Loan Modification
Sometimes it happens. You’ve started your business and life gets in the way; you can’t make the monthly payments on the SBA loan. You could try and negotiate a loan modification, but lenders don’t like changing loan terms, and neither does the SBA. However, a bank might be willing to accept a workout plan and loan modification rather than deal with a bad loan. This is more likely at larger institutions.
When you actually come to talk to the bank, they’ll lay out your options.
- Interest reduction: temporary or permanent, so you’ll pay less interest each month.
- Deferral: putting payments on hold for a set period, or paying just principal for a while.
- Maturity extension: the remaining balance gets spread over a longer time, reducing each payment.
- Temporary payment reduction: reducing the payment amount for a fixed duration.
- Re-amortizing: recomputing the payment schedule.
The right choice depends on whether the cash flow issue is temporary or permanent.
Do SBA lenders actually modify loans? The SBA has a written policy on them. The SBA’s policy authorization and guidelines for SBA loan modifications are in Chapter 5, paragraphs 8(a), 15(a), 16(a) and 17, and Chapter 7, paragraphs 5(b) through 5(h), of the SBA’s Standard Operating Procedure 50-50-4. Point your lender to it.
The Remaining Deficiency
Sometimes a modification is the perfect outcome. But not always. Sometimes a business closes up shop for good and its remaining assets are liquidated. A lot of business owners see that and think, “Phew. I’m done here.” But no, you’re not. Remember that the SBA guaranty runs to the lender, not to you, the business owner or other guarantors. Later collection actions can include loss of assets or even wage garnishment by the U.S. Treasury. Bankruptcy isn’t the only option here. SBA loans can be discharged in bankruptcy, but you don’t necessarily have to go that far.
And it might not occur to you yet, but there’s actually one last, really critical window of opportunity that most people miss. This is the time between liquidating all of the business assets and filing further litigation. It’s often during this time that you can negotiate a settlement with the lender and the SBA that covers the remaining deficiency for a fraction of the total amount due. This is known as the SBA Offer in Compromise program.
Here are the steps involved in negotiating an SBA Offer in Compromise:
- Review the case to see if it is eligible for settlement.
- Review the original SBA loan documents.
- Gather financial documents, including a full listing of assets and liabilities.
- Inform the lender or the SBA of your intention to settle.
- Complete SBA Form 1150 (Offer in Compromise).
- Complete SBA Form 770 (Financial Statement of Debtor).
- Analyze the financial information and decide on the amount to offer.
- File the offer with the lender or the SBA.
- Begin negotiations to achieve a settlement.
The SBA is not legally required to accept any borrower’s Offer in Compromise. But it knows that some percentage of loans will fail - and that’s why the program exists - so it wants the best deal it can get. If the offer will lead to a quick, cost-effective resolution that’s better than what the SBA could get in five years of enforced collection, it will seriously consider it. You can increase the likelihood of acceptance if you act promptly. If you receive a 60-day demand notice from the SBA, don’t wait. If you wait too long the SBA can transfer the account to the Treasury Department’s Treasury Offset Program (TOP). If that happens, the SBA can seize your IRS tax refund, garnish your wages, and even offset your Social Security benefits.
Their Home Is Still Encumbered by a Lien
Some debtors have discovered, much to their chagrin, that while their SBA loan has been wiped out in bankruptcy their home is still encumbered by a lien. The SBA does not always immediately foreclose even when it has the right to do so. It may leave a lien on real estate for many years without taking action. However, federal law provides that there is no statute of limitations on the SBA bringing a foreclosure action, even twenty years later. Why didn’t the SBA foreclose on the property? Often, the property has very little equity on it. Or it’s easier to conserve resources and wait until the owner wants to sell or refinance the property. Most people don’t realize a lien survives bankruptcy until they try to sell or refinance their home.
The amount you have to pay to get the lien released depends on a number of different things, most importantly how much equity is in the property and whether the SBA lien is second or third in line to the existing mortgages on the house (and therefore unlikely to get anything if the house is foreclosed on). You may be able to get the lien released by offering a settlement, but be prepared to offer at least 70% or more of the equity. In some cases you may be allowed to make payments over time, but a lump sum is the standard.
If you’re on the receiving end of collection activities from the SBA, don’t panic. Be aware of your options. If your business is still operating, you can ask for a modification of your terms. If you’ve shut down and sold everything off, then you can make an Offer in Compromise on whatever is left. If you have a home with an SBA lien on it, then that lien can be negotiated as well. In any of these scenarios, the sooner you act the better. Seek professional legal advice or assistance from an experienced settlement advisor.
