SBA Loan Default: Debenture Purchase
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Administrative wage garnishment (AWG) is the ability to divert a percentage of a SBA debtor’s disposable pay without having to go through the court system. The Debt Collection Improvement Act of 1996 provides that the federal government can garnish the wages of any employee to satisfy a delinquent non-tax debt owed to the United States. With the recent codification of the Debt Collection Improvement Act into the Small Business Administration regulations, administrative wage garnishment can now be conducted by SBA against virtually anyone who has remained employed for 12 continuous months or more on delinquent non-tax debt owed to the Agency.
Wage garnishment is the ability to compel an employer to divert a percentage of a debtor’s disposable pay toward payment on a delinquent loan. It’s traditionally been a complicated means to enforce collection. The process ordinarily involves obtaining a judgment in court, and then going through a certification program on a semi-annual basis to continue justifying the garnishment.
Disposable pay means that part of the debtor's compensation (including, but not limited to, salary, bonuses, commissions, and vacation pay) from an employer remaining after the deduction of health insurance premiums and any amounts required by law to be withheld. For purposes of this section, “amounts required by law to be withheld” include amounts for deductions such as social security taxes and withholding taxes, but do not include any amount withheld pursuant to a court order.
Delinquent non-tax debt means any debt not related to an obligation under the Internal Revenue Code of 1986, as amended, that has not been paid by the date specified in SBA’s initial written demand for payment, or applicable agreement, unless other satisfactory payment arrangements have been made. For purposes of AWG, the terms debt and claim are synonymous and refer to delinquent non-tax debt
Debt or claim means any amount of money, funds or property that has been determined by an appropriate official of the Federal Government to be owed to the United States by an individual, including debt administered by a third party as an agent for the Federal Government. Debt also includes accrued interest, administrative costs incurred in collection efforts by SBA or a lender participating in an SBA loan program, and penalties imposed pursuant to law or contract.
Yes. Federal salary offset pertains to federal employees (includes employees of the U.S. Postal Service or Postal Rate Commission, members of the Uniformed Services or Research of the Uniformed Services) that are delinquent on non-tax debt owed to the USA. Administrative wage garnishment pertains to delinquent debtors that are employed by private companies situated in the USA or by state or local government entities.
In AWG, the debtor is not a Federal employee. AWG debtors do include state or local government employees. By law, an employee must be employed for at least 12 continuous months before garnishment proceedings can be initiated. Federal salary offset give the debtor 60 days notice before garnishment begins. In AWG, it’s a 30-day notice. AWG has its own set of standardized notice forms.
Whenever SBA determines a borrower or guarantor owes a delinquent non-tax debt, the Agency may initiate administrative wage garnishment proceedings to withhold a portion of your wages to satisfy the debt.
(1) SBA will send a written notice by first-class mail to the debtor’s last known address at least 30 days before initiating garnishment. This pre-garnishment notice will inform the debtor of:
The SBA debtor has the right to:
(1) Procedural rules
Procedural rules for the conduct of administrative wage garnishment hearings are established in 13 C.F.R. § 140.11.
(2) Request for hearing. The debtor will be provided with a hearing, if the debtor requests one in writing disputing either the existence or amount of the debt or the terms of the repayment schedule (except a repayment schedule you and SBA agreed to in writing).
(3) Type of hearing or review. (i) The debtor will have the right to an oral hearing only if the Hearing Official determines that the issues in dispute cannot be resolved solely by review of the documentary evidence, for example, when the Hearing Official finds that the validity of the claim turns on the issue of credibility or veracity.
(4) Effect of timely request for hearing. Absent a failure to appear, if the Hearing Official determines the debtor’s written request for a hearing was received by the Hearing Official by the 15th business day after SBA mailed the pre-garnishment notice, SBA will not issue a garnishment order before the Judge renders a decision.
(5) Untimely request for hearing. If the Hearing Official determines the debtor’s written request for a hearing was not received by the Hearing Official by the 15th business day after SBA mailed the pre-garnishment notice, SBA will still provide a hearing. However, SBA may proceed with the issuance of a garnishment order and acceptance of payments unless the Hearing Official determines that the delay in filing the request was caused by factors over which you had no control, or that information received justifies a delay or cancellation of the garnishment order.
(6) Hearing official. A hearing official may be any qualified individual designated in the pre-garnishment notice.
(7) Procedure. After the debtor requests a hearing, the Hearing Official will decide what type of hearing to hold and will notify the garnishee and the SBA of:
(8) Burden of proof. (i) The SBA will have the burden of going forward to prove the existence or amount of the debt.
(ii) Thereafter, if the debtor disputes the existence or amount of the debt, the debtor must establish by a preponderance of the evidence that no debt exists or that the amount of the debt is incorrect. In addition, the debtor may present evidence that the terms of the repayment schedule are unlawful, would cause a financial hardship, or that collection of the debt may not be pursued due to operation of law.
(9) Record. The Hearing Official must maintain a summary record of any hearing provided under this section. A hearing is not required to be a formal evidentiary-type hearing; however, witnesses who testify in oral hearings will do so under oath or affirmation.
(10) Date of decision. The Hearing Official must render a written decision within 60 days of the date on which the debtor’s request for a hearing was received. If the Hearing Official's decision is not rendered within that time, and SBA had previously issued a garnishment order, SBA must suspend garnishment beginning on the 61st day. This suspension must continue until the Hearing Official renders a decision.
(11) Content of decision. The written decision shall include:
(12) Final agency action. The Hearing Official's decision will be the final agency action for the purposes of judicial review under the Administrative Procedure Act (5 U.S.C. 701 et seq.).
(13) Failure to appear. In the absence of good cause shown, a debtor who fails to appear at an oral hearing will be deemed as not having timely filed a request for a hearing.
(g) Garnishment order. (1) Unless SBA receives an adverse decision from the Hearing Official or information it believes justifies delaying or canceling garnishment, SBA will send the garnishment order to the debtor’s employer by first-class mail, within the following time frames:
The garnishment order will be in a form prescribed by the Secretary of the Treasury, and will contain the signature of, or the image of the signature of, SBA’s Administrator or his/her delegate (see Form SF-329). The garnishment order will contain only the information necessary for compliance, including the debtor’s name, address, and social security number, the instructions for garnishing the debtor’s pay, and the address for sending payments.
SBA will retain evidence of service showing when it mailed the garnishment order.
Along with the garnishment order, SBA will send the debtor’s employer a certification, in a form determined by the Secretary of the Treasury. The employer must complete and return this certification to SBA within the time stated in the certification instructions (see Form SF-329). The certification will include information about the debtor’s employment status and the amount of your disposable pay available for garnishment.
(i) Amounts withheld. (1) [The] employer must deduct the garnishment amount from [the debtor’s] disposable pay during each pay period.
(2) Except as shown in [instances where other garnishments are taking place, or if the debtor requests a higher garnishment], the amount of garnishment will be the lesser of:
(3) If the debtor’s pay is subject to other garnishment orders, the following applies:
(i) Unless otherwise provided by Federal law, SBA garnishment orders must be paid in the amounts prescribed above, and will have priority over other garnishment orders issued later. However, withholding orders for family support have priority over SBA garnishment orders.
(ii) If amounts are being withheld from the debtor’s pay because of a garnishment order issued before SBA's garnishment order, or because of a garnishment order for family support issued at any time, the earlier or family support order will have priority, and the amount withheld because of the SBA garnishment order will be the lesser of:
(iii) If [the debtor owes] more than one delinquent non-tax debt, SBA may issue multiple garnishment orders if the amount withheld from [the debtor’s] pay does not exceed the amount in paragraph (i)(2) of this section.
(j ) Exclusions from garnishment. The Agency may not garnish [the debtor’s] wages if the Agency knows that [the debtor] has been involuntarily unemployed at any time during the last 12 months. [The debtor] is responsible for informing the Agency of the facts and circumstances of the unemployment.
Hardship requests must specifically state why the current amount of garnishment causes the SBA debtor financial hardship and the SBA debtor must send documentation supporting that claim.
If SBA finds financial hardship, SBA will decide how much and how long to reduce the amount garnished from the debtor’s pay. SBA will notify the employer of any reductions.
(2) SBA will review the debtor’s account to ensure that garnishment has stopped if the debtor has paid the debt in full.
According to the regulations, no employer may fire, refuse to employ, or take disciplinary action against the debtor because of a withholding order issued by SBA.
SBA must promptly refund any amount collected by administrative wage garnishment if either—
Note: Refunds of amounts collected will not earn interest unless required by federal law or contract.
The Agency may sue your employer for any amount that the employer fails to withhold from wages owed and payable to you in accordance with paragraphs (g) and (i) of this section. However, the Agency may not file such a suit until the collection action involving the obligor has ended unless earlier filing is necessary to avoid expiration of any applicable statute of limitations period. For purposes of this section, the collection action involving the obligor ends when the Agency stops the collection action in accordance with the FCCS or other applicable standards. In any event, the collection action involving the obligor will be deemed ended if the Agency has not received any payments from the obligor to satisfy the debt, in whole or in part, for a period of one (1) year.
Yes. The final AWG regulations contain the following:
“This section applies despite any State law.”
“SBA’s receipt of payments under this section does not prevent SBA from pursuing other debt collection remedies. SBA may pursue debt collection remedies separately or together with administrative wage garnishment.”
The courts will be the final arbiter to determine if this language is sufficient to ward off any such defenses.
Unlike actions pursued in court, there is no statute of limitations on initiating AWG. However, the equitable doctrine of laches will apply. Consequently, if AWG is initiated after an “unreasonable” number of years from when the loan went into default, the SBA debtor may be able to raise this defense. While there is no bright line of demarcation for this defense, the Department of Justice’s Commercial Litigation Branch Assistant Director for Corporate/Financial Litigation has warned, “think twice before pursuing AWG if 15-20 years have lapsed since the cause of action has accrued (e.g., the default date).”
While the Regulations do not prohibit AWG against part-time employees or those earning close to the minimum wage limit, these factors should be viewed as “red flags” that the SBA debtor could have a hardship case against garnishment. Another “red flag” is if the debtor has a pattern of frequently changing employment. Even if the debtor has been employed for the requisite minimum of one year, the likelihood that the debtor will continue this pattern should be taken into consideration.
Agency means the SBA or any entity, public or private, that pursues recovery of the debt on SBA's behalf.
Business day means Monday through Friday excluding Federal legal holidays.
Day means calendar day. For purposes of computation, the last day of the period will be included unless it is a Saturday, a Sunday, or a Federal legal holiday.
Debt or claim means any amount of money, funds or property that has been determined by an appropriate official of the Federal Government to be owed to the United States by an individual, including debt administered by a third party as an agent for the Federal Government. Debt also includes accrued interest, administrative costs incurred in collection efforts by SBA or a lender participating in an SBA loan program, and penalties imposed pursuant to law or contract.
Debtor means an individual who owes a delinquent non-tax debt to the United States.
Delinquent non-tax debt means any debt not related to an obligation under the Internal Revenue Code of 1986, as amended, that has not been paid by the date specified in SBA's initial written demand for payment, or applicable agreement, unless other satisfactory payment arrangements have been made. For purposes of this section, the terms “debt” and “claim” are synonymous and refer to delinquent non-tax debt.
Disposable pay means that part of the debtor's compensation (including, but not limited to, salary, bonuses, commissions, and vacation pay) from an employer remaining after the deduction of health insurance premiums and any amounts required by law to be withheld. For purposes of this section, “amounts required by law to be withheld” include amounts for deductions such as social security taxes and withholding taxes, but do not include any amount withheld pursuant to a court order.
Employer means a person or entity that employs the services of others and that pays their wages or salaries. The term employer includes, but is not limited to, State and local Governments, but does not include an agency of the Federal Government.
Evidence of service means information retained by the Agency indicating the nature of the document to which it pertains, the date of mailing of the document, and to whom the document is being sent. Evidence of service may be retained electronically so long as the manner of retention is sufficient for evidentiary purposes.
Garnishment means the process of withholding amounts from an employee's disposable pay and the paying of those amounts to a creditor in satisfaction of a withholding order.
Withholding order means any order for withholding or garnishment of pay issued by an agency, or judicial or administrative body. For purposes of this section, the terms “wage garnishment order” and “garnishment order” have the same meaning as “withholding order.”
If you are facing an Administrative Wage Garnishment related to an SBA loan default, contact us today for a FREE initial consultation with an experienced SBA workout attorney at 888-756-9969
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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 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.
The clients are personally guaranteed an SBA 7(a) loan. The SBA referred the debt to the Department of Treasury, which was seeking payment of $487,981 from our clients. We initially filed a Cross-Servicing Dispute, which was denied. As a result, we filed an Appeals Petition with the SBA Office of Hearings and Appeals asserting legal defenses and supporting evidence uncovered during the discovery and investigation phase of our services. Ultimately, the SBA settled the debt for $25,000 - saving our clients approximately $462,981.
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