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Hi, my name is Jason Milleisen, and I’m the founder of Distressed Loan Advisors. We specialize in assisting borrowers through the SBA offer in compromise process. I’ve been doing this for about 10 years, and my former job was as a workout officer for the largest SBA lender in the country. These days I help small business owners just like you to work through SBA loan default issues, specifically through the offer in compromise process. Today I want to talk to you about 15 common SBA loan default mistakes—things that people do wrong. To be clear, it’s not their fault; it’s because they don’t know any better.
1. Assuming that you didn’t personally guarantee your SBA alone.
This is something that does come up from time to time. People believe that because they have an LLC, an S corp, or something like that, they don’t have any personal liability. I can tell you from years of experience that this is usually incorrect. I can count on one hand the number of people that have come to me who don’t have unlimited guarantees that they were an owner of the business. The only exception that I see is a spouse who has a guarantee that is limited to a lien on their home. Other than that, almost every single SBA loan that I see does include a personal guarantee. So just because you can’t find a guarantee document, it doesn’t mean that you didn’t pledge it. Chances are good that you did.
2. Thinking that personal bankruptcy is going to make it all go away in any situation.
That is incorrect. For those who don’t know, filing for personal bankruptcy is something you actually need to qualify for. Not everyone does. So if you’ve got significant personal assets or you’ve got significant personal income, you may not qualify. And just as an aside, there’s actually more than one type of personal bankruptcy. Depending on what your situation looks like, it may or may not make sense for you to try to do the bankruptcy as opposed to just a straight up settlement.
The other thing to consider is that even if you file for personal bankruptcy, if you have pledged your home as collateral, the lien on the home will remain there if there is equity in the house. I’ve had people call me and say, “Well, my house is pledged, and I’m afraid they’re going to foreclose on it—so I might just have to file for bankruptcy.” And that’s fine if they qualified for bankruptcy, but you need to understand that if there’s equity in the home, the lien is going to remain there.
3. Trying to settle while keeping the business open.
One of the prerequisites for the SBA to consider an offer in compromise is that the business must cease operations and the assets must be sold. There is a caveat within the SBA standard operating procedures that says that they actually can settle if a business is still open. I can tell you that from a practical standpoint, though, that is not something I’ve seen them do. I’ve tried to settle with businesses that are still open, and they’ve all been rejected.
4. Trying to sell the business assets without bank approval.
This is something that can really get you into trouble and hamper your chances of settling. As I said above, the SBA requires the business assets to be sold as a condition of settlement. But you can’t just go and sell them on your own. You really need to get your lender’s permission. Remember that your lender has a security interest in the business assets, which means that if they’re going to release their lien, they get a say over what the purchase price is going to be. If you go and sell it without telling the lender, you’re essentially selling somebody a piece of property that your lender has secured as collateral, which could be construed as a fraudulent conveyance. That’s not something you want to do.
Any time you sell your business assets, you need to get your lender on board with it. You want to get it in writing that they approved the sale. This is an issue that I’ve seen come up in the past, and I’ve actually seen lenders refuse to talk about an offer in compromise in any way, shape or form until the seller comes up with the cash for the proceeds of the assets. What happened in those situations was that the borrowers went and sold the business assets and then used the money to pay other creditors, credit cards, vendors, etc. The lender, understandably, said, “Well, that was our collateral. That money needs to come to us. And until you give it to us, we’re not considering any sort of offer compromise here.”
5. Trying to release your personal guarantee in conjunction with the sale of your business.
I’ve had people who rationalize that if you can sell your business for $100,000 and the assets of the business are only worth $10,000. it would be worth it for the Bank/SBA to release their personal guarantee in order to get that additional $90,000.
While that’s it, it’s a decent rationale, it’s not one that the SBA agrees with. The SBA is pretty consistent on the point that there are two steps to this process. One, the business needs to be sold or closed, and the assets need to be sold. And two, you have to negotiate the release of your personal guarantee. Even though it makes sense that you would want to leverage the sale of your business to get your personal guarantee released, the SBA is not willing to get on board.
What you really need to do is negotiate the sale of the business first. The lender gets all of the proceeds, and then at that point, you submit your offer in compromise. I have not seen the SBA or a bank consider any settlement prior to the closing of the sale or the liquidation of the assets.
6. Tattle-tailing on the lender to the SBA.
There are, of course, limits to this, because if your lender is being completely negligent, then what else can you do but go over their head? But getting an answer that you don’t like from the lender is not a reason to go to the SBA. The SBA relies on its lending partners to make servicing decisions. They actually pay them a fee to do this, which means that if you’re asking for a loan modification or if you’re asking for an offer in compromise and your lender turns down your offer, the SBA is just going to step in and reverse a decision.
If you’re not able to come to terms with your lender, you really just need to go back to the table with them and try to sweeten the deal for them. You need to improve the deal, change the terms in some way that makes it more attractive to them, because going over their head to the SBA on just a standard servicing matter generally won’t work. The SBA will just refer you back to the servicing company.
7. Taking advice from people who don’t have experience with SBA settlements.
This is one that it really strikes a chord with me because I do get calls from people who basically give me some form of the following: “I have a friend who’s a lawyer and he says to do this.” In most cases, that advice is completely wrong. It’s clear that the person giving the advice might have some general idea about settlements, but that person has no idea when it comes to SBA debt settlements. And there’s a big difference.
Here’s an example. I had a guy call me the other day and say, “Oh, I have a friend who told me that I probably would want to pursue both personal bankruptcy and an offer in compromise.” My answer to him was that I have never heard of anyone successfully doing that. And the reason is that if you file for a personal bankruptcy, then your personal guarantee is going to be wiped out if that is discharged. On the other hand, if you do an offer in compromise and you settle it and there’s no other creditors you need to deal with, there’s really no need for a bankruptcy. In other words, it’s typically one or the other, not both.
I’ve also had people come to me and say, “My attorney said to wait because the longer we wait, the more likely they are to settle.” That as the exact opposite of what I recommend. The reason is that once these things go to the US Treasury, I can’t help you. And keep in mind that if something gets referred to the US Treasury, you are looking at a 28% penalty on top of your existing loan balance. That effectively means that they’re going to come to you and say, “We’ll settle for 70% or 80% of the new balance.” If you add 30% and then knock 30% off, you’re essentially settling for the original loan amount. Also, keep in mind that they’re going to want a lump sum of cash. They won’t take payments.
So taking advice from people who don’t have experience with this process can really be detrimental. I get it. You’re trying to save money. You don’t want to spend money on somebody like me, so you’re trying to get advice from a friend so you don’t have to incur an additional expense. But in the long run, that may end up costing you more than it saves you.
8. Assuming that a settlement or an offer in compromise is a right.
It is not. The SBA specifically requires that you demonstrate to them that you’re experiencing financial hardship and that you have a lack of ability to pay.
You can’t just submit an offer and expect that your bank is going to go for it. I’ve had people who have enough equity in their homes—homes that they have pledged—to pay off a loan in full. I’ve had people who have the cash to pay it off in full who come to me and say, “Well, I’m a taxpayer, and the SBA funded this, so I have a right to be heard.” I don’t think that’s necessarily true. You have a right to have a conversation with your lender, but your lender is under no obligation to consider settling a debt that they know you have the ability to pay in full.
9. Not taking your offer in compromise paperwork seriously.
This is a point that I bring up often. It seems like common sense, but I see people do it wrong over and over and over again. The offer in compromise should be handled with the same due diligence that you put into your loan application, and possibly even more. When you applied for your loan, you didn’t just scribble down whatever and call it a day. You took a lot of time thinking, “Okay, whoever reviews this is going to really be judging and evaluating every single factor, and I need to get this right.” You really need to look at your offer in compromise paperwork the same way.
That means not only filling out the paperwork correctly, but also giving them the additional supporting information that allows them to verify that what you’re saying on your personal financial statement is accurate and that it fully represents your financial situation.
10. Ignoring or avoiding your lender.
I understand that it’s super stressful to have to deal with a business closing. You’re laying off workers you know. Maybe you owe them payroll. You owe vendors money. You owe other creditors money. The most convenient thing would be to not respond to phone calls or letters or emails and hope that it goes away. I’ve even had people say, “I didn’t hear from them for years, and I thought that maybe that they just forgave the loans, because I heard that the SBA just forgives loans sometimes.”
For the record, the SBA doesn’t just forgive loans without any input from you. The worst thing you can do is ignore or avoid the issue because it will end up at the Treasury. And the Treasure can garnish your wages even without a judgment. They can garnish your Social Security; they can take your federal tax refund.
Avoiding your lender can also lead to a lawsuit. If you’ve pledged your house, they can go after that. In many states they can sue you and go after your liquid assets like your bank accounts. There’s a lot of things that can happen that are going to be fairly adverse to you. But trying to settle by engaging with them proactively can help you avoid all of that. I always tell people that in these situations, there are really no good options. It’s just choosing among your bad options. To me the better option among your bad options is to engage with your lender and try to work out reasonable settlement terms.
11. Assuming that you have all the time in the world.
Unfortunately, you don’t, especially if you get that 60-day letter from the SBA. They are deadly serious about that 60 days. And if you hit that 60-day mark, whether or not you’ve asked them for documentation, if you have not submitted an offer or worked out payment terms with them, it will go to the Treasury.
I’ve had people call me and say, “Oh, my attorney said request all the documentation first.” I get that. The attorney is thinking that works because that’s what they do in court: they ask the other side for proof of the debt. But as far as the SBA goes, you can ask them for the paperwork, but if you still haven’t sent anything in, after 60 days they are going to send the case to the Treasury. And once it gets to the Treasury, your situation usually falls on deaf ears.
So be proactive. Definitely about the 60-day mark, but even when dealing with your lender, be punctual, and respond when they ask you for information. If it’s going to take you more than a couple of days, ask them if that’s okay or let them know why it’s going to take longer. Because if they assume that you’re not engaging in the process, they’re just going to move on to the next step in their process, which is either referring the case to their counsel or sending it to the SBA.
12. Thinking you’re off the hook because you haven’t heard from your lender lenders.
I alluded to this above, but it bears repeating.
10 years ago I was working for an SBA lender when the financial crisis hit. Daily, I was getting files on my desk for workouts that I needed to handle. And so I had to prioritize them, which meant that if I had a hundred files, I probably wasn’t going to be able to reach out to all of them. I didn’t have the time or resources.
The wrong thing to think in that situation is, “Oh, the bank must’ve forgotten about me. Nothing bad’s going to happen.” The SBA does track these with their lender. They follow up with the lender to find out what’s going on with them, and they want status updates. If the bank doesn’t give a status update, after a certain period of time has passed, the SBA will pull the file and you’ll get that 60-day letter. And if you ignore that, again, it goes to the Treasury. So thinking that you’re off the hook just because you haven’t heard from them is wrong. I have never heard of an SBA loan that has been forgiven just by the lender with no further action.
13. Assuming that every SBA office is exactly the same.
Some people assume that if their friends settled their loan, they can use that earlier settlement as a guide. That might be the case if you had the same type of loan and you get the same workout officer at that same office. But keep in mind that 7a, 504 loans, and Express Loans are all serviced in different places. And even though they’re all operating under the same SBA guidelines, they really all have their own applications of the standard operating procedures. What that means practically is that even though you can owe the same exact amount, if you have a different type of loan, the outcome could be very different.
The only reason that you should consider using someone else’s case as your guide is if that person had the same loan and it was serviced in the same office. Keep in mind, though, that if you could get assigned to a different workout person in that office.
14. Thinking that you’ll get another SBA loan in the future.
You won’t. They’re going to put you on a list. It’s called the CAIVRS list. It’s actually a universal government list, and anyone who’s defaulted on any government obligation is put on there. Once you’re put on that list, you’re not going to be eligible for a lot of different types of government aid, including SBA loans, but also FHA loans like home loans, and I believe also federally subsidized student loans. So if you’re in a position where you could afford to pay your loan and you’re thinking, “Well, I’d rather just settle it,” just understand that there are additional consequences to defaulting on that loan and settling. You’ll never get another SBA loan, and you’ll be ineligible for other types of loans as well.
15. Assuming that there is one universal settlement or percentage.
To set the record straight, there’s no specific formula that guides this process. It really is a negotiation. Whenever I’m working with clients, I tell them, “There’s a range that I can give you, and I have an idea of what they’re going to want based on your circumstances. But there’s no formula that I can plug this into that’s going to say, ‘here is the exact number that they will settle for; as long as we give that to them, they will accept it.’” It doesn’t work like that.
There is a lot of subjectivity in this process because financial hardship is a subjective concept. Sure, if somebody has a net worth of negative $10 million, and they have no income or assets, it’s an easy decision. But it’s rarely so black or white. What does your income look like? What are your expenses? Are those expenses discretionary, or are they mostly required (e.g., a mortgage)? These are important questions, and the answers aren’t always cut and dried. Different workout officers in different offices might judge them differently.
So that’s it. Those are the 15 common SBA loan default mistakes that I see and that I wanted to describe to you today. As always, if you have questions about SBA default, you can reach me at 631-428-1978, or you can visit my website, www.jasontees.com.