Common Mistakes to Avoid When Applying for an SBA Offer in Compromise
Common Mistakes to Avoid When Applying for an SBA Offer in Compromise
Discover actionable tips for small businesses facing COVID-EIDL problems. Contact us today.
Book a Consultation CallThe Small Business Administration (SBA) continues to grapple with the complexities of managing its COVID-19 Economic Injury Disaster Loan (EIDL) Program, revealing significant charge-offs and oversight gaps. As small businesses face mounting financial challenges and a Trump 2.0 administration looming in January 2025, understanding the evolving SBA landscape is critical for borrowers, obligors and guarantors.
The SBA reported $18.6 billion in charge-offs from its COVID-EIDL program for fiscal year 2024, reflecting 6.5% of the active portfolio. While this is a reduction from the $52 billion in charge-offs during fiscal 2023, it remains significantly higher than he charge-off rates of other SBA programs, such as 7(a) loans (below 1%) and 504 loans (below 0.5%).
This high rate has raised questions about the sustainability of the COVID-EIDL program and the adequacy of SBA oversight. Audits by the Office of Inspector General (OIG) and KPMG revealed issues such as monitoring deficiencies, financial reporting weaknesses, and outdated servicing policies. These gaps have fueled concerns about long-term accountability and the SBA’s ability to support struggling borrowers effectively.
To assist borrowers, the SBA expanded its Hardship Accommodation Program (HAP), which offers temporary payment relief. Key features include:
· Eligibility: Enrollment for businesses with loans under $200,000.
· Reduced Payments: Initial rounds require only 10% of monthly payments,increasing to 50% and 75% in subsequent rounds for up to five cycles.
· Loan Reclassification: Loans enrolled in HAP are reclassified as performing, potentially lowering default statistics.
However, critics warn that HAP may delay inevitable defaults as interest accrues during reduced-payment periods, exacerbating long-term debt burdens for borrowers.
With a Trump 2.0 administration taking office in January 2025, SBA policies could undergo significant changes:
· Tighter Oversight: High COVID-EIDL charge-offs may prompt stricter compliance requirements and loan eligibility criteria to prevent further losses.
· Program Reforms: Existing SBA loan programs like 7(a) and 504 could see restructuring to enhance sustainability and reduce taxpayer risk.
· Aggressive Collections: A more assertive approach to recovering debts, particularly from delinquent borrowers and guarantors, might emerge as a fiscal priority.
Trump’s business-friendly stance could also lead to broader access to capital and settlement options, but likely with enhanced scrutiny of borrower accountability.
Borrowers with 7(a), 504, or traditional disaster loans may experience indirect effects of heightened COVID-EIDL scrutiny:
· Increased Compliance: More audits and stricter documentation requirements could complicate loan applications and renewals.
· Less Leniency: Unlike HAP’s flexibility, non-COVID SBA loans may face stricter repayment demands or accelerated collection efforts.
· Treasury Referrals: Borrowers and guarantors with delinquent loans could see their debts referred to the Treasury Department, triggering aggressive measures such as administrative offsets, garnishments, referral to Private Collection Agencies, lawsuits or foreclosure actions by the Department of Justice's Financial Litigation Unit.
Given the financial strain on small businesses, the SBA’s willingness to approve OICs, workouts,and settlements might expand, particularly under a Trump 2.0 administration prioritizing efficiency and deregulation. Borrowers and guarantors could benefit from:
· Settlements: Cash or Term OICs could become more accessible for guarantors proving financial hardship.
· Structured Workouts: Extensions on loan terms, reduced interest rates, or deferments may help borrowers avoid defaults while keeping businesses operational.
· Streamlined Approvals: Simplified processes for small-dollar settlements could expedite debt resolution for both borrowers and the SBA.
However, the SBA might also tighten eligibility criteria for settlements, requiring more thorough documentation and good-faith efforts to repay – especially if Trump nominee, Kelly Loeffler, takes the same approach that Besty Devos did with the Borrower Defense Rule and delinquent Department of Education student loans that were procured due to fraud by for-profit educational institutions.
Borrowers should consider taking the following actions to prepare for potential policy shifts and protect their financial stability:
1. Review Loan Agreements: Ensure compliance with terms to avoid default or collection escalation.
2. Engage with the SBA: Monitor communications and respond promptly to notices or program changes.
3. Consult Qualified Experts: Seek Certified Public Accountants or Lawyers authorized to practice before the SBA pursuant to the Federal Agency Practice Act to explore options like OICs, workouts, or bankruptcy, where applicable.
4. Stay Informed: Track developments in SBA policies and broader economic trends to anticipate changes.
The SBA’s challenges with the COVID-EIDL program offer lessons for future disaster relief efforts and highlight the importance of robust oversight. With potential shifts in SBA policies under a new Trump administration, small businesses should be vigilant, proactive, and informed. Whether through expanded settlement options or stricter debt recovery measures, borrowers should plan and prepare for a changing landscape in 2025 and the next 4 years.
This blog post is intended to provide general guidance and is not a substitute for professional legal advice.
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 personally guaranteed SBA 7(a) loan balance of $58,000. The client received a notice of Intent to initiate Administrative Wage Garnishment (AWG) Proceedings. We represented the client at the hearing and successfully defeated the AWG Order based on several legal and equitable grounds.
Client personally guaranteed an SBA 7(a) loan for $100,000 from the lender. The SBA loan went into early default in 2006 less than 12 months from disbursement. The SBA paid the 7(a) guaranty monies to the lender and subsequently acquired the deficiency balance of about $96,000, including the right to collect against the guarantor. However, the SBA sent the Official 60-Day Due Process Notice to the Client's defunct business address instead of his personal residence, which he never received. As a result, the debt was transferred to Treasury's Bureau of Fiscal Service where substantial collection fees were assessed, including accrued interest per the promissory note. Treasury eventually referred the debt to a Private Collection Agency (PCA) - Pioneer Credit Recovery, Inc. Pioneer sent a demand letter claiming a debt balance of almost $310,000 - a shocking 223% increase from the original loan amount assigned to the SBA. Client's social security disability benefits were seized through the Treasury Offset Program (TOP). Client hired the Firm to represent him as the debt continued to snowball despite seizure of his social security benefits and federal tax refunds as the involuntary payments were first applied to Treasury's collection fees, then to accrued interest with minimal allocation to the SBA principal balance.
We initially submitted a Cross-Servicing Dispute (CSD) challenging the referral of the debt to Treasury based on the defective notice sent to the defunct business address. Despite overwhelming evidence proving a violation of the Client's Due Process rights, the SBA still rejected the CSD. As a result, an Appeals Petition was filed with the SBA Office of Hearings & Appeals (OHA) Court challenging the SBA decision and its certification the debt was legally enforceable in the amount claimed. After several months of litigation before the SBA OHA Court, our Firm Attorney successfully negotiated an Offer in Compromise (OIC) Term Workout with the SBA Supervising Trial Attorney for $82,000 spread over a term of 74 months at a significantly reduced interest rate saving the Client an estimated $241,000 in Treasury collection fees, accrued interest (contract interest rate and Current Value of Funds Rate (CVFR)), and the PCA contingency fee.
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.
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