SBA Loan Default & Treasury's Aggressive Collection Tactics
Dealing with an SBA OIC case can be hard on anyone. This is why you should allow one of our lawyers to settle SBA debt on your behalf. Talk to us about your SBA loan default situation.
Preliminary Bankruptcy Analysis
An SBA Offer in Compromise or a compromise offer to the Treasury Department (DOT) is an out-of-court settlement request and is an alternative to filing for bankruptcy.
Depending on an SBA debtor’s income, expenses, assets and liabilities, the SBA debtor may or may not qualify for a Chapter 7 bankruptcy, a Chapter 13 bankruptcy or even a Chapter 11 bankruptcy. It all depends on a number of several conditions and factors.
In general, to file a Chapter 13 bankruptcy, a debtor’s unsecured debts must exceed at least $383,175 and/or the secured debts must exceed at least $1,149,525
Chapter 13 bankruptcy requires debtors to repay creditors via a repayment plan that can last for up to 5 years. Such a repayment plan would include SBA loan debt. Moreover, debtors should be aware that over 67% of all Chapter 13 cases generally DO NOT result in a discharge.
For Chapter 7 – It is important to discover if your median annual gross income for your household in your zip code meets the requisite thresholds. If you are interested in a Chapter 7 bankruptcy, go to https://www.legalconsumer.com/bankruptcy/means-test/ to find out if you qualify.
Note that even if you are under the median gross income for your area, any equity you may have in any of your reachable assets may be at risk to be seized by the bankruptcy trustee and sold to repay your debts. You may be entitled to certain exemptions in the equity you have in your assets, but if any verifiable equity exceeds the statutory exemption amounts, your assets may be vulnerable to pay creditors.
To file bankruptcy, a debtor may have to do a great deal of expensive pre-filing asset protection transactions (which could also expose the debtor to certain fraudulent conveyance issues, a DOJ investigation and possibly a non-dischargeability finding by a bankruptcy judge). This would be an expensive Chapter 7 and one where there appears to a great deal of risk that could materialize with an SBA debtor possibly losing some of his or her assets.
In addition, filing for a Chapter 7 can be very overwhelming.
Chapter 11 – Individuals can file under a Chapter 11 reorganization. However, Chapter 11 cases can be expensive and it is estimated that only 10% to 15% of Chapter 11 cases result in successful reorganizations. Most cases are dismissed or converted to Chapter 7 liquidations.
Even for a “simple Chapter 11” you can expect a qualified attorney to be paid a $25,000 retainer fee. Chapter 11 cases, unlike Chapter 7 or Chapter 13 cases, are often not done on a flat fee basis but, instead, on an hourly basis and you can expect that retainer to be used up fairly quickly. If the case gets dismissed or converted, you are in the same situation you are in now and at risk to lose assets, plus you will be out a significant amount of money for bankruptcy attorney fees and costs.
In conclusion, although Chapter 7 or Chapter 11 bankruptcies are potential options, there appears to be a great deal of risk and those options do not seem to be any less expensive than dealing directly with the SBA debt as part of a bankruptcy alternative settlement.
What Are The Disadvantages Of Filing A Chapter 7 Bankruptcy?
o Taking bankruptcy can weaken your ability to get credit, especially at a low interest rate. Also, your bankruptcy may haunt you when a prospective employer looks up your credit report as part of a reference check.
o The trustee takes over complete control of your debts and finances from the day you file until the judge discharges your case. You can’t spend anything without the trustee’s approval.
o For Sole Proprietors and Partnerships: The costs, hassles and surrendering of your property could cause you to close your business.
o You may lose a large amount of wealth if you have a large amount of nonexempt personal property or a large amount of equity in secured assets such as your house and cars. There is a chance you could lose any rental properties to the trustee.
What Are The Disadvantages Of Filing A Chapter 13 Bankruptcy?
o You may pay much more to settle your bankruptcy under Chapter 13 than Chapter 7.
o You may have more hassle and headaches. For three or five years, you have a trustee running your financial life.
o If you miss payments under the plan, you may be at risk of having your bankruptcy dismissed and you are back at square one. Over 67% of Chapter 13 filings end up dismissed or converted to Chapter 7.
o You can’t take on any more debt while you’re in Chapter 13. This can stop business growth when you are a sole proprietor and limit your lifestyle options.
What Are The Disadvantages Of Filing A Chapter 11 Bankruptcy?
o The process of obtaining approval of your reorganization plan is long and expensive.
o Chapter 11 cases are subject to much more assertive and aggressive creditor action, including adversary actions (lawsuits filed against you within the context of the bankruptcy proceeding). Active creditors make Chapter 11 cases more expensive and more drawn out for long periods of time, thereby increasing your attorney’s fees.
o As a general rule of thumb, Chapter 11 cases can cost upwards of $50,000 at a minimum.
Are There Any Hidden Costs To Filing Bankruptcy?
o Filing for bankruptcy also has a “hidden” cost. Operating in the business world is complicated when the borrower files for bankruptcy, and these complications can cost real money over the 10 years that a bankruptcy is reported on a credit report.
It has been estimated that the “hidden” cost of filing bankruptcy is between $75,000 – $150,000. Stated another way, if an SBA debtor can afford an SBA Offer in Compromise or DOT settlement for less, it is probably a good idea to try and obtain an SBA Offer in Compromise or DOT compromise. However, if the SBA Offer in Compromise or DOT compromise settlement cost is higher than the “hidden” bankruptcy cost, then the SBA debtor should probably seek protection through a 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.
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 SBA 7(a) loan for $150,000. COVID-19 caused the business to fail, and the loan went into default with a balance of $133,000. Client initially hired a non-attorney consultant to negotiate an OIC. The SBA summarily rejected the ineligible OIC and the debt was referred to Treasury’sBureau of Fiscal Service for enforced collection in the debt amount of $195,000. We were hired to intervene and initiated discovery for SBA and Fiscal Service records. We were able to recall the case from Fiscal Service back to the SBA. We then negotiated a structured workout with favorable terms that saves the client approximately $198,000 over the agreed-upon workout term by waiving contractual and statutory administrative fees, collection costs, penalties, and interest.
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.
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