It seems to be a fact of life that when people don’t know what to do, they do nothing. The workout and settlement of SBA debt appears to be no exception. I have a client who purchased a building via the SBA 504 program. The economy killed his construction business, and he eventually did a short sale on his commercial building and lost a huge sum of money in the process. Following the sale, he ended up owing over $1Million to the SBA. Such an event would send even the most level headed entrepreneur into a tailspin, so it was not surprising to hear that my client took a “wait and see” approach when it came to dealing with the massive shortfall on the SBA debt.
My client figured that his local CDC (the local organization that serviced his loan) would be in touch soon enough, so until then, he would just sit tight. Many people take this approach, and in many cases, it works out fine. But not in this case. His local CDC, as it turned out, was sending letters that were inviting him to submit an Offer In Compromise package to the old building. He was not having mail forwarded, so he had no that the CDC didn’t have his new address. Since the CDC never heard from him, they promptly referred the file to the US Treasury. In other words, they sent his file to the place where loan settlements go to die.
Just yesterday, after 3 months of begging and pleading, we got word back that the SBA is not interested in taking the loan back from the Treasury. And with that decision, any chance to settle the debt went out the window.
So what can we learn from this story:
1) Being proactive about your SBA workout is crucial, and you never want to assume that your lender will contact you eventually.
2) Even though my client caught a bad break when the CDC sent letters to the wrong address, the SBA and Treasury have no sympathy. Had he been proactive, he might have settled his debt for a reasonable sum.