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.
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.
Clients obtained an SBA 7(a) loan for $324,000 to buy a small business and its facility. The business and real estate had an appraisal value of $318,000 at the time of purchase. The business ultimately failed but the participating lender abandoned the business equipment and real estate collateral even though it had valid security liens. As a result, the lender recouped nearly nothing from the pledged collateral, leaving the business owners liable for the deficiency balance. The SBA paid the lender the 7(a) guaranty money and was assigned ownership of the debt, including the right to collect. However, the clients never received the SBA Official 60-Day Notice and were denied the opportunity to negotiate an Offer in Compromise (OIC) or a Workout directly with the SBA before being transferred to Treasury's Bureau of Fiscal Service, which added an additional $80,000 in collection fees. Treasury garnished and offset the clients' wages, federal salary and social security benefits. When the clients tried to negotiate with Treasury by themselves, they were offered an unaffordable repayment plan which would have caused severe financial hardship. Clients subsequently hired the Firm to litigate an Appeals Petition before the SBA Office & Hearings Appeals (OHA) challenging the legal enforceability and amount of the debt. The Firm successfully negotiated a term OIC that was approved by the SBA Office of General Counsel, saving the clients approximately $205,000.
Client personally guaranteed an SBA 7(a) loan to help with a relative’s new business venture. After the business failed, Treasury was able to secure a recurring Treasury Offset Program (TOP) levy against his monthly Social Security Benefits based on the claim that he owed over $1.2 million dollars. We initially submitted a Cross-Servicing Dispute, but then, prepared and filed an Appeals Petition with the SBA Office of Hearings and Appeals (SBA OHA). As a result of our efforts, we were able to convince the SBA to not only terminate the claimed debt of $1.2 million dollars against our client (without him having to file bankruptcy) but also refund the past recurring amounts that were offset from his Social Security Benefits in connection with the TOP levy.
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