Over the past few years, I’ve gotten calls from all corners of the country about people’s issues when it comes to SBA loans.
During the course of some of the calls, people reveal that they’ve spoke to an attorney or another consultant.
Sometimes, I end up just shaking my head because of some of the advice that’s been doled out.
I understand that it’s hard for people to admit when they don’t know something, especially when you’ve handled something kinda sorta like the thing you don’t know anything about.
When it comes to SBA settlements, having settled other types of debt doesn’t help. The process that the SBA has set forth is completely different than how one might go about settling with a credit card company, a landlord, and even a bank that made a regular non-SBA loan.
As you’ll see below, not everyone fully grasps just how different settling SBA debt is from any other type of debt.
Without further ado, here are some of my “favorite” tidbits of bad advice:
1) Sell your business to yourself or a friend, settle your personal guarantee, then buy it back later.
My Comment: This is not a “sophisticated strategy”, it’s fraud. If you were to explain the details of this shady maneuver to your bank, I guarantee the bank and SBA would shoot it down.
The SBA is quite clear on SBA form 1150 that, in order to consider a settlement, a business needs to cease operations and all the business assets need to be sold.
The same form also states that there is “no fraud or misrepresentation”. So when you misrepresent the sale of your business, it’s clearly out of bounds.
I’d venture to guess that whoever pitches this scam won’t advocate full disclosure to the SBA because they know what they bank would say. They also conveniently forget to tell their client that too.
I’ve actually had people express complete shock when I explain to them that the strategy they thought was “just the way it’s done”.
Here’s the bottom line on this one: if it were legit, I would do it too. What these guys are charging for this “service” is obscene.
2) Ignore your lender for a while, and at some point they will be willing to settle for less than they would right now.
My Comment: This advice usually comes from a well meaning CPA or attorney who has never handled and SBA settlement before.
The problem, you see, is that they are giving the exact opposite advice they should be. The best settlements I’ve had all happened at the time when the bank was still servicing the loan.
If you ignore the bank and hold out for a pennies on the dollar settlement, you’ll be waiting forever. Once the bank deems your account to be uncollectible, they will refer it to the US Treasury, who will add a hefty 28% penalty to your loan balance, then demand at least 50% of the loan balance (recently I’ve been hearing as high as 80%). Trust me friends, settling sooner than later will almost always be your best bet.
3) Don’t do a short sale on your building unless it includes a release of your personal guarantee.
My Comment: This just shows ignorance of the process. The SBA REQUIRES that the short sale be consummated before an Offer In Compromise can be submitted.
Sure, we can argue until we are blue in the face about how unfair that is, but it won’t change the facts. The fact is that the SBA won’t negotiate your OIC until the building (on 504 loans) or assets (on 7a loans) is liquidated. I’ve seen people walk away from sales, thinking that SBA would blink. They didn’t.
4) You need to submit an OIC in order to get a lien released from your home following a chapter 7 personal bankruptcy.
My Comment: Ummm, no. That’s wrong.
Once your personal guarantee is discharged in bankruptcy, an OIC is not needed in order to get a lien released from your personal residence.
If your lender is a preferred lender (most major SBA lenders are), the SBA doesn’t need to even know about it. In fact, their regulations specifically that that a notification isn’t even required.
To get a lien released, only the bank needs to agree to it, and there should be no personal information disclosed by the former guarantor since he/she is no longer personally liable. In other words, the personal financial situation of the homeowner is not relevant and the bank should not be asking for it when it comes to lien releases.