Want to Settle SBA Loan Debt? Here's How
If you want to settle SBA loan debt but don't know how, then the answer is simple. Click here for your ultimate guide today!
Protect Law Group can provide the path forward for SBA debtors and guarantors before claims are made against your estate. Book a consultation call with us today!
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As a result of the 2008 Great Recession, my dad's small business failed leaving a defaulted and outstanding Small Business Administration (SBA) loan of $500,000 secured by his personal guarantee. In addition, the Treasury Department's Bureau of Fiscal Service has been sending notices for payment with substantial costs, fees penalties and interest in the amount of $160,000. But when you ask Treasury collection agents to provide proof of the additional amount, they provide no explanation or corroborating evidence.
My dad passed away recently ... leaving my 82 year old mom the family home with a mortgage and an SBA lien in junior position. During his retirement, dad's Social Security Income was garnished for years as a result of a Treasury Offset Program levy but the balance never decreased. It appears the SBA principal loan balance, Treasury's substantial collection fees and accruing interest were so much more than what was levied to even make a dent against the overall debt balance. Mom has some funds in an IRA account but to just forfeit that money to Treasury would leave her vulnerable with no safety net if she were to fall ill and need medical attention for services not covered by Medicare or her supplemental health insurance. We have been going back and forth with Treasury to negotiate a settlement, but it’s been several years with no resolution. Mom is experiencing a lot of stress around what the government could seize or force for repayment of a debt that is practically impossible to pay back out-of-pocket.
Dad left a sizeable estate after he passed. But my mom and the family are worried if and when she passes, can the SBA or Treasury make claims and seize the remaining assets of the estate to satisfy the $660,000 debt balance? If this story sounds eerily familar, read on.
When a decedent signs a personal guarantee, establishing liability for SBA or Treasury debt, the estate may be liable for satisfying that debt. This is how the process generally works.
An personal guarantee is a legally binding commitment that ensures the guarantor is personally responsible for repaying the SBA debt if the primary obligor (often a business) defaults. Upon the guarantor's death, the estate steps into the decedent’s shoes and assumes the obligations, including the SBA debt covered by the personal guarantee.
Under the Uniform Probate Code (UPC), which many states follow, the estate must pay off the decedent’s debts, including those guaranteed through a personal guarantee, before distributing any remaining assets to heirs. If the estate cannot satisfy the debt, creditors may attempt to make claims against any assets within the estate.
The SBA and the Treasury's Bureau of Fiscal Service can file claims against a decedent's estate during the probate process. This is grounded in the principle that debts do not disappear upon death. Instead, they must be settled from the decedent’s estate.
Under 31 U.S.C. §3713, the federal government’s claims take priority over most other creditors during the administration of the estate. This means that if the decedent's estate owes the federal government (e.g., SBA loan guaranteed by the decedent),those claims must generally be satisfied before most other unsecured creditors.
The UPC provides that creditors, including the federal government, may file claims against the decedent’s estate within a certain period after the death. The estate’s personal representative (executor) is responsible for notifying creditors and paying valid claimsbefore any distribution to beneficiaries (§ 3-801 to 3-803 UPC).
During probate, creditors, including the SBA and Treasury, will be notified of the death and given the opportunity to submit claims. The personal representative of the estate is required to pay all legitimate debts, taxes, and expenses of administration from the estate’s assets before distributing the remainder to the heirs or beneficiaries.
31 U.S.C. § 3713(a)(1)(B) requires that the estate’s personal representative pay the government’s claims before paying any other debts or making distributions from the estate. Failure to prioritize federal claims could result in personal liability for the executor.
Under 26 U.S.C. § 6324, federal tax liens can attach to the estate, which would affect the distribution of assets if taxes or debts to the federal government are outstanding.
Treasury’s Bureau of Fiscal Service is responsible for collecting delinquent federal debts, including those arising from SBA loans. The collection mechanisms they may use include:
Treasury can intercept tax refunds, Social Security payments, and other federal disbursements due to the decedent's estate underthe Debt Collection Improvement Act of 1996 (DCIA).
If the decedent’s estate contains income-generating assets, Fiscal Service may seek wage garnishment or place liens on the estate's property to satisfy the outstanding debt.
To mitigate the risk of such claims against the estate, individuals may engage in estate planning and asset protection strategies prior to death. However, certain strategies may not shield assets from federal creditors if the debt existed prior to death or if fraudulent conveyance laws are implicated.
While irrevocable trusts may shield assets from certain creditors, the Federal Debt Collection ProceduresAct (28 U.S.C. § 3001 et seq.) may permit the government to pierce such trusts in some circumstances if the decedent retained control over the assets or if the trust was created with the intent to defraud creditors.
Many states provide homestead exemptions that protect a portion of the decedent’s residence from creditors. However, federal claims often take precedence over state law protections.
Under certain state laws, assets passing directly to a surviving spouse through joint tenancy or survivorship mechanisms may be protected from creditor claims. However, if the decedent's estate is insufficient to cover the debt, the federal government could still pursue the spouse if he or she signed the guarantee or are otherwise liable.
In practical terms, when a decedent has signed a personal guarantee, it is essential for the executor or personal representative to thoroughly assess the outstanding obligations and prioritize federal debts as required by law. Failure to address SBA or Treasury debts could expose the estate and its beneficiaries to significant legal risks, including possible enforcement actions by the federal government.
The estate of a decedent who signed a personal guarantee remains liable for the guaranteed debt, and the SBA and Treasury's Bureau of Fiscal Service can make claims against the estate under federal law. These claims typically take priority over other unsecured creditors, and collection actions may involve offsetting federal payments, garnishments, or property liens. Effective estate planning may help mitigate some risks, but federal debt remains difficult to avoid. It's recommended that debtors do not wait until their time is up. It's better to act now, explore strategies, and execute a plan to resolve the SBA or Treasury debt during your lifetime through remedial measures such as Offer in Compromise, Repayment, Workout or Bankruptcy.
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 obtained an SBA 7(a) loan for $324,000 to buy a small business and its facility. The business and real estate had an appraisal value of $318,000 at the time of purchase. The business ultimately failed but the participating lender abandoned the business equipment and real estate collateral even though it had valid security liens. As a result, the lender recouped nearly nothing from the pledged collateral, leaving the business owners liable for the deficiency balance. The SBA paid the lender the 7(a) guaranty money and was assigned ownership of the debt, including the right to collect. However, the clients never received the SBA Official 60-Day Notice and were denied the opportunity to negotiate an Offer in Compromise (OIC) or a Workout directly with the SBA before being transferred to Treasury's Bureau of Fiscal Service, which added an additional $80,000 in collection fees. Treasury garnished and offset the clients' wages, federal salary and social security benefits. When the clients tried to negotiate with Treasury by themselves, they were offered an unaffordable repayment plan which would have caused severe financial hardship. Clients subsequently hired the Firm to litigate an Appeals Petition before the SBA Office & Hearings Appeals (OHA) challenging the legal enforceability and amount of the debt. The Firm successfully negotiated a term OIC that was approved by the SBA Office of General Counsel, saving the clients approximately $205,000.
Client's small business obtained an SBA COVID EIDL for $301,000 pledging collateral by executing the Note, Unconditional Guarantee and Security Agreement. The business defaulted on the loan and the SBA CESC called the Note and Guarantee, accelerated the principal balance due, accrued interest and retracted the 30-year term schedule.
The loan was transferred to the Treasury's Bureau of Fiscal Service which resulted in the statutory addition of $90,000+ in administrative fees, costs, penalties and interest with the total debt now at $391.000+. Treasury also initiated a Treasury Offset Program (TOP) levy against the client's federal contractor payments for the full amount each month - intercepting all of its revenue and pushing the business to the brink of bankruptcy.
The Firm was hired to investigate and find an alternate solution to the bankruptcy option. After submitting formal production requests for all government records, it was discovered that the SBA failed to send the required Official 60-Day Pre-Referral Notice to the borrower and guarantor prior to referring the debt to Treasury. This procedural due process violation served as the basis to submit a Cross-Servicing Dispute to recall the debt from Treasury back to the SBA and to negotiate a reinstatement of the original 30-year maturity date, a modified workout, cessation of the TOP levy against the federal contractor payments and removal of the $90,000+ Treasury-based collection fees, interest and penalties.
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.
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