What Is Debt Forgiveness?

Debt forgiveness is really a somewhat new concept, not generally understood or done effectively by most. Debt forgiveness is a viable alternative to bankruptcy to successfully work out the problem of SBA defaulted loans or bank defaulted loans. Forgiveness of debt is the process in which a bank allows a borrower to pay off less then is owed and does not pursue foreclosure or other remedies.

Given the enormous downturn in our economy, over 15% of the outstanding SBA guaranteed loans have been defaulted on and the number may be rising. This is no surprise as the economy has experienced a severe downturn that appears likely to be with us for a long while, many years.

While foreclosure and liquidation are the preferred strategies implemented by banks – really, their only strategies when loan default occurs be it SBA loan default or traditional bank loan default – there is another option that is infrequently employed but available to those who are experienced and savvy in the procedures and requirements. That is debt forgiveness.

Typically, this originates from a commercial loan that cannot be repaid. The business goes into loan workout where the result is usually foreclosure and liquidation which yields a very low return to the bank and thus a large remaining portion of the debt goes unpaid. This falls on the personal guaranty of the borrower – the business owner – and frequently his/her spouse. Payment is demanded from them personally. Bankruptcy is usually the only other answer with its huge losses and costs and the guarantors can seldom support payment of the remaining shortfall liability.

The only other possible resolution is debt forgiveness, where the bank forgives the borrowers a portion of the debt in exchange for a partial payoff. For an SBA default or a bank loan default, either one, loan forgiveness is the alternative answer to bankruptcy and a much better strategy.

SBA loan forgiveness and bank loan forgiveness is an option but one must know how to implement and support such a strategy as in most cases the bank and SBA will turn away from such a suggestion. There is a process, however, called Offer In Compromise which is an SBA program that supports such an outcome if the defaulting borrower is qualified. Call us for help. This tricky situation can be successfully navigated.