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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 executed personal and corporate guarantees for an SBA 7(a) loan from a Preferred Lender Provider (PLP). The borrower corporation defaulted on the loan exposing all collateral pledged by the Clients. The SBA subsequently acquired the loan balance from the PLP, including the right to collect against all guarantors. The SBA sent the Official Pre-Referral Notice to the guarantors giving them sixty (60) days to either pay the outstanding balance in full, negotiate a Repayment (Offer in Compromise (OIC) or Structured Workout (SW)), challenge their alleged guarantor liability or file a Request for Hearing (Appeals Petition) with the SBA Office of Hearings & Appeals.
Because the Clients were not financially eligible for an OIC, they opted for Structured Workout negotiations directly with the SBA before the debt was transferred to the Bureau of Fiscal Service, a division of the U.S. Department of Treasury for enforced collection.
The Firm was hired to negotiate a global Workout Agreement directly with the SBA to resolve the personal and corporate guarantees. After submitting the Structured Workout proposal, the assigned SBA Loan Specialist approved the requested terms in under ten (10) days without any lengthy back and forth negotiations.
The favorable terms of the Workout included an extended maturity at an affordable principal amount, along with a significantly reduced interest rate saving the Clients approximately $181,000 in administrative fees, penalties and interest (contract interest rate and Current Value of Funds Rate (CVFR)) as authorized by 31 U.S.C. § 3717(e) had the SBA loan been transferred to BFS.
Clients' 7(a) loan was referred to Treasury's Bureau of Fiscal Service for enforced collection in 2015. They not only personally guaranteed the loan, but also pledged their primary residence as additional collateral. One of the clients filed for Chapter 7 bankruptcy thinking that it would discharge the SBA 7(a) lien encumbering their home. They later discovered that they were mistakenly advised. The Firm was subsequently hired to review their case and defend against a series of collection actions. Eventually, we were able to negotiate a structured workout for $180,000 directly with the SBA, saving them approximately $250,000 (by reducing the default interest rate and removing Treasury's substantial collection fees) and from possible foreclosure.
Our firm successfully resolved an SBA 7(a) loan default in the amount of $140,000 on behalf of a husband-and-wife guarantor pair. The business had closed following a prolonged decline in revenue, leaving the borrowers personally liable for the remaining balance.
After conducting a comprehensive financial analysis and preparing a detailed SBA Offer in Compromise (SBA OIC) package, we negotiated directly with the SBA and the lender to achieve a settlement for $70,000 — just 50% of the outstanding balance. This settlement released the borrowers from further personal liability and allowed them to move forward without the threat of enforced collection.
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