreement.
Treasury never provides an accounting of the reasonable attorney time expended in enforcing the guarantee agreement and note, the reasonable value of this time, or any other reasonable costs associated with their so-called “enforcement expenses.”
Moreover, these “collection fees” are extrinsic to the agreement that the SBA debtor signed as they are based on the federal statutes and regulations as cited above. The inclusion of this extrinsic collection fees provision violates a substantive principle of basic contract law – the parol evidence rule.
According to the parol evidence rule, when parties enter into an integrated written agreement, extrinsic evidence may not be relied upon to alter or add to the terms of the writing. It is founded on the principle that when the parties put all the terms of their agreement in writing, the writing itself becomes the agreement. The written terms supersede statements made before, during or after the negotiations of the final agreement. The purpose of the rule is to ensure that the parties’ final understanding, deliberately expressed in writing, is not subject to change.
Hence, the inclusion of the 28%-32% collection fees claimed by Treasury which is not part of the original note or guarantee agreement signed by the SBA debtor arguably violates the parol evidence rule and therefore, should not be a compensable element of damages that should be unilaterally awarded to Treasury.
Don’t Try to Resolve your SBA debt or Treasury’s Collection Fees without Professional Help
Don’t try to resolve SBA debt and Treasury Collection fee issues by yourself. Speak to an SBA and Treasury Workout Attorney with Protect Law Group.
Protect Law Group has proven, nationwide experience resolving SBA loan problems and Treasury debts.
Owe more than $30,000? Contact Protect Law Group for a Case Evaluation or call us toll-free at 1-888-756-9969.
We can analyze your SBA debt or Treasury problems and advise you on potential solutions.
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Client personally guaranteed SBA 7(a) loan for $350,000. The small business failed but because of the personal guarantee liability, the client continued to pay the monthly principal & interest out-of-pocket draining his savings. Client hired a local attorney but quickly realized that he was not familiar with SBA-backed loans or their standard operating procedures. Our firm was subsequently hired after the client received the SBA's official 60-day notice. After back-and-forth negotiations, we were able to convince the SBA to reinstate the loan, retract the acceleration of the outstanding balance, modify the original terms, and approve a structured workout reducing the interest rate from 7.75% to 0% and extending the maturity date for a longer period to make the monthly payments affordable. In conclusion, not only we were able to help the client avoid litigation and bankruptcy, but we also save him approximately $227,945 over the term of the workout.
$150,000 SBA 7A LOAN - SBA OIC CASH SETTLEMENT
Client personally guaranteed SBA 7(a) loan balance of over $150,000. Business failed and eventually shut down. SBA then pursued client for the balance. We intervened and was able to present an SBA OIC that was accepted for $30,000.
Clients personally guaranteed an SBA 7(a) loan that was referred to the Department of Treasury for collection. Treasury claimed our clients owed over $220,000 once it added its statutory collection fees and interest. We were able to negotiate a significant reduction of the total claimed amount from $220,000 to $119,000, saving the clients over $100,000 by arguing for a waiver of the statutory 28%-30% administrative fees and costs.