When a lender has a SBA loan that has gone into default the lender must take steps to liquidate the collateral securing the loan. Sometimes borrowers are cooperative and most times they are not. In cases where you have an uncooperative borrower, litigation may be necessary to liquidate the collateral. However, in cases where litigation is not necessary to liquidate the collateral, then the lender must decide whether or not to engage in litigation to collect the outstanding balance.
The SBA SOP 50 57 (2) (the “SOP”) devotes an entire chapter to litigation and when a lender should engage in litigation. Chapter 21 of the SOP states, inter alia, that litigation should be necessary, reasonable and customary, as well as being cost effective. See SOP 50 57(2), Chapter 21, Section A. Chapter 21goes so far to say that if the litigation is not going to be cost effective, the lender should submit a Wrap-up Report following liquidation of the collateral so the loan can be referred to Treasury for enforced collections. See SOP 50 57(2), Chapter 21, Section A.
Lenders should keep in mind that obtaining a judgment may be the easy part of engaging in litigation, while collecting on the judgment can oftentimes be expensive, time consuming and may not result in any recovery. When lenders are contemplating litigation, lenders should have a discussion with their attorney upfront to determine how the collection laws for the particular state they would have to file suit in will impact any potential execution on a judgment the lender may obtain.
For instance, there are twenty-six (26) states, including Pennsylvania and New Jersey, that recognize property owned by husband and wife to be property held as “tenants by the entireties.” This essentially means that the property does not belong to either spouse individually, and each spouse is entitled to the whole of the property. In Pennsylvania, this means that if you have a judgment against one spouse and you execute against bank accounts and include an account the spouses hold as “tenants by the entireties,” you generally cannot access the money in that account to satisfy your judgment. There is a similar effect when you have a judgment lien recorded against one spouse who happens to own real estate as “tenants by the entireties” with their spouse. In most cases, that judgment lien will not attach to that real property so long as both spouses remain alive and continue to hold the property as husband and wife. This can vary somewhat depending on state laws and may not continue if the spouses get divorced or one passes away.
There are nine (9) states that recognize community property between spouses. In California, which is a community property state, a creditor may be able to go after spousal property to satisfy a debt against only one spouse. This is dependent on whether the debt arose before or during the marriage. This can also vary from state to state, and there may be other state laws that impact litigation in these states that the lender should review with their attorney .
Finally, the remaining states follow common law to determine if a creditor can execute against the property of spouses to satisfy a judgment against only one spouse. The analysis differs on a state by state basis.
Because of these differences, it is important to have this conversation upfront with your attorney so that the lender can engage in a detailed analysis of what the proposed attorney’s fees may be to obtain and execute on a judgment versus turning the loan over to Treasury for enforced collections by the government. This is also a good time to have your attorney prepare an outline of the steps to be taken and a budget of the associated fees so a litigation plan can be submitted to the SBA upfront for approval. If the SBA does not approve the proposed litigation plan, the lender can then revisit their proposed course of action for collection of the loan balance before they head down the litigation and execution path.
If you have a SBA loan going into default and need assistance with that loan, feel free to reach out to the attorneys at Starfield & Smith, P.C. at 215-542-7070.
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