In the world of debt workout the Treasury is a little-known area that files go to die.
Lawyers, accountants, and many other professionals have told my clients that once a file reaches Treasury collection they have to file a bankruptcy because the loan cannot be settled.
That is completely inaccurate and frankly, bad advice to many guarantors. Though bankruptcy is a valid answer for many individuals with overwhelming debts, the damage it can cause is crippling for future business endeavors. Your credit will be trashed for 7-10 years.
For those who do not know, the US Treasury does many tasks, one of which is the collection of all federally backed debts. An SBA loan is federally backed and therefore if a resolution cannot be accomplished in a reasonable amount of time with the lender, the file will be transferred and the US Treasury Department will begin collection.
The Treasury scares many professionals for two reasons. First, lawyers are trained to litigate or to utilize the advantages the laws can provide a debtor in order to resolve your debts. However, there is no avenue to perform such a task with a defaulted SBA loan as the client signed the contract and owes the debt. There are few if any defenses in the legal arena. The second reason is that very few people have had enough experience dealing with the Treasury to learn how the process works. The process is very long and convoluted and it can take many months and often years to accomplish a settlement. Many professionals will not endure such a long battle or they simply give up as time goes on and all parties become frustrated.
Second Wind has invested considerable time and energy with our non-profit work through Debt Relief Services, to work with defaulted borrowers who find themselves in the Treasury and has learned the process of dealing with the Treasury. We do not get frustrated with the process because we understand it. It takes time and we set our clients’ expectations properly.
The most important information we can provide to anyone finding themselves dealing with a defaulted loan serviced through the US Treasury is how the Treasury chooses to collect.
Universally my clients are told and believe the Treasury will use any and every method to collect their debt, up to and including criminal prosecution. Debtor’s prisons did once exist in this country, but luckily that is no longer the case. The US Treasury is a massive entity and individual loans are not inspected by staff directly unless necessary. Instead, the Treasury uses automated systems and passive forms of collection the majority of the time.
The most commonly used method of collection is called federal offset. This term means if the federal government was due to pay you a balance, the Treasury can choose to have all, or part, of that balance, withheld and instead apply it against your outstanding debt. Common targets of federal offset are social security disbursements of which it is common to see a 15% offset occur and federal tax refunds which generally are completely withheld from defaulted guarantors.
The second common practice is wage garnishment. Much like federal offset, garnishment is a passive means of collection where no courts or lawsuits are required. The Treasury will issue a letter to the employer of the debtor and demand a certain percentage between 15%-25% of their earnings be withheld. Any employer who does not comply faces penalties up to and including being made liable for the full balance of the outstanding debt. The percentage of garnishment is applied after involuntary wage deductions such as medicare and social security withholdings, but before any personal expenses such as employer-provided health insurance and retirement investments.
These facts do not make the Treasury any easier to deal with, but it will hopefully remove the fear and worry associated with the process. If handled correctly not only is a reasonable payment plan achievable, but it is also very possible to shed the greater portion of a defaulted obligation.