The Treasury Offset Program
What happens when a SBA borrower and guarantor go into default on a loan and have no plan? What happens if they ignore the collection calls and notices just hoping they go away, or better yet, assume that the bank will just write off the debt and not come after them? What happens after the business closes but the guarantor does not complete an offer in compromise nor file bankruptcy? The answer is that the loan is then entered into the US Treasury Offset Program where collections actions continue indefinitely.
What is different about a SBA loan while it is in the Treasury Offset Program is that the Offer in Compromise program that was once in play with the SBA is no longer there. The Treasury collects on many types of debt ranging from defaulted tax debts, federally back mortgages, SBA loans, and many more. They take the same approach to collection regardless of the debt. This process is much more harsh than that of the SBA. For example, when calculating a guarantor’s future earning potential, the Treasury measures the amount of wages that could be garnished over the course of that person’s working life expectancy rather than 3-5 years like the SBA does. This broad approach results in much higher settlement criteria, not to mention a very long settlement process.
Typically the benchmarks for collection with the Treasury Offset Program are to try and collect 50% or more of the outstanding balance. Keep in mind that after the file is transferred to Treasury, additional fees and interest are applied to the balance which can sometimes increase the balance owed by as much as 20%. While our office have seen settlements as low as 33% of the outstanding balance, those results are few and far between. Additionally, the process of settling with Treasury is so lengthy, in certain cases being in excess of 2 years, that many guarantors opt to file bankruptcy just as a means of concluding the issue quickly
The Treasury will also take steps such as offsetting or garnishing tax returns, garnishing social security income, or removing any other sort of financial federal aid. Seeing as how these funds come from the federal government, they have a right to offset the amount you owe them with these proceeds until the loan is satisfied, a settlement is reached, or a bankruptcy is filed.
All in all a SBA borrower or guarantor in default should take every step necessary to avoid their file from entering the Treasury Offset Program. While being in Treasury does not eliminate the possibility of a settlement, it will undoubtedly increase the time and costs associated with settling. Work with the SBA lender to make sure the underlying collateral of the loan is liquidated in a timely manor and then present an Offer in Compromise as soon as they are willing to accept it. Many defaulted guarantors think they should wait several months, try to increase their net worth in order to put forth a reasonable offer. While putting forth an offer substantial enough to be considered is important, defaulted borrowers simply do not have the time to let their personal balance sheets to recover. Put forth the best offer based on your financial condition at the time and preserve your opportunity to work directly with your bank and the SBA to settle.
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