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SBA Loan Default: Filing Bankruptcy May Not Prevent An Offset

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SBA Loan Default: Filing Bankruptcy May Not Prevent An Offset

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.

Why Hire Us to Help You with Your Treasury or SBA Debt Problems?

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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

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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.

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Small business and guarantors obtained an SBA COVID-EIDL loan for $1,000,000. Clients defaulted causing SBA to charge-off the loan, accelerate the balance and refer the debt to Treasury's Bureau of Fiscal Service for collection. Treasury added nearly $500,000 in collection fees totaling $1,500,000. Clients were served with the SBA's Official 60-Day Notice and exercised the Repayment option by applying for the SBA’s Hardship Accommodation Plan. However, their application was summarily rejected by the SBA without providing any meaningful reasons. Clients hired the Firm to represent them against the SBA, Treasury and a Private Collection Agency.  After securing government records through discovery, we filed an Appeals Petition with the SBA Office of Hearings & Appeals (OHA) court challenging the SBA's referral of the debt to Treasury. During litigation and before the OHA court issued a final Decision and Order, the Firm successfully negotiated a reinstatement and recall of the loan back to the SBA, a modification of the original repayment terms, termination of Treasury's enforced collection and removal of the statutory collection fees.

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