This in an unedited transcript. If you want to read the article that it’s based on or listen to the podcast episode, please go here.
Hey guys, this is Jason, the founder of Distressed Loan Advisors on the podcast today. Is your lender confused about SBA default? I know it’s, it’s hard to believe, but some lenders are actually unclear on how to properly handle SBA loan default situations. And so every once in awhile I come across a lender who actually needs me to explain to them what the proper SBA protocol is.
So just to be clear, you’re hearing me right. The very institution who holds the fate of you, your partners, your spouse in their hands, doesn’t even know the rules of the SBA. So in this episode, uh, I’m going to cover an article that I wrote. It’s one of my most popular about the common points of confusion that I see amongst SBA lenders. So first, uh, the most common one that I see is whether or not they have the authority to release a lien that was granted in connection with an SBA loan.
And so this is actually one of the services that I offer to borrowers. In addition to helping through the offer in compromise process. Um, occasionally I will help a borrower get a lien released from their home. Uh, typically it’s following a bankruptcy. And so what happens is if you file for bankruptcy, you get the personal guarantee thrown out. But if there’s a lien on your home and there’s equity in it, that’s going to remain there. And so I help people negotiate the release of that in exchange for cash. And so the thing about the lien release is it’s actually not a settlement. It is what I would call a release of lien in exchange for cash consideration. So they’re not actually settling the debt, they’re taking a cash payment in exchange for the release of a lien on your home. And so this does not require an offer in compromise.
And that means your lender, if they’re a preferred lender, typically has the ability to make this decision without even letting the SBA know, and they definitely don’t need to get SBA approval if they’re a preferred lender. Um, most lenders out there are preferred lenders, some aren’t. But, so if you’re a preferred lender, uh, you as a lender do not need to get SBA approval to release the lien on a piece of collateral. That’s the decision you can make yourself. But I’ve seen lenders get confused and say you have to do an offer and compromise. Not true. Typically we’re able to straighten it out. But on more than one occasion, I have heard that at the outset and had to explain it to them. So, um, related to that is basically they’re very frequently concerned or confused about when an offer and compromises actually required.
Um, the, the lien release, again, it doesn’t require it and offering compromise is only really required when a borrower or a guarantor once they release for less than the full balance. So if your business closes, you still owe money and you want to be released from your personal guarantee, which is this is the most common scenario. If you want to be released from the personal guarantee, you will need to submit an offer and compromise. That’s not something that the bank can do on their own, because if they do, they risk losing the SBA guarantee, which at you know, 75 to 85%, um, is not something most lenders are willing to, to do on their own. So that would require an offer in compromise. Uh, the third thing that they are often confused about is, um, the liquidation requirement. Um, so if you look at SBA form 1150, and in the article that I wrote here, I’m actually have a screenshot audit.
Um, one of the elements of what they call a workable compromise offer is that the borrower has ceased operations and all business assets have been liquidated. And so as far as business assets, that’s true. So the business assets definitely need to be sold. Um, but what they don’t require is that you liquidate your home. Uh, that’s the sort of thing where the SBA has taken a stance historically that they’re not looking to kick people out of their homes. Um, they’re not looking to, um, really foreclose on your home and take it. So, you know, that’s an exception to the liquidation rule. That doesn’t have to be liquidated, but really everything else does. And I’ve had people try to use the liquidation of their business as a whole or as just, you know, piecemeal and collateral as a bargaining chip. And so what they want to do is they want to find a buyer for their business or for their equipment and then go to the SBA and say, Hey, I’ll do this deal, but you have to release me as part of it.
And I will tell you, it’s not something the SBA will go for. They actually won’t even consider a settlement offer until after all the business assets will be liquidated. So the order that things need to go is step one, you’ve got to cease operations and liquidate all the business collateral to then you submit the offer in compromise and it has to be in that order. Um, there is obviously confusion because you know, the, the order of it is not specifically spelled out, but it’ll tell you from having done this for over 10 years now. Um, it’s definitely, um, really, really, really difficult. I haven’t seen it. I have not seen the SBA agree to release a guarantor in conjunction with the sale of a business is just not something they’re willing to do. So it’s important to know that and not all lenders fully understand that. Um,
So what happens after the bank closes its file? And I, I can’t really blame the lender for this one cause I didn’t know this when I was a lender, but basically we would tell them if we were closing our file where we’re going to refer to treasury. And really we didn’t know much beyond that. And so, um, that’s what I used to tell people. But now when I hear that I get a little agitated because bankers have told me nonchalantly that they’ve declined a client’s offer. But don’t worry, you can try to settle it with treasury. And that’s typically when I say, um, um, the treasury is we’re SB loans go to die. And you know, I, I tell them all the horror stories about the treasury and how, um, it’s hard to reach anyone.
They don’t even have email. You have to fax everything. No one has a direct extension, really. No one’s accountable for anything. And they’re generally pretty arbitrary with their settlements. And so when someone says, Oh, don’t worry, you can settle with the treasury. What they don’t know is no treasury. Treasury is where things go to die. Settlements don’t happen there. And so for that reason, when lenders tell me that, I very quickly say, no, I want to try to work this out with you. What can we do? Um, so that’s one thing that lenders don’t fully know, um, about what happens after they closed their file. Uh, the second thing that they don’t know whole lot about is the 60 day letter. Um, and just for those who don’t know, I’ve done other podcast episodes about the 60 day letter. I’ve written other stuff about the 60 letter.
But just in a nutshell, it’s the last stop on the train. This is the final attempt of the SBA to try to work something out, either a settlement or a repayment plan. And after the 60 days it goes to the treasury. And so here are some other tidbits that a lot of lenders don’t know. One, not every 60 day letter comes from the same SBA office. Um, it depends on your physical location, your loan type, and ultimately how much you owe. That will also determine who’s going to be reviewing a potential settlement. Um, if you wait until day 60 to contact them, it will be referred to treasury. You won’t be able to work it out. Um, and really the 60 day letter is your last chance to work things out. And so sometimes lenders don’t, don’t realize that. And so, um, it’s really important if you get that at 60 day letter, you have to address it immediately.
Um, otherwise it’s a problem. Um, and then the other thing that I would mention is they are generally not aware about the penalties that the treasury adds. And just for the record, it’s 28% of your loan balance, which means if you are a hundred, it’s going to go up to about 128,000. And then they act like they’re doing you a favor when they offer you to settle for 70 to 80% of the balance, which essentially adds up to what you owe at the time that it was referred, um, to the treasury. So, so the question is, well, what do I do if my banker is wrong about something? Um, I say one point to the written facts. So like element number four on the SBA 1150 is a perfect example. So if the banker says you need to sell your home, point out that it specifically says business assets not personal.
Um, and so the SBA doesn’t require that. Um, but it is important. You also want to be respectful. I’m trying to bully your way into a yes. It generally doesn’t work. Trying to embarrass them, um, threatening them, you know, threatening litigation, threatening bankruptcy generally is it, it doesn’t work. It didn’t work on me as a lender, as a lender, they have certain ways that they have to look at things. And so the best thing you can do to turn a no into a yes is one. If there’s additional facts that haven’t been introduced, certainly introduce them. Um, but you generally also have to improve the offer. So if they said no the first time going back and just arguing the same facts all over again, generally I’ve not found that to be useful. Um, and then finally, as a last resort, if your bank is not willing to play ball, um, you actually can contact your local congressional representative.
They usually don’t take aside, but they can certainly make an inquiry on behalf of constituent. And so when you make those inquiries, you really want to keep it fact based. This is not time for a sob story, but really you want to tell them, my bank has not responded for six months. Um, the bank, you know, maybe if the bank said something in writing and now that they’re, they’re not honoring it or something like that. If they’re bundling the process, um, and you have documentation of that, um, you can go to your Congress person and eventually that can get to, uh, the right person at the spa. So that’s it for this article. That is, um, um, the, the podcast episode for today. As always, if you have questions, my direct number is area code six three one four two eight one nine seven, eight. Again at six, three one four two eight one nine seven, eight. If you have questions about SBA loan default, SBA loan forgiveness, and the SBA offering compromise process. If you want to find me on the web, you can simply Google Jason SBA loan default and my website, Jason T’s dot com will come up. Uh, the name of my company is distressed on advisers. That’s it for this episode. Thanks for listening. We’ll catch you next time.