SBA Loans Explained - The 7(a) Loan
If you obtain an SBA loan - specifically a 7(a) loan, you can use the loan proceeds to help finance a great variety of business expenses.
The transcript of the video follows below for further review.
One of the most powerful weapons that may be incorporated into certain loan documents on an SBA Loan Default Case where the SBA or Treasury Department is the primary creditor or assigned creditor (from the original lender of record (SBA 7(a) Loan) or from the Certified Development Corporation (SBA 504 Loan)) is a Confession of Judgment. A sample Confession of Judgment clause has been reproduced below:
IMPORTANT NOTICE
THIS INSTRUMENT CONTAINS A CONFESSION OF JUDGMENT PROVISION WHICH CONSTITUTES A WAIVER OF IMPORTANT RIGHTS YOU MAY HAVE AS A DEBTOR AND ALLOWS THE CREDITOR TO OBTAIN A JUDGMENT AGAINST YOU WITHOUT ANY FURTHER NOTICE.
CONFESSION OF JUDGMENT. In the event of any default under this Instrument, including, but not limited to any payment under this Instrument not being paid when due, whether at maturity, by acceleration or otherwise, Debtor hereby irrevocably appoints and constitutes XX of XX County, and/or XX of XX County, any one of whom may act without the joinder of the other(s), as Debtor’s duly constituted attorney-in-fact to appear in the Clerk’s Office of the Circuit Court for XX, XX, or in any other court of competent jurisdiction, and to confess judgment pursuant to the provisions of Section XX of the Code of XX, as amended, against Debtor for all principal and interest and any other amounts due and payable under this Instrument as evidenced by an affidavit signed by an officer of the SBA or its agent or SBA setting forth the amount then due, together with attorney’s fees and collection fees as provided in this Instrument (to the extent permitted by law). This power of attorney is coupled with an interest and may not be terminated by Debtor and shall not be revoked or terminated by Debtor and shall not be revoked or terminated by Debtor’s death, disability or dissolution. If a copy of the Instrument, verified by affidavit, shall have been filed in the above clerk’s office, it will not be necessary to file the original as a warrant of attorney. Debtor releases all errors and waives all rights of appeal, stay of execution, and the benefit of all exemption laws now or hereafter in effect. Debtor shall, upon SBA or its agent’s or SBA’s request, name such additional or alternative person(s) designated by SBA or its agent’s or SBA as Debtor’s duly constituted attorney(s)-in-fact to confess judgment against the Debtor. No single exercise of the power to confess judgment shall be deemed to exhaust the power and no judgment against fewer then all the persons constituting the Debtor shall bar subsequent action or judgment against any one or more of such persons against whom judgment has not been obtained in this Instrument.
This sample Confession of Judgment clause, which may typically be included in a promissory note, personal or unconditional guarantee, stipulation, settlement agreement and/or other document obligating someone to make payments, states that if a default occurs, the defaulting party shall agree to the entry of a Judgment by a court of competent jurisdiction without notice or a trial. Once a judgment has been obtained, the creditor may immediately begin collection proceedings. A Confession of Judgment is a statutory creature and has to be specifically recognized by applicable state law where the federal or state court sits, which, in turn, is asked to consider said judgment proceedings. The power to confess a judgment must be clearly stated in a document that is signed by the debtor. A complaint to confess judgment, supported by an affidavit as to the amount due, must be filed in the county in which the note or obligation was executed, a county in which one or more of the defendants reside, or any county in which the debtor's real or personal property is located.
The process of obtaining a Judgment can move quickly. Often, a Judgment is entered on the same day that a Complaint for Confession of Judgment is filed. That Judgment may then be recorded in any county in which the debtor owns real estate. Because no written notice is required, a summons need not be served on the debtor. Given the extraordinary nature of this remedy, a creditor (such as the SBA or Treasury Department) might conclude that it should attempt to obtain a Judgment by Confession whenever possible. There are, however, compelling reasons why this may not be the case.
First, a court will carefully scrutinize every Confession of Judgment complaint. If the promissory note, unconditional or personal guaranty or other obligation which contains the clause does not specifically empower someone to act as the debtor's attorney and sign a court document agreeing to the entry of a judgment against the debtor, the judgment will not be granted.
Further, the document containing the Confession of Judgment clause must clearly explain the extent of the debtor's liability. Numerous courts have held that a guaranty that is all-encompassing—for example, one that refers to any and all debts, liabilities and obligations of every nature or form of the debtor—is so broad as to be void.
Additionally, select state laws provide that a debtor may file a motion to challenge a Judgment by Confession if the debtor can raise a valid affirmative defense to the judgment.
If, at the hearing on the motion, it appears that the debtor has a valid affirmative defense to all or a part of the creditor's claim, the court must set the matter for trial. Therefore, the summary procedure initially used by a creditor that once seemed quick and bulletproof has now resulted in a delay of at least several months, with the distinct possibility that the judgment will be vacated or overturned.
Rather than squandering time on a Confession of Judgment complaint, the SBA or Treasury Department might have been better off—and obtained a faster result—had it filed a conventional breach of contract or personal guarantee lawsuit against the SBA debtor.
If you are facing an SBA loan default or a Treasury/Bureau of Fiscal Service debt problem that has been referred to a Private Collection Agency, contact us today for a FREE initial consultation with an experienced attorney at 888-756-9969
We analyze your SBA loan problems and advise you on potential solutions such as an SBA offer in compromise for your SBA loan default.
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.
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 borrowed and personally guaranteed an SBA 7(a) loan. Clients defaulted on the SBA loan and were sued in federal district court for breach of contract. The SBA lender demanded the Client pledge several personal real estate properties as collateral to reinstate and secure the defaulted SBA loan. We were subsequently hired to intervene and aggressively defend the lawsuit. After several months of litigation, our attorneys negotiated a reinstatement of the SBA loan and a structured workout that did not involve any liens against the Client's personal real estate holdings.
Clients personally guaranteed an SBA 504 loan balance of $337,000. The Third Party Lender had obtained a Judgment against the clients. We represented clients before the SBA and negotiated an SBA OIC that was accepted for $30,000.
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