This is a huge issue which we frequently confront on many different fronts. Let’s assume an SBA loan was not used to purchase the property. Also assume that it is also a subordinate loan attached to the property by some vehicle that secures the loan in the event there is a breach in payments such as a lien or even a deed in trust. Many may believe that the property cannot be sold or financed because the subordinate lien cannot be satisfied. There is the additional possibility that typically the property is not worth the first and second mortgages, if there is one, and that the attached SBA lien is entirely underwater. But, this issue of the lien remains a huge problem as there will never be any value unless the subordinate SBA lien is removed.
As a borrower/owner of the property who wants to sell or refinance, or someday enjoy the potential equity building within the financing, if only we could get rid of the SBA lien. What can we do?
There is a strategy for this. The SBA will be willing to release the mortgage/lien so that the owner can be allowed to sell or refinance the property under the proper circumstances. However, cooperation is required. Commitment on the borrower’s behalf is also necessary. The borrower must not receive any of the sales or refinance consideration. Although all proceeds must be distributed in order of priority, it is possible.
In most cases, the best path to removal is making an Offer In Compromise which resolves the SBA subordinate lien for pennies on the dollar, and once that is settled the lien will be released, and the offer value of the property returned to the owner.
Even if you have filed for a bankruptcy, while the SBA debt may no longer be an obligation which needs to be paid by the bankrupt borrower, the lien remains attached to the property pending sale or refinancing. So even a bankruptcy does not remove the lien. There is a method of removal which sometimes works, by making a motion to the court to strip the lien off because it carries no inherent value, there is no equity and the subordinate lien is unsecured. Many judges and courts will permit this, it just is not a guaranteed result.
Other complications exist which muddy the process including a spousal ownership position who does not have a guaranty, and thus is entitled to protection for his/her part of the equity. This is always a complication that supports cooperation in a workout.
Occasionally the SBA loan provided the purchase money for the acquisition and now in default there is no other priority lien blocking the SBA from collecting the full value of the property. This is a larger problem and most often results in losing the property, although even this scenario has strategies which work for the benefit of the defaulting borrower, as we can negotiate a deed in lieu, giving the property back to the lender in exchange for some consideration in the overall debt workout, which eliminates their need to foreclose and take ownership at the auction. This can work out to be an advantage if negotiated effectively.
There is always a path to achieve the right results, it is complicated and sometimes a tricky way but none the less a path always exists. It takes patience, and expertise, and sometimes some capital. If you want to keep your home and regain your equity there is a way through this puzzle. Call us for help and direction.