Challenges in SBA Loan Forgiveness
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When is an SBA Guarantee Legally Unenforceable
Book a Consultation CallObtaining commercial financing is one of the most difficult challenges facing small businesses. Many small businesses turn to SBA loan programs to finance their businesses.
Without adequate sources of collateral, the participating SBA lender and the SBA always require a personal guarantee before it agrees to approve a loan to the small business. While SBA lenders, banks, financing companies, or other SBA loan underwriters attempt to collect on a personal guarantee, there are certain circumstances where the SBA personal guarantee agreement may be legally unenforceable.
An SBA personal guarantee is a promise to pay a debt for another –which is usually the small business borrower. The SBA personal guarantor is the person making the promise – who is usually a member or shareholder of the small business borrower seeking the SBA loan. SBA Standard Operating Procedures (SOPs) state that participating SBA lenders are required to obtain the personal guarantees of individuals owning at least 20% of a small business’s interest or shares.
When you sign an SBA personal guarantee on behalf of an eligible small business, you agree to be personally responsible for repaying that SBA debt in the event the small business later becomes insolvent. For example: your small business manufactures and sells widgets, and it needs commercial equipment to do so. You go to an SBA lender and obtain financing for the commercial equipment, and part of the financing agreement contains an SBA personal guarantee. Sometime later, due to unexpected circumstances, your small business customers suddenly no longer need your widgets, and your small business fails as a result. If the SBA lender cannot recover the balance of its loan from the assets of your small business, it will then consider suing you personally for the remaining balance pursuant to the SBA personal guarantee you signed.
In other words, when you sign an SBA personal guarantee in order for your small business to receive a loan, you pledge your personal assets as collateral, including your home, the cash in your personal checking account, your savings and investments, and your future wages, which the SBA lender or SBA can try to seize.
SBA personal guarantees are a critical aspect of many SBA loan transactions, so entrepreneurs and small business owners should familiarize themselves with the potential consequences of signing one. In general, to be enforceable, SBA personal guarantee must meet certain criteria.
An SBA personal guarantee must be in writing and it must be signed by the SBA guarantor in the SBA guarantor’s personal capacity.
While this may be obvious, this cannot be overlooked. To be legally enforceable, the signatory to the SBA personal guarantee agreement must sign in his or her personal capacity and not as the “President” or “CEO” of the small business receiving the loan, which is its own legal entity, separate and apart from the people that run and operate it.
An SBA personal guarantee is not legally enforceable without consideration
In fact, no contract is legally enforceable without consideration. An SBA personal guarantee is a type of contract. A contract is an enforceable promise. The legal enforceability of a contract comes from one party’s giving of “consideration” to the other party. Here, the SBA lender gives an SBA-guaranteed loan (the consideration) in exchange for the SBA personal guarantor’s promise to repay it. In a lawsuit to collect a debt, the SBA lender must prove that it has the right to collect the debt, i.e., that it gave the loan (i.e., the consideration) to the debtor. Sometimes, the parties to an SBA loan transaction cannot produce documents showing a right to collect; this may be attributable, at least in part, to the number of times that SBA loans are resold on the secondary market or assigned to other counterparties.
An SBA personal guarantee may be legally unenforceable if it was obtained under fraudulent circumstances or it violates federal law or public policy.
Under certain circumstances, an SBA personal guarantee may be found to legally unenforceable if, for example, it was required from a business owner’s spouse who was not an owner, shareholder, officer or employee of the small business. Obtaining a spousal guarantee under certain circumstances may violate the Equal Credit Opportunity Act (ECOA) and could render the SBA personal guarantee signed by the spouse void.
Can an SBA personal guarantee be revoked?
An otherwise valid and legally enforceable SBA personal guarantee can be revoked in several different ways. An SBA personal guarantee much like any other contract, can be revoked if both the SBA guarantor and the SBA lender agree (with the SBA’s approval) in writing. Some debts owed by SBA personal guarantors can also be discharged in bankruptcy or declared invalid pursuant to court order through litigation.
Many factors can affect the legal enforceability of SBA personal guarantees. If you have any questions about the legal enforceability of an SBA personal guarantee that you are about to sign or have already signed, consult with one of our experienced SBA debt attorneys who can assess your situation and offer thoughtful and practical guidance to assist in your decision.
Contact us today to set up an appointment to discuss your SBA loan issues and problems.
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.
Our firm successfully assisted a client in closing an SBA Disaster Loan tied to a COVID-19 Economic Injury Disaster Loan (EIDL). The borrower obtained an EIDL loan of $153,800, but due to the prolonged economic impact of the COVID-19 pandemic, the business was unable to recover and ultimately closed.
As part of the business closure review and audit, we worked closely with the SBA to negotiate a resolution. The borrower was required to pay only $1,625 to release the remaining collateral, effectively closing the matter without further financial liability for the owner/officer.
This case highlights the importance of strategic negotiations when dealing with SBA settlements, particularly for businesses that have shut down due to unforeseen economic challenges. If you or your business are struggling with SBA loan debt, we focus on SBA Offer in Compromise (SBA OIC) solutions to help settle outstanding obligations efficiently.
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.
Client’s small business obtained an SBA 7(a) loan for $750,000. She and her husband signed personal guarantees exposing all of their non-exempt income and assets. With just 18 months left on the maturity date and payment on the remaining balance, the Great Recession of 2008 hit, which ultimately caused the business to fail and default on the loan terms. The 7(a) lender accelerated and sent a demand for full payment of the remaining loan balance. The SBA lender’s note allowed for a default interest rate of about 7% per year. In response to the lender's aggressive collection action, Client's husband filed for Chapter 7 bankruptcy in an attempt to protect against their personal assets. However, his bankruptcy discharge did not relieve the Client's personal guarantee liability for the SBA debt. The SBA lender opted to pursue the SBA 7(a) Guaranty and subsequently assigned the loan and the right to enforce collection against the Client to the SBA. The Client then received the SBA Official 60-Day Notice. After conducting a Case Evaluation with her, she then hired the Firm to respond and negotiate on her behalf with just 34 days left before the impending referral to Treasury. The Client wanted to dispute the SBA’s alleged debt balance as stated in the 60-Day Notice by claiming the 7(a) lender failed to liquidate business collateral in a commercially reasonable manner - which if done properly - proceeds would have paid back the entire debt balance. However, due to time constraints, waivers contained in the SBA loan instruments, including the fact the Client was not able to inspect the SBA's records for investigation purposes before the remaining deadline, Client agreed to submit a Structured Workout for the alleged balance in response to the Official 60-Day Notice as she was not eligible for an Offer in Compromise (OIC) because of equity in non-exempt income and assets. After back and forth negotiations, the SBA Loan Specialist approved the Workout proposal, reducing the Client's purported liability by nearly $142,142.27 in accrued interest, and statutory collection fees. Without the Firm's intervention and subsequent approval of the Workout proposal, the Client's debt amount (with accrued interest, Treasury's statutory collection fee and Treasury's interest based on the Current Value of Funds Rate (CVFR) would have been nearly $291,030.