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The Three Most Common Misconceptions About SBA 504 Loan Workouts

Distressed Loan Advisors (http://www.JasonTees.com) offers expert advice about dealing with SBA Loan Default and Forgiveness, and can be reached at 1-877-436-4533 or loanhelp@jasontees.com.

Here is a quick synopsis of the SBA 504 loan:

1) There is a “regular” commercial loan in 1st lien position that is made by a bank, and finances 50% of the project cost.  This loan does NOT have an SBA guarantee, but the lender who is in 1st position is in a very strong collateral position (1st lien and a 50% loan-to-value at loan inception).

2) The SBA loan (originated through a CDC, or Community Development Corporation) is always in a 2nd lien position, and typically finances 40% of the project cost.  This loan is 100% guaranteed by the SBA, so the CDC has minimal financial risk.

So what are the most commons error I see? 

1) The first misconception is the belief that if the 1st lien holder forecloses, the SBA obligation disappears (hint: it doesn’t)  While it’s correct that in a foreclosure scenario, the CDC/SBA 2nd lien could get wiped out, business owners always forget about that pesky personal guarantee that they signed.  So in other words, if the 1st lien holder forecloses, it will eliminate the CDC/SBA security interest in the real estate, but it doesn’t mean that the personal guarantors are off the hook.  In order to be released from the obligation, guarantors need to submit an Offer In Compromise.

2) The second misconception is that an Offer In Compromise (i.e. Release of your personal guarantee) can be negotiated before a short sale is completed (hint: it can’t).  If you want to sell your building, but the value is less than the amount you owe, the SBA is usually pretty accommodating in terms of releasing their lien.  What they won’t do, however, it release your personal guarantee in conjunction with the short sale.  The short sale and the Offer In Compromise are two separate events.  Many borrowers don’t like the idea of closing on a short sale without know how much they will be able to settle for, and I get that.  All I can tell you is that until the liquidation of the real estate is complete, the SBA will not agree to an OIC.  If you think threatening not to do the short sale will change their mind, thing again.  I’ve seen deal blow up because the borrower thought the SBA would blink first (hint: they won’t).

3) The third misconception is that proceeds from a short sale can be used to make an Offer In Compromise.  The purpose of the OIC is for the guarantors to make an offer in exchange for the release of their personal guarantee. In order to accomplish this, an offer needs to be made that pays the SBA a sum that is above and beyond the collateral they already have.  In other words, sending the SBA the proceeds from the sale of collateral that was pledged for the loan (in most cases, this is the real estate) is not sufficient.  The SBA already has a lien on the real estate, so if you offer them the proceeds from a short sale, you aren’t really offering them something they couldn’t get anyway by foreclosing.  True, your short sale might fetch a price higher than what the SBA could sell if for in foreclosure, but unfortunately the SBA does not take that little tidbit into account.

Overall, the navigation through the short sale of your real estate, and subsequent settlement of your SBA debt can be daunting.  There are many nuances that, if not fully understood, can really give you a major headache.  Having the right advisors can make all the difference.

May 9, 2013 Posted by | bank loan settlement, business debt negotiation, business debt reduction, business debt resolution, business loan default, business loan settlement, commercial loan default, commercial loan settlement, release personal guarantee, SBA default, sba deferment, sba loan default, sba loan forgiveness, sba loan settlement, SBA Loan Workouts, SBA Loans, sba modification, SBA offer in compromise |, sba workout | , , , , , , , , , | Leave a comment

SBA Workouts: Can I Sell My Business To My Friend?

Lately, I have been getting a lot of calls with a similar theme, so I figured I would offer my thoughts for all to read again (I have addressed this issue is past articles).  Most of the calls about this particular topic go something like this:  “I talked to this other consulting firm who claims the right way to do an OIC is to sell my business to a friend, a business associate, or a corporation owned by me.  Something about that doesn’t sound right, so I wanted to speak with someone else who offers these kinds of services.”

After I am done shaking my head, my response is always the same:  If the purpose of your action is to dupe the bank and the SBA into thinking your business has been sold or closed, knowing full well that you intend to re-acquire the business or business assets, that is fraud.  Plain and simple.  I’ll repeat that.  It’s fraud.  It’s not a loophole.  It’s not a “sophisticated workout strategy”.  It’s fraud.

So now your head is spinning.  Those guys are saying one thing, I’m saying another.  Who to believe?  Here are my arguments for you to consider.

1) If the SBA and banks were agreeable to this sort of idea, wouldn’t it just be easier to write down the loan balance?  In other words, if this were a legit strategy that lenders are willing to get on board with, why the need to jump through these hoops?  The answer is simple:  if the SBA and bank knew that the relationship between the seller of the business and the buyer of the business was NOT arm’s length, they would have some serious reservations.  If they knew that your sole reason for engaging in the sale is to temporarily transfer ownership so that an OIC could be negotiated, they would definitely reject the sale.

2) If this were a legit way to get your debt reduced, why doesn’t everyone do it?  For the most part, people realize there is not something quite right about the whole concept, so the conversation ends there.  Are there some people who try it and get away with it?  Probably.  Are there people who get caught and end up worse off than when they started?  Absolutely.  Conveniently for the consultant, it’s the borrower who is left holding the bag.

Overall, I firmly believe that the right way to settle debt is to be forthright and honest, and after doing this for  number of years, truly believe that fair and reasonable settlements can still be achieved without resorting to deception.  There is a world of difference between putting a positive spin on a situation, and blatantly lying.  I once heard a good quote that sums it up nicely:  the great thing about telling the truth is that you never have to worry about which version of your story you previously told.

January 6, 2013 Posted by | bank loan settlement, business debt negotiation, business debt reduction, business debt resolution, business loan default, business loan settlement, commercial loan default, commercial loan settlement, release personal guarantee, SBA default, sba deferment, sba loan default, sba loan forgiveness, sba loan settlement, SBA Loan Workouts, SBA Loans, sba modification, SBA offer in compromise |, sba workout, Small Business Issues | , , , , , , , , , , | Leave a comment

A Million Reasons To Settle Sooner Your SBA 504 Loan Than Later

I recently had a client who owed the SBA $1 Million following a short sale of his commercial real estate (it was a 504 loan).  After the short sale, he got some bad advice and offered a nominal amount to settle, which was quickly rejected.  After rejecting the offer, the CDC (the company that services the SBA loan) referred the file to the US Treasury for collection, and had a 28% penalty added to the loan balance.  Once he was contacted by the Treasury, he reached out to me for help.  Given my experience with the Treasury (i.e. they are unreasonable), I told my client that his best opportunity to settle had passed, and that working something out with the Treasury on reasonable terms would be almost impossible.  My client stated that he’d be willing to pay back the full principal balance of $1 Million.  Surely, the Treasury would not be so short-sighted as to turn away a borrower who wants to repay $1 Million over 12 years, right?  WRONG!

 When we presented our very reasonable offer to repay the principal balance in full, it was quickly rejected.  Instead, the Treasury offered three options, none of which were feasible (or reasonable):

1) Pay them 50% of the loan balance in a lump sum. (Since he had to short sale the building, it’s unclear why they think this would be remotely possible.)

2) Make a large down payment, then make payments for 24 months, and revisit the balance at that time.  Just to make matter worse, they also insisted that the 28% penalty would need to be repaid as well.  (We quickly decided this option was no good, as there was no guarantee what would happen in 24 months.)

3) Repay the full balance over 7 years. (They couldn’t afford their building, so what reasonable person would think they could afford to pay $1.3 Million over such a short period of time.)

 I don’t understand why the Treasury chooses to opt for unrealistic settlement terms.  Such demanding terms might work with smaller loan amounts like $50,000, but for a $1 Million balance, the Treasury might as well save everyone the time and effort and simply not attempt to collect the debt.  The cynic in me thinks that if the debt were owed to a private entity, deals would get done.  But since it’s the government, there is little repercussion for having limited success.  I’m sure they rationalize that the debt is with them in the first place because the borrower refused to make a deal with the CDC, and therefore they only get files that are likely to be uncollectible.  What they will never admit is that their predictably minimal success when it comes to collections is due to their own short-sighted demands.  To me, their settlement parameters scream “it’s not my money, and I don’t care”.  How else could you explain their stance on settlements?

So what lessons can be learned from my client’s situation?

1) Trying to go it alone (or with an inexperienced advisor) early in the process can result in disaster.  Following a 504 loan short sale or foreclosure, you might only have a limited window of time to settle your SBA debt.  Can I guarantee that involving me will result in a settlement?  No, not 100% of the time.  But I’d be willing to wager that you’d have a better chance by asking for my help then by going it alone.

2) The Treasury makes unrealistic requests with regards to settlements, and the SBA will NOT be willing to step in to help.

3) With regards to settling SBA 504 debt, time is of the essence.  If you are going to sit back and wait for the CDC to contact you, that is a huge mistake.  If the CDC refers the file to the Treasury, you are dead in the water.  You need to be proactive about settling your SBA 504 loan, which means being in constant contact with the CDC, and having an Offer In Compromise ready for submission as soon as the short sale/foreclosure is complete.

Distressed Loan Advisors (http://www.JasonTees.com) offers expert advice about dealing with SBA Loan Default and Forgiveness, and can be reached at 1-877-436-4533 or loanhelp@jasontees.com.

September 13, 2012 Posted by | bank loan settlement, business debt negotiation, business debt reduction, business debt resolution, business loan default, business loan settlement, commercial loan default, commercial loan settlement, release personal guarantee, SBA default, sba deferment, sba loan default, sba loan forgiveness, sba loan settlement, SBA Loan Workouts, SBA Loans, sba modification, SBA offer in compromise |, sba workout, Small Business Issues | , , , , , , , , , , | Leave a comment

Another SBA Offer In Compromise “No-No”

I was recently assisting a client with their Offer In Compromise package.  As sometimes happens, I asked my client for a number of documents that I knew that bank would ask for, and over a couple of weeks the documents were emailed to me in drips and drabs.  I never understand why clients don’t make assembling important documentation a priority, considering that there are tens or hundreds of thousands of dollars on the line.  The problem, you see, is that the SBA wants all the information for a reason.  The reason is that when you combine all of the information, it paints a fairly comprehensive picture of the borrowers financial situation, so if I don’t have all the info, there may be a crucial piece of the puzzle that I don’t find out about until the very end.

In my recent client’s case, the bank already had a judgment against them, so time was of the essence since many banks will attempt to execute on a judgment as quickly as the law allows.  For that reason, I was anxious to get the settlement submitted.  My clients were not able to get their proof of income quickly , so we decided to submit the settlement offer without tax returns or proof of income because it was unclear how long it would take to get those items.  As expected, after I submitted the OIC, the bank came back and requested 2011 personal tax returns.  They were on extension (not uncommon), and in such cases we provide W2s instead.  So after the personal financial statement had already been submitted, my client sent me his W2 which showed a huge amount of income from the prior year.  Since they had many debts and expenses associated with their defunct business, we were able to piece together a spreadsheet that demonstrated where all the money went (showing why they didn’t have much to offer right now).  The problem was that much of the money was spend on “discretionary” items like vacations, toys, and eating out.  When a lender sees that, their first thought is “wow, you owed us $500,000, and you decided to spend $15,000 on a vacation?”.  This rubs banks the wrong way, and could be used against you since they can argue that your offer was not made in good faith.

As it turned out, a large part of the W2 was bonus, with the rest being in the form of salary.  The problem was that the salary he earned didn’t match the salary my client had written on his personal financial statement.  That, my friends, presents a problem too.  Now we are in a position to go back an revise the PFS that’s already been submitted.  This means we will potentially be revising the offer to account for higher income.

So what lessons can be learned here:

1) When you hire an advisor and time is of the essence, sending your documentation promptly will ensure that the settlement strategy will put in place without the worry of surprises (like a huge W2 from last year, or a sizable asset that you forgot to mention).  The worst thing that can happen is to submit information on a personal financial statement that can’t be supported.  If you indicate that you make $5,000 per month, but your paystub later shows that you make $10,000 per month, that presents a major problem.

2) When you owe a bank (or anyone, for that matter) money, keep in mind that the expectation is that you are going to make a settlement offer because you are experiencing financial hardship.  Spending your cash on things that you could clearly have lived without indicates to the bank that you could have offered more money, but you made the conscious decision to spend it on non-essential purchases.

 

August 19, 2012 Posted by | bank loan settlement, business debt negotiation, business debt reduction, business debt resolution, business loan default, business loan settlement, commercial loan default, commercial loan settlement, release personal guarantee, SBA default, sba deferment, sba loan default, sba loan forgiveness, sba loan settlement, SBA Loan Workouts, SBA Loans, sba modification, SBA offer in compromise |, sba workout, Small Business Issues, Uncategorized | , , , , , , , , , , | Leave a comment

SBA Offer In Compromise and the Personal Guaranty

I spend my days fielding phone calls from people around the country, almost all of whom have an ongoing issue with an SBA loan.  One of the most common complaints that I hear from people pertain to the personal guarantee, and usually fall within one of these variations:

QUESTION:  I signed a personal guarantee for my friend’s business, but I had nothing to do with the business.  Why are they coming after me and not my friend?

ANSWER: When you agree to personally guarantee debt, your have personally committed to repay the debt if the business fails to do so.  In most cases, the bank is under no obligation to pursue the guarantors in any particular order.  The bank can choose to pursue all the guarantors at once, or alternatively, they can pursue the guarantor that they believe has the most assets.  If when the loan was granted, the friend who guaranteed the loan had a significant net worth while the business owner had a minimal net worth, you can be sure that the bank will spend their time and money pursuing the more wealthy of the pair.  While you may not think it’s fair that a bank would sue a person who had no ownership interest in the business, that’s the reality of a personal guarantee.  This is why agreeing to personally guarantee debt for a friend should never be taken lightly.

 

QUESTION: I personally guaranteed an SBA loan for my ex-spouse.  The divorce decree states that my ex-spouse is solely responsible for repaying the debt, but I just got a letter stating that I am liable.  What gives?

ANSWER: Let me start with my disclaimer: I’m not an attorney, and this is not legal advice.  You should see an attorney in your area for all legal matters.  Now, with that said, I will tell you what I’ve seen as far as this situation is concerned.  When two people get divorced, it’s common to split all the assets and liabilities.  It’s important to note that the agreement is between the individuals, NOT THE CREDITORS.  In other words, unless the banks agrees to release one of the spouses, they will pursue both of you regardless of the agreement between you.  Even though it seems unfair, logically it makes perfect sense.  The bank, after all, may have required both spouses to guarantee the SBA loan because both spouses were brining attributes to the table.  Furthermore, if it were possible for one personal guarantor to indemnify the other, this would be a huge loophole.  It would basically mean that if two business partners signed personal guarantees, they could easily get one of them off the hook by establishing an agreement between them stating that one would be handling the loan, and the other was not responsible.

So if a divorce agreement won’t help with creditors, what good is it?  Well, if you are the spouse who was indemnified, and your ex fails to make their loan payments, you’d have recourse against your former spouse.  Of course, that won’t help you out of the personal guarantee, which is a very tough pill for most former spouses to swallow.

Overall, when it comes to personal guarantees of SBA debt, you should always ponder the worst case scenario when signing one.  If you aren’t prepared to deal with a worst case scenario (they borrower defaults), you should re-evaluate whether signing one is the right way to go.

August 2, 2012 Posted by | bank loan settlement, business debt negotiation, business debt reduction, business debt resolution, business loan default, business loan settlement, commercial loan default, commercial loan settlement, release personal guarantee, SBA default, sba deferment, sba loan default, sba loan forgiveness, sba loan settlement, SBA Loan Workouts, SBA Loans, sba modification, SBA offer in compromise |, sba workout, Small Business Issues | , , , , , , , , , , | Leave a comment

SBA Offer In C…

SBA Offer In Compromise Is A Business Decision

When it comes to submitting an SBA Offer In Compromise, many borrowers believe that in order to get their settlement offer approved, they need to explain their tale of woe to the bank in great detail.  I get it: for many people, losing their business (and in many cases their life’s savings) is an emotionally traumatic experience.  You put your whole life into the business.  You work 80 hours a week, haven’t taken a vacation for years, and you can’t recall the last time you gave yourself a paycheck beyond meager amounts needed to put food on table and keep the lights on.  While it’s understood that you’ve been through financial hell, the story of how your misfortune unfolded is not going to be the focus of your bank’s and the SBA’s OIC decision.

When I discuss this topic with clients, I try not to sound heartless, but since I’m being paid to advise the client, I do need to explain why the story of what led to the business failure is basically irrelevant for two main reasons:

1) Every business that has failed has a story.  Some are a more sad than others, but the basically details are usually the same.  If the SBA were going to forgiven debt based on “hard luck” stories, they would forgive just about every loan that ever defaulted.  I can tell you that’s not the case.

2) The main goal of the bank and the SBA is to recover the money that they lent to you.  Their philosophy is simple:  you borrowed the money, and are legally responsible for repaying the debt regardless of how much you lost money on the business.  While it tempting to rationalize that since you lost money, the bank should be willing to share equally in the losses, it’s just not how banks view it.  If you don’t have the ability to repay the debt in full, then yes, a settlement of your SBA debt may be possible.  But just because you lost $50K on the business doesn’t mean that the bank/SBA will will automatically forgiven a portion of your loan.  Even if you strongly believe that the bank/SBA should participate in the losses, you’re better off not expressing this to your lender.

Just to drive the point home, here are some common questions and comments I get, along with my response:

Client: I bought my business, and it appears that the seller defrauded me.  The business doesn’t make as nearly as much as the seller claimed it would. Will the bank take this into consideration, and will they help me sue the seller?

Me: Unfortunately, the bank won’t care that you feel you were defrauded, and they usually are not interested in litigation with the seller.  In many cases, it takes lots of time and money to prove fraud, and since banks have limited resources, that’s not a path they are interested in going down.

Client: I lost [Insert Dollar Amount Here] on this business!  That was a huge chunk of my life’s savings, including my retirement accounts, a home equity loan, and my stock portfolio.  The bank needs to understand this.  I still have savings, but the bank needs to realize how much I’ve already lost.

Me:  Banks are focused on getting back the money they lent to you.  Sadly, how much you lost is not as much of a factor as the amount of money you have remaining.

So if the background story doesn’t matter, what does matter?

Debt forgiveness, in most cases, is a business decision.  This means that the bank chooses the option that will result in them recovering the most money, so charity is not part of the equation.  Many borrower’s may think that philosophy is not fair, but it’s the reality of the situation when it comes to the SBA Offer In Compromise.  This is not to say that your banker won’t sympathize with your situation, especially if you have a good relationship with them.  Even in such a case, it’s important to remember that the SBA has the final say on your OIC, so even if your banker was your mother, they don’t have the power to approve your OIC without SBA approval.

July 21, 2012 Posted by | bank loan settlement, business debt negotiation, business debt reduction, business debt resolution, business loan default, business loan settlement, commercial loan default, commercial loan settlement, release personal guarantee, SBA default, sba deferment, sba loan default, sba loan forgiveness, sba loan settlement, SBA Loan Workouts, SBA Loans, sba modification, SBA offer in compromise |, sba workout, Small Business Issues | , , , , , , , , , , | Leave a comment

3 Myths About The SBA Offer In Compromise

Distressed Loan Advisors (http://www.JasonTees.com) offers expert advice about dealing with SBA Loan Default and Forgiveness, and can be reached at 1-877-436-4533 or loanhelp@jasontees.com.

1)  The Best Workout Consultants Are Aggressive – If you think that in order to be an effective negotiator, your workout consultant needs to be aggressive and/or abrasive, think again.  While I don’t wilt when challenged by a banker, I also don’t actively seek confrontation.  As in life, the best way to reach a mutually agreeable resolution is to be respectful.  Anyone who tries to convince you otherwise has clearly never sat on the other side of the table as a workout officer.  When I was a workout officer, people who were civil to me were more likely to get the benefit of the doubt than people who gave me grief for no reason.

2) The Threat of Bankruptcy Gives You Lots of Leverage – I’ve written about this before, but it bears repeating:  bankers do not tremble in fear simply because you threaten to file for bankruptcy.  First, bankers know that not everyone qualifies for bankruptcy.  Second, banks are required to make a decision about a settlement offer based on the borrowers ability to pay, not based on whether they’ll file for bankruptcy. Third, if you filing for bankruptcy takes a file off your workout officer’s plate, it’s usually a welcome event.

3) The Sale of Business Assets Can Fund Your Settlement – In most cases (most loans except 504 loans) the lender has a lien on the business assets. Therefore, when your business closes, liquidation of the business assets is performed in order for the bank to recover as much cash as possible.  Since the bank had a lien on the assets, theses funds are NOT considered to be part of the OIC.  The OIC, you see, includes the amounts of cash that you are offering above and beyond the cash obtained via business asset liquidation.

June 27, 2012 Posted by | bank loan settlement, business debt negotiation, business debt reduction, business debt resolution, business loan default, business loan settlement, commercial loan default, commercial loan settlement, release personal guarantee, SBA default, sba deferment, sba loan default, sba loan forgiveness, sba loan settlement, SBA Loan Workouts, SBA Loans, sba modification, SBA offer in compromise |, sba workout, Small Business Issues | , , | Leave a comment

SBA OIC (Offer In Compromise) and Community Banks

Distressed Loan Advisors (http://www.JasonTees.com) offers expert advice about dealing with SBA Loan Default and Forgiveness, and can be reached at 1-877-436-4533 or loanhelp@jasontees.com.

If I were to ever borrow money from a bank under one of the SBA programs (which, by the way, is unlikely after all the carnage I’ve seen), I would never borrow from a community bank or a credit union.

In many cases, obtaining a loan through your local community bank or credit union may be easier than going through one of the major national banks.  Decisions tend to be made locally (as opposed to being approved in an underwriting center hundreds or thousands of mile from you), and because of that, these lenders tend to be able to make faster decisions, and make exceptions that the larger lenders won’t make because their underwriters are not empowered to do so. 

So if they are easier to get a loan from, why am I saying that I’d never take an SBA loan from them?  Here’s why: When the you-know-what hits the fan and you can’t afford your loan payment, community banks and credit unions tend to be quite rigid and unwilling to discuss an SBA Offer In Compromise. While this is by no means an absolute, it has been my experience that larger banks are more willing to consider settlements. 

After recently having a very reasonable offer turned down by a community bank, I began thinking about similar experiences I’ve had in the past with other community banks around the country.  It became clear that when you are attempting to work out and SBA Offer In Compromise, you almost always want to be dealing with a larger institution.

So, why are community banks so unwilling to compromise?  Here’s what I think:

- The bank doesn’t do a lot of SBA lending, and is unaware that the Offer In Compromise process even exists.  Since they’ve never been through the process before, it’s much easier to say no to an offer than to take the time to muddle through the process.

- The bank is afraid to lose their SBA guarantee.  I’ve have a good number of smaller lenders sue borrowers, and claim that the SBA requires them to do it.  This is NOT TRUE.  While the SBA does require the banks to take steps to achieve the best possible recovery, there is nothing in the SBA SOPs (Standard Operating Procedures) that requires litigation in order for the SBA to reimburse a bank on a defaulted loan.

- Community banks tends to have lower default rates on their loans, and therefore take defaulted loans more personally, and give them much more attention.  Think about it this way:  If you had a portfolio that consisted of 1000 loans, and 10 of them defaulted, you would give those 10 loans lots of scrutiny.  You’d also tend to be more aggressive about collecting on those loans because there are only 10 in the entire bank.  Contrast that with a huge bank with millions of loans.  Even if the same percentage of loans are delinquent, that translates to thousands of loans.  That’s too many for the bank to “take it personally” that therefore they are more likely to develop the philosophy that not every loan warrants long and costly litigation.  It also allows them to gain experience with settlements so that they are not shocked when a borrower offers 25 cents on the dollar to settle.

- Community banks sometimes do not even have workout officers.  If there is nobody at the bank that is dedicated to working out defaulted loans, you may get stuck with a loan officer who has no experience (or interest) in figuring out how the settlement process works.

- When a bank doesn’t have much workout experience, they tend to refer defaulted loans to their attorney rather than trying to find a reasonable workout plan.  The attorneys usually have no experience with SBA settlements either, since their main job is to litigate (as opposed to negotiate).

- Finally, since community banks negotiate less often, then are hesitant to engage in meaningful discussions about why a settlement offer has been deemed to be insufficient.  Since they are afraid to say the wrong thing, they instead say nothing.  Without understanding why they feel an offer is not acceptable in the first place, it’s really difficult to revise the offer in a meaningful way and reach a mutually agreeable settlement.

April 20, 2012 Posted by | bank loan settlement, business debt negotiation, business debt reduction, business debt resolution, business loan default, business loan settlement, commercial loan default, commercial loan settlement, release personal guarantee, SBA default, sba deferment, sba loan default, sba loan forgiveness, sba loan settlement, SBA Loan Workouts, SBA Loans, sba modification, SBA offer in compromise |, sba workout, Small Business Issues | , , , , , , , , , , | Leave a comment

Common Questions about SBA Loan Personal and Corporate Guarantees

(Distressed Loan Advisors (http://www.JasonTees.com) offers expert advice about dealing with SBA Loan Default and Forgiveness, and can be reached at 1-877-436-4533 or loanhelp@jasontees.com.)

Question:  If I file for personal bankruptcy, can the bank still legally come after my business and shut me down?

Answer: Yes – Assuming the business assets are owned by an entity other than you (such as an S-Corp, C-Corp, LLC etc), the bank can still usually go after the business assets.  This assumes that the bank required the aforementioned corporate entity to act as a borrower or guarantor, which is the case in 99.99% of cases. Having your personal guarantee discharged only relieves you of personal liability.  In other words, they can’t go after your personal assets (unless they were pledged prior to the BK) such as your home, bank accounts, or paycheck.

Question: When I took this SBA loan, I was advised to form a corporation, who is listed as the borrower.  Doesn’t this shield me from any personal liability?

Answer:  Forming a corporation certainly has some benefits.  If the corporation was the ONLY entity that was required to be named as a borrower/guarantor, you would be off the hook personally if the business became insolvent at some point in the future.  Unfortunately, the bankers know this fact too, so in 99.99999% of cases they require the business owners to pledge their personal guaranty in connection with the SBA debt.  By doing this, you are essentially saying “fine, if the business cannot afford to pay you, I will use my personal resources that I owned outside the business to repay this loan”.

Some people tell me that they would have never gone through with the loan had they realized what the personal guarantee meant.  First of all, shame on your banker and attorney for not explaining it to you.  Second of all, I can assure you that had you refused to offer your personal guarantee, the bank would not have agreed to lend you the money in the first place.

Question: When I signed the personal guarantee, I thought I was signing as an officer of the company.  Was I wrong?

Answer: Yes, you were wrong.  If the document that you signed says “Unlimited Personal Guarantee”, you are personally liable.

Question: Does my business need to file for bankruptcy in order to qualify for a settlement?

Answer: No, in most cases, just ceasing operations is sufficient.  There may be other strategic reasons for filing a corporate BK, but doing it to qualify for an OIC is not one of them.  Interestingly, the SBA has recently in certain begun considering reductions in loan balances on businesses that are still operating.  It’s still not the norm, but it’s definitely a change from the past policy which absolutely required a business to be closed.

Question: Will the bank be able to foreclose on my home if I file for personal chapter 7 bankruptcy?

Answer:  It depends.  If there was a lien on your home prior to the bankruptcy, then the lien will not be extinguished.  If there was not a lien prior to the bankruptcy, the having your personal guarantee discharged will protect your home due to the fact that the bank would not be able to liquidate your personal assets in order to repay the SBA loan.

Question:  I met with a bankruptcy attorney, who recommended that I file for bankruptcy.  Why should I try to try to settle the debt instead?

Answer:  I tell all prospective clients the same thing:  gather all the facts, then make an informed decision.  Whichever approach you take will have it’s own unique pros and cons.  The key is to fully understand the keys pros and cons of each approach so you don’t regret the decision later.  There is no one right approach…your individual situation will often dictate which approach makes more sense. 

Question: The person at the bank told me that since I owe them so much, I should file for bankruptcy because the SBA will never release my personal guarantee.  Is she right?

Answer:  Whenever I hear this, it shocks me.  Your banker (who works for the bank, not you) should not being offering legal advice of any kind.  When I was a Vice President is the Workout department, I’d always tell borrowers that if they had legal or bankruptcy questions, they should speak with their attorney.  Only an attorney should be recommending whether or not you file for bankruptcy in order to avoid an SBA loan personal guarantee.  It’s one thing to discuss the pros and cons of bankruptcy, it’s quite another to say “the only way to get out of this is to file for bk”.

March 31, 2012 Posted by | bank loan settlement, business debt negotiation, business debt reduction, business debt resolution, business loan default, business loan settlement, commercial loan default, commercial loan settlement, release personal guarantee, SBA default, sba deferment, sba loan default, sba loan forgiveness, sba loan settlement, SBA Loan Workouts, SBA Loans, sba modification, SBA offer in compromise |, sba workout, Small Business Issues | , , , , , , , , , , | Leave a comment

SBA Default and Fraudulent Asset Transfers

(Distressed Loan Advisors (http://www.JasonTees.com) offers expert advice about dealing with SBA Loan Default and Forgiveness, and can be reached at 1-877-436-4533 or loanhelp@jasontees.com.)

There is a lot of confusion out there about what constitutes a legitimate assets transfer, and what banks and the SBA consider to be fraudulent assets transfers.

In general, a legit transfer involved the sale of your business or business assets to an unaffiliated third-party buyer.  If the business assets are pledged as collateral for your loan, you MUST get your lenders permission to sell the assets.  The idea is that both parties involved in the transaction are negotiating in their own best interest. 

Here is an example of what can be considered a legit transaction:

You own a restaurant that was financed with an SBA loan (which is secured with your business assets), and after years of struggles, you decide to sell it because you can no longer afford your loan payment.  You reach out to a local competitor to see if he has an interest in buying your business.  He comes over to examine the equipment, and says he will buy all the business assets – your coolers, stove, chairs, tables, utensils, walk in coolers and so on.  After some negotiating, you settle on a price of $25,000 for everything.  Your competitor is going to run the business, and you will not being leasing or buying back the business at any point in the future.  You draw up a contract of sale and present the transaction to the bank for approval.  The bank agrees to release their lien on the assets upon receipt of the proceeds from the transaction.

Now, let’s contrast the above example of what I’d consider to be fraudulent transactions:

Example #1 of a Fraudulent Transaction (I call this intentional fraud):

You own a restaurant, and after years of struggles, you come to the conclusion that you simply can’t afford to run the business with the current amount of debt that you owe.  You’ve heard about the SBA offer in compromise, and that for your type of loan, the bank and the SBA require the borrower to cease operations before they will consider a reduction in principal.  Once the business ceases operations, you learn that the bank and the SBA will consider settlement offers in exchange for the release of your personal guarantee.  Thinking you found a loophole, you decided to form a new corporation who you will sell your business to.  Since it’s obvious that the bank won’t let you sell your business to a corporation owned by you, the new corporation is owned by a friend or a business associate.  You draw up a contract of sale, and present it to the bank, conveniently forgetting to omit the fact that the “buyer” is a friend / business associate.  This kind of approach is clearly fraudulent.  The sole purpose of this transaction is to create the appearance of a sale in order to induce the bank into settling your personal guarantee, and once that happens, you intend to buy or “lease” the business back from the “buyer”.  If the bank were aware of all the details, it’s highly likely that they would not approve the sale.

Example #2 of a Fraudulent Transaction (I call this unintentional fraud):

You own a restaurant that was financed with an SBA loan (which is secured with your business assets), and after years of struggles, you decide to sell it because you can no longer afford your loan payment.  You reach out to a local competitor to see if he has an interest in buying your business.  He comes over to examine the equipment, and says he will buy all the business assets – your coolers, stove, chairs, tables, utensils, walk in coolers and so on.  After some negotiating, you settle on a price of $25,000 for everything.  Your competitor is going to run the business, and you will not being leasing or buying back the business at any point in the future.  You draw up a contract of sale and close the deal without getting bank approval.  You take the proceeds from the sale, and pay down some credit card debt.  While most people who do this don’t realize that they are doing anything wrong, the SBA does require lenders to refer these types of occurrences to the SBA Inspector General, who investigates fraud within the SBA.

In summary, the rule of thumb is simple: When in doubt, ASK YOUR BANKER IF YOUR TRANSACTION IS ACCEPTABLE TO THE BANK, INCLUDE ALL DETAILS , AND GET THEIR ANSWER IN WRITING!  If you are not fully disclosing all the details of the transaction, there is probably something wrong.

 

February 22, 2012 Posted by | bank loan settlement, business debt negotiation, business debt reduction, business debt resolution, business loan default, business loan settlement, commercial loan default, commercial loan settlement, release personal guarantee, SBA default, sba deferment, sba loan default, sba loan forgiveness, sba loan settlement, SBA Loan Workouts, SBA Loans, sba modification, SBA offer in compromise |, sba workout, Small Business Issues | , , , , , , , , , , | Leave a comment

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