If you have been deemed liable for an SBA debt due to a breach of an SBA loan agreement or personal guarantee, you may have to consider a couple of resolution options. Either, you may have to explore an SBA Offer in Compromise or a Treasury Department (DOT) Compromise Offer versus either a Chapter 7, 11 or 13 bankruptcy filing.
Below is a discussion regarding bankruptcy as an option to resolve your SBA loan problem or DOT collection case.
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 and assets/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.
Generally speaking, 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 may qualify.
Please 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 overwhelming. Click here to get a glimpse of a flow chart for a typical Chapter 7 bankruptcy filing and the various steps and hoops that one must confront: Chapter 7 BK Flowchart
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 demand 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.
Disadvantages Of Chapter 7
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.
Disadvantages Of Chapter 13
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.
Disadvantages Of Chapter 11
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.
Final Thoughts on 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.
If you are struggling with circumstances that involve SBA loan default, you deserve professional aid! Our attorneys all know how to win SBA Offer in Compromise cases. If you contact us, we help you resolve your SBA loan problems once and for all. After you schedule an appointment, you confer with a dedicated SBA Offer in Compromise lawyer and Treasury Department Practitioner who helps you through your administrative legal battle. After your claim is resolved, you never again have to worry about your SBA loan problems haunting you. Our team of lawyers has assisted many clients through the years. Now it is your turn! You truly can resolve your SBA loan problems for good!
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.
The client personally guaranteed an SBA 7(a) loan for $150,000. His business revenue decreased significantly causing default and an accelerated balance of $143,000. The client received the SBA's Official 60-day notice with the debt scheduled for referral to the Treasury’s Bureau of Fiscal Service for aggressive collection in less than 26 days. We were hired to represent him, respond to the SBA's Official 60-day notice, and prevent enforced collection by the Treasury and the Department of Justice. We successfully negotiated a structured workout with an extended maturity date that included a reduction of the 14% interest rate and removal of substantial collection fees (30% of the loan balance), effectively saving the client over $242,000.
Our firm successfully negotiated an SBA offer in compromise (SBA OIC), settling a $974,535.93 SBA loan balance for just $18,000. The offerors, personal guarantors on an SBA 7(a) loan, originally obtained financing to purchase a commercial building in Lancaster, California.
The borrower filed for bankruptcy, and the third-party lender (TPL) foreclosed on the property. Despite the loan default, the SBA pursued the offerors for repayment. Given their limited income, lack of significant assets, and approaching retirement, we presented a strong case demonstrating their financial hardship.
Through strategic negotiations, we secured a favorable SBA settlement, reducing the nearly $1 million debt to a fraction of the amount owed. This outcome allowed the offerors to resolve their liability without prolonged financial strain.
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.
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