Disaster Loan is a Disaster, Debt Workout and Debt Forgiveness is Almost Impossible

It makes little sense, as the SBA has a definite Offer in Compromise program; we initiate it frequently and resolve defaulted loans very effectively. There are procedures, guidelines, requirements and a resolution process. It works. It is frequently difficult to navigate, cumbersome to use, but since we understand the process well and are much practiced at it, and very successful with it, we get it done.

Not so with Katrina disaster loans or other disaster loans that goes into default.

For some reason, they have not gotten the memo. They are unaware of any Offer in Compromise process and act as if they are not SBA guaranteed loans. They cannot be worked out. We know we have tried repeatedly and have gotten nowhere every time.

Apparently the SBA has determined in its own infinite wisdom, that there is a significant difference between directly lending money given to them by congress to support disaster situations, and guarantees of loans made through traditional banks. For some reason this is difference enough for there to be an Offer In Compromise procedure for guaranteed loans issues through banks and direct loans issues directly from the SBA.

Why there is a difference, I do not know. I cannot even fathom the logic behind such a demarcation, but there is.

A breached disaster loan goes right to the Department of Justice, US Treasury and is handled by an Assistant US Attorney and prosecuted as if the default was a crime.

Now we have actually taken the defense of such a situation all the way through the Federal District Court system and had it litigated before a Federal District Judge and achieved a huge forgiveness, our typical 90% forgiveness on a $1.2 million dollar loan, however, the sad part of this is the enormous legal fee the borrowers had to pay for such justice. It took years and a small fortune for legal fees which could have been used to reduce the debt but instead was used to prove the point that the borrowers were broke and out of work and could not pay a dime more. In fact the payment was structured over a number of years.

Picture the scene, your home and business washed away, your entire community gone, and the SBA is on location working out of a mobile office, offering cash on the spot to rebuild. Rebuilding did not go well, did not bring the business or market back and revenues have disappeared for seemingly forever, and then the second disaster occurs, the SBA comes collecting their payback and even though the borrower never recovered from the disaster, losing everything they had, the US treasury is going to collect no matter what.

Despite the facts and despite the reality that the SBA has a debt forgiveness plan, the Disaster loans are not included within this process. Let's beat the borrowers up again, says the SBA, let's collect no matter what... and so they do...no matter what, and until you get to the US Federal District Court, there are no workouts available. We know. We are defending a handful and we are not winning. We are losing.