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.
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.
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 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.
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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.
The client personally guaranteed an SBA 504 loan balance of $375,000. Debt had been cross-referred to the Treasury at the time we got involved with the case. We successfully had debt recalled to the SBA where we then presented an SBA OIC that was accepted for $58,000.
Client’s small business obtained an SBA 7(a) loan for $150,000. He and his wife signed personal guarantees and pledged their home as collateral. The SBA loan went into default, the term or maturity date was accelerated and demand for payment of the entire amount claimed was made. The SBA lender’s note gave it the right to adjust the default interest rate from 7.25% to 18% per annum. The business filed for Chapter 11 bankruptcy but was dismissed after 3 years due to its inability to continue with payments under the plan. Clients wanted to file for Chapter 7 bankruptcy, which would have been a mistake as their home had significant equity to repay the SBA loan balance in full as the Trustee would likely seize and sell the home to repay the secured and unsecured creditors. However, the SBA lender opted to pursue the SBA 7(a) Guaranty and subsequently assigned the loan and the right to enforce collection to the SBA. Clients then received the SBA Official 60-Day Notice and hired the Firm to respond to it and negotiate on their behalf. Clients disputed the SBA’s alleged balance of $148,000, as several payments made to the SBA lender during the Chapter 11 reorganization were not accounted for. To challenge the SBA’s claimed debt balance, the Firm Attorneys initiated expedited discovery to obtain government records. SBA records disclosed the true amount owed was about $97,000. Moreover, because the Clients’ home had significant equity, they were not eligible for an Offer in Compromise or an immediate Release of Lien for Consideration, despite being incorrectly advised by non-attorney consulting companies that they were. Instead, our Firm Attorneys recommended a Workout of $97,000 spread over a lengthy term and a waiver of the applicable interest rate making the monthly payment affordable. After back and forth negotiations, SBA approved the Workout proposal, thereby saving the home from imminent foreclosure and reducing the Clients' liability by nearly $81,000 in incorrect principal balance, accrued interest, and statutory collection fees.
Clients personally guaranteed SBA 7(a) loan balance of over $300,000. Clients also pledged their homes as additional collateral. SBA OIC accepted $87,000 with the full lien release against the home.
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