So here is today’s DLA advice of the day:

ONLY MAKE A SETTLEMENT OFFER IF YOU HAVE THE MEANS TO HONOR THE TERMS OF YOUR OFFER!

Situations like this drive me nuts for a number of reasons:

Loss of Credibility – If you try to re-negotiate a settlement once it’s approved, your banker and the SBA will at some point begin to wonder if you fully grasp your own finances, and whether you truly intend to honor the terms of the settlement.

Red Tape (Times 2!) – After working on a settlement for a number of months, your banker is going to be annoyed when you want to re-negotiate the settlement.  First, they need to get their manager or loan committee to buy into the new settlement, which means going through the time and effort of amending the original proposal.  They also would need to provide an explanation about why the offer has changed.  If enough time has passed, they may ask you for updated paperwork.

When a client’s potential settlement offer is low relative to other settlements I’ve negotiated for other clients, I always tell them that all we can do is make their best offer.  Regardless of what the bank or SBA wants, or what it says on paper that they can afford, the bottom line is that the client needs to be fairly confident in their ability to follow through on the settlement.  To agree to a settlement in order to get that temporary sign of relief can be tempting, but taking that route will only come back to bite you.  Most settlement agreements, you see, contain a provision that is known as a “claw back” provision.  In a nutshell, it says that if you default on the terms of the settlement, the bank has the right to take action against you for the FULL AMOUNT OF PRINCIPAL AND INTEREST.

So what’s a person to do when they can afford $100 per month, and the bank wants $200?  It’s time to get creative.  Given that tens or hundreds of thousands of debt are at stake, nothing should be off limits.  Even with a 10% penalty, taking funds from your 401-k should be considered.  Even if you take out $50K and pay a $5K penalty, having $100K or more forgiven might make it worth enduring the associated taxes and penalties.

The attorney called me, and I could tell from the start that he was skeptical about what I could do for his client.  Finally he asked the “million dollar” question: “What can you do for my client that I can’t do myself?”

“Well” I said, “do you have any experience with the modification or settlement of SBA debt?”

His response: “No.”

“Do you routinely work with tax returns and personal financial statements?”

Once again, “No”.

So really, it seemed to me that the real question here was this: what made this attorney think he was qualified to represent his client in a negotiation?  Attorneys specialize in many areas, so it’s ludicrous to assume that just because someone passed their state bar exam, that makes them an expert in every aspect of the law.  To go a step further, settlement negotiations usually have NOTHING to do with the law (although the resulting paperwork does).  Settlements have to do with coming to reasonable terms so that the bank never has to take legal action.

Of course, not every attorney was as arrogant as the one I described above.  In fact, I often get calls from attorneys who looked me up because their client needs help with an SBA settlement, and the attorney knew that he was not well-versed enough to add value to the process.  In my opinion, the smartest people are the ones who know when to say “I don’t know”.  I get questions all the time about tax and bankruptcy issues that I honestly don’t know the answer to, and that’s exactly what I say.  In a similar light, a smart attorney who realizes debt settlement is not his area of expertise should not “winging it”.  Instead, they should tell their client that they need an expert in the area of debt settlement.  Otherwise, your attorney will simply be learning the process as he goes….which doesn’t exactly sound like a recipe for success.

Every time my phone rings, I take a quick glance at my caller ID to see what state the call is coming from.  I am almost always excited to find out about the callers situation, and how I might be able to help.  But there is one exception: when the call comes from Louisiana.  Do I dislike the state of Louisiana?  No, of course not.  But I do tend to sigh when I get a call from the Big Easy, and the reason is simple:  many SBA disaster loans were issued after Hurricane Katrina to Louisiana residents.

In a nutshell, SBA disaster loans are really, really, really, really, really difficult to settle.  And this is why I don’t like getting calls from Louisiana.  I get 2 to 3 calls per week from someone with a disaster loan who is struggling to pay them, and in most cases I turn those people away.  Believe me, I’d love to help, but disaster loans tend to not to be conducive to settlements for a few reasons:

1)      Disaster Loans Are Almost Always Secured With Homes.  In cases where your home has equity in it that is sufficient to cover your debt, there is no chance that the SBA will settle the debt.  The logic is simple: if they can foreclose on you and get all their money back, there is no reason to settle.

2)      Disaster Loan Terms are Generous To Begin With. Most SBA disaster loans are offer very low interest rates over a long period of time (usually 30 years), so when things go wrong, there is not much that can be done to help.  If your payment is $150 per month, and you are struggling to make that payment, it’s likely that payment at any level would be onerous.

3)      Disaster Loans Are Typically Issued To Individuals. As a result of going to people who had scarce resources to begin with, asking a person to raise a material sum of cash to settle a disaster loan is always a tall order.  If you owe $30,000 and can’t afford a $300 per month payment, it’s likely that you don’t have access to enough cash to make a lump sum settlement offer.  In other words, since most disaster loan borrowers have limited financial resources, the chances of raising enough of  lump sum to settle are limited as well.

4)      The “Powers That Be” Are Arbitrary. More than any other area of the SBA, I’ve found that the SBA Disaster Loan folks rely less on the facts and more on arbitrary thresholds.  Unlike the SBA business loan settlements, which heavily consider a person’s financial situation, the Disaster Loan people basically say “we don’t care that you can only afford $1,000, we want you to pay $10,000”.  For this reason alone, many disaster loans never have a chance to settle.

Fast forward a couple of years.

After years of banks lending money to people who don’t have the ability to pay it back, the you-know-what hits the fan in September 2008.  The residential mortgage market melts down and banks start collapsing left and right, the stock market plummets, and the economy quickly follows suit.  POOF! Your business, which was previously humming along nicely, is all of a sudden showing signs of a slowdown.  You batten down the hatches. You begin to slash expenses wherever and however you can.  You even have to lay people off, which hurts, but is unavoidable.  And finally, after months of struggle, you come to a frightening realization:  you won’t have the money to make next month’s SBA loan payment.

Upon coming to the previously unthinkable conclusion that you lack the funds needed to make this month’s loan payment, you begin to think about what might happen.  One of the first questions that pops into your head is:

Will the bank take my home if I default on my SBA loan?

The answer to that question varies depending on your situation.  Let’s try to break it down:

1)      You pledged your home as collateral for the loan.  When a person pledges their home as collateral, they grant their lender a lien on their home.  What that means is that if the goin’ gets tough, the bank has the right to foreclose on the home if the situation warrants it.  Of course, whether or not the bank forecloses depends on a number of factors such as how much equity is in the home, or whether you successfully reach an Offer-In-Compromise.

2)      You did NOT pledge your home as collateral.  I had a client get very upset when I explained that even though he did not pledge his home at loan origination, there was still a risk of the lender placing what is known as a “judgment lien”.   “I refused to pledge my home in order to prevent this from happening!” he said to me.

Here’s why this client (and most SBA borrowers) still risk having a judgment lien on their home even though the house was not specifically pledged:  In 99.99% of SBA loans, all principal owners are required to personally guarantee the loan, meaning that if things went bad and the business could not pay, the bank would look to the personal guarantors to repay the loan.  And as anyone who has even been sued knows, if you are going to voluntarily offer up your personal assets, the bank can go to the courts and ask for permission to take your personal assets by force.  Once the court approves and grants a judgment, the bank has the right to go after your assets.  Most banks are interested in two things: cash and real estate.  Since a judgment has been granted against you in favor of the bank, they have the right to levy bank accounts, and place liens on your real estate.  In many states, a judgment lien cannot be foreclosed upon.  That’s the good news.  The bad news is that they do have the ability to block the sale or refinance of your home in the future.  That means if you ever plan to move, the judgment lien will need to be dealt with.

And that, my friends, is how a person who never pledged their home can still have a lien placed on it by their lender.

In my experience, the more creditors that a borrower has, the more complicated their situation gets. I always liken trying to settle with multiple banks to herding cats. Their decision making is not always predictable, and the speed at which they make decisions is pretty much impossible to guess. With that said, most of my clients have at least two creditors that need to be dealt with. The two most common creditors are landlords and former business owners. Let’s address the most common questions I get about both of them:

Can my landlord sue me? If you were named as the lessee on the lease, or as a personal guarantor, it’s likely that you are personally liable for the lease payments. In this rough economy, some landlords don’t require personal guarantees in order to entice businesses to rent from them. Obviously, it’s very important to know whether or not you are personally liable.

Will landlords settle? Most will consider a settlement, especially if you lack the resources to pay the lease and the landlord is aware of this fact.

How can I get out of my lease if my business is going to close? The most common method I see is to find someone to buy or take over your business. Even if you don’t get much for the business, convincing the landlord to allow you out of the lease if you can find a replacement can save you hundreds of thousands of dollars that a lease might obligate you to pay.

What does it mean for me if the bank required the seller note to be subordinate to the bank debt? It basically means that the seller has to wait in line to take action against you if you default. In most subordination documentation, it prohibits the seller from taking action against the collateral without the banks approval, and that’s because the bank is first in line in a liquidation situation. The subordination may keep the seller at bay for a bit, but if your business fails, it’s only a matter of time before the seller comes knocking.

The seller refuses to settle. What the heck? Even though you as the business owner think the seller got enough money at closing to be satisfied, that’s not how the seller thinks about it. Unlike banks, for most sellers, this is the one and only time in their lifetime that they will be a creditor. So what happens when you default? They take it very, very personally. As a result, they think of it as “their money” and quite often they will be resistant to a settlement.

As I always do, my first call after being hired was to the collection company.  The person who handles wage garnishment was very friendly, but she made it clear that she has seen the Treasury turn down pretty much every settlement offer.  Apparently their attitude is that once they start garnishing, they are willing to bet that the borrower will stay at their current job long enough to pay the debt in full.  My client says he won’t be with his current employer long enough for the Treasury to get all their money back, but that concept did not appear to phase the Treasury.  Ultimately, the Treasury turned down an offer that was significantly higher than most of my other offers that are approved.

So what lessons can be learned here?

-          Ignoring your SBA loan obligation will not make it go away.  In fact, it’s just the opposite.  If you wait for it to get into the hands of a collection company, your chances of a successful settlement drop dramatically.

-          Wages garnishment is a real possibility if you owe the SBA money and have chosen to ignore the banks and SBA’s attempts to work out a settlement.

-          Being proactive about debt settlement can be the difference between a successful settlement and years of headaches.

-          How you choose to rationalize the situation is likely to be vastly different than how the Treasury will rationalize it.  In most cases, threats of quitting your job (to avoid garnishment) and filing for Chapter 7 personal bankruptcy will fall on deaf ears.  In most cases their attitude will be “ok, go for it”.

I can understand why a borrower might read my articles, which always advocate being proactive in the settlement process) and say “of course you are going to say that, you make money when people settle!”  True, that is how I make a living.  But at the same time, it doesn’t mean I’m wrong.  The example described above is a perfect example of why it makes more sense to bite the bullet today in order to save yourself an ever larger headache down the road.  If the fact that it’s hard to settle doesn’t convince you, keep this in mind:  when the file gets passed to a collection company, an automatic penalty of 28% of the loan balance is tacked on to the loan balance.  In other words, you can save 28% on your settlement just by dealing with the situation sooner than later.

There are a few possible reasons why your phone isn’t ringing:

1) Your bank is understaffed. If you are just 1 of 200 loans that your workout officer is responsible for, it’s simply a numbers game. When there is literally not enough time in the day to handle all the phone calls, emails, projects and meetings, prompt attention is out the window.
2) Your banker is incompetent. Let’s face it: No matter what profession you are talking about, there are a certain number of people who will be terrible at their job.
3) You did something to make them mad. Did you promise to make a payment, and then flaked out and didn’t send it? Did you make a major change to the business without telling them? Were you rude or abusive when you last spoke with them?
4) Your file has been referred directly to the SBA. I often hear from people who were waiting for the bank to call them back, and all of a sudden 6 months later, they get a letter directly from the SBA.

If the loan is 75% guaranteed by the SBA, don’t I only owe them 25% of the loan balance?

Sorry, the SBA guaranty is for the bank only. The idea behind the SBA guaranty is to compel lenders to lend to borrowers who they would otherwise have to decline. Whether or not the SBA reimburses the bank has no bearing on how much you owe. All that really changes is that the SBA will get 75 cents of every dollar that is collected on that loan going forward.

I have a business partner, and we both personally guaranteed the debt. Am I only liable for 50% of the debt?

In most cases, all personal guarantors sign unlimited personal guarantees. This means that you are both responsible for 100% of the debt. Therefore, they will pursue both of you for the full amount.

I personally guaranteed the loan as a favor to a friend/family member, but I had nothing to do with the business. Shouldn’t that count for something when they are considering my Offer In Compromise?

No. The reason they asked for your personal guarantee in the first place was because the business and business owners did not qualify for the loan by themselves. The whole idea was to have a guarantor who has resources available to repay the debt in a worst case scenario. A personal guarantee is a personal guarantee regardless of why you agreed to it at loan origination.

When I first took this loan, I pledged my home as collateral. My lender said the bank would release the lien after 12 months of on-time payments, but now they won’t. What gives?

It’s important to realize who made that promise to you: a sales person. Their job is to bring in loans. Unfortunately, some sales people will tell you things with a wink and a nod that they have no authority to promise. Unless you have it in writing from the bank that your home will be release at a certain point in time, you will be out of luck.

“So, why do you feel that you need an attorney to help with a modification?” I asked.

“The bank has threatened foreclosure!” he responded.

Dude.  Seriously?

For the record, pretty much every bank threatens legal action when you don’t make payments for 3+ months.  Until it actually happens, it’s all talk and an attorney can’t do anything more than I can when it comes to rectifying a default.  I knew from this guy’s tone that he had his mind made up, and no amount of explanation was going to sway him.  He truly seemed to think that the bank would be intimidated if an attorney called them.  As a former banker, I can tell you that his assumption is not correct.  Bankers deal with attorneys all the time.

So the question remains: When do you need an attorney?

You need an attorney when:

1)      You need to be represented in court.

2)      You want to file for bankruptcy.

3)      You need to answer a legal summons and complaint.

4)      You are asked to sign a legal document.

You’ll notice that the above list does not include loan modifications or debt settlement.  Why?  Because negotiating SBA debt settlements and loan modifications doesn’t require a law degree.  It requires the following attributes:

1)      Experience analyzing financial statements and cash flow analysis.

2)      A strong understanding of the rules of SBA settlements and loan modification protocol.

3)      Experience negotiating SBA settlements and loan modifications.

While there may be attorneys who do possess the above attributes, my point here is that not all do, so to assume that you need an attorney in all workout situations is a false assumption.

I know what you are thinking: The guy writing this article clearly has an interest in convincing me not to use an attorney because he wants me to hire him!  True, but it doesn’t mean my points are not valid.  I see it as a similar situation to when borrowers are trying to consider whether to hire me, or to hire a bankruptcy attorney.  The bankruptcy attorney usually recommends filing for bankruptcy regardless of the situation.  It doesn’t mean it’s not a legitimate option, it’s just one perspective.

I always tell prospective clients to simply evaluate all their options, then make an informed decision.  And that’s really the point of this article.  In some cases it makes a lot of sense to engage an attorney, but in some cases it doesn’t.  But to assume that an attorney is always a better option than an SBA workout consulting just isn’t true.

Time is of the Essence – I’ve weaved this theme throughout various articles, but it does bear repeating.  The longer you wait, the harder it will be to settle.  If your file gets referred to an attorney to begin litigation, it can make it infinitely harder to settle.  Just ask my client who has been waiting a year for a settlement, as the bank pushes ahead with personal judgments against them.

The Rules Are Always Changing – As times passes, the stance that lenders and the SBA take with respect to certain issues evolve to fit the current the current economic times.  Even though the SOPs (Standard Operating Procedures) tend to stay the same, the interpretation and focus tends to vary over time, and even within the different SBA offices.  Working with an expert who knows how the SBA is currently viewing different factors can be the difference between a successful settlement and a long, drawn out battle that ends in the levying of tax refunds and wage garnishment.

Freedom Isn’t Free – The idea behind settling (from the bank/SBA perspective) is to settle for an amount that is reflective of a guarantor’s ability to pay. This means that if you are going to successfully negotiate an OIC, you need to be willing to tap all available resources.  If you are going to have 50% or more or your debt forgiven, the expectation is that you will give as much as you can afford…not simply as much as you feel like paying.

I know this advice is going to fall on deaf ears, because I see the same scenario every single day. I get a call from someone who thought the bank/SBA had given up on trying to collect their defaulted SBA loan, only to get a call from one of the collection companies that the US Treasury hires to “beat the bushes” in an effort to recover some cash.

Here’s the problem with the collection companies: they are really really really hard to settle with. They want a lot of cash, and they want it now.

So, how can I avoid being backed into a corner by a collection company, you ask? It’s simple: BE PROACTIVE. Don’t wait for the bank to come to you. Instead, you should go to them. This means that the day you close your business, you need to be in touch with the bank and get the process moving. If you don’t get a return phone call in a few days, try again. If you are intimidated by the bank, then hire a guy like me.

Overall, the reality is this: In the vast majority of cases, a more reasonable settlement can be worked out through the bank/SBA than through the collection companies.

Life Isn’t Fair, and Neither is The SBA

Don’t get me wrong, I actually find the SBA to be a very reasonable group of people to deal with. That said, when their form letter goes out that says you have 60 days to get back to them, I’d strongly advise responding as soon as you can. On more than one occasion, I have had clients come to be on day 59, only to be disappointed that their loan was turned over to the Treasury before they had a chance to make a settlement offer. And believe me, complaining to the Treasury that you only got 59 days instead of 60 will get you nowhere. Once its goes to the Treasury (and then to a collection agency), you MUST deal with those entities. I’ve even seen the file be turned over to the Treasury a week or two before they were supposed to.

Fees, Fees, and More Fees

When you signed your loan documents, there was a section where you agreed to pay the bank/SBA for the costs they incur in trying to collect the debt from you. In the case of the Treasury and its collection companies, that often can add an additional 20% to your debt total. Attempting to dispute these fees will be like trying to explain physics to my golden retriever…no matter what you say or how you say it, you will not have any success.

So please folks, in order to give yourself the best chance at settling, take action today!