Filing bankruptcy may not solve your SBA loan default problems. Aside from other financial considerations, the government may still be able to offset against your assets.
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The Bankruptcy Code preserves a creditor’s right to setoff. Section 553(a) of the Bankruptcy Code provides:
Except as otherwise provided in this section and sections 362 and 363 of this title, this title does not affect any right of a creditor to offset a mutual debt owing by such creditor to the debtor that arose before the commencement of the case under this title against a claim of such creditor against the debtor that arose before the commencement of the case.
Setoff requires mutuality in that the indebtedness must be between the same parties. For bankruptcy purposes, this generally requires that both debts (i.e., the debt owed by the debtor and the debt owed to the debtor) fall on the same side of the bankruptcy line (i.e., on the same side of the timeline marked by the filing of the petition). That is, with some exceptions, both debts must be prepetition or both debts must be postpetition. Creditors with prepetition setoff rights have a secured claim under section 506(a)(1) of the Bankruptcy Code.
Federal agencies are authorized to intercept certain federal payments to collect delinquent debt owed to the United States. This includes the authority to offset tax overpayments for debts owed to the United States. This applies only to tax refunds for years before the debtor filed for bankruptcy protection. Offsets for postpetition years are not allowed, unless the debtor owes postpetition debts to the United States.
For a creditor to have setoff rights both the obligation of the creditor to the debtor and the debtor’s obligation to the creditor must arise prior to the petition date. While the most common example of when both obligations would arise prepetition in the federal debt collection context is when the debtor has made overpayments of federal tax in the year preceding its bankruptcy filing, there are other circumstances where an obligation of the United States may arise prior to the petition date. For example, certain portions of a federal salary payment may have accrued to the debtor prior to the petition date, and to the extent the debtor owed the United States a federal debt prior to the petition date, the United States would have setoff rights with regard to those portions of the federal salary payment. The same would be true for retirement payments, vendor payments, and tort payments, to the extent the right to those payments arose prior to the petition date. To the extent a creditor agency is aware of a federal payment to which the debtor is entitled, the agency should analyze whether its setoff rights have been preserved by the Bankruptcy Code.
If you are facing an SBA loan default, contact Protect Law Group today at www.sba-attorneys.com or 1-888-756-9969 to schedule your initial consultation.
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 several trust deeds pledging seven (7) real estate properties and unconditional personal guarantees for an SBA 7(a) loan from the participating lender. The clients' small business failed and eventually defaulted on repayment of the loan exposing all collateral pledged by the clients. The SBA subsequently acquired the loan balance from the lender, including the right to liquidate and collect all pledged collateral pursuant to the trust deed instruments.
The Firm was hired to negotiate separate release of lien proposals for all 7 real estate properties. In preparation for the work assignment, the Firm Attorneys initiated discovery to secure records from the SBA and Treasury's Bureau of Fiscal Service. After reviewing the records and understanding the interplay between the lender and the SBA, the attorneys then prepared, submitted and negotiated the release of lien (ROL) for each of the 7 real estate properties for consideration.
After submitting the proposals, the assigned SBA Loan Specialists approved each ROL package - significantly reducing the total SBA debt claimed.
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.
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