A defaulted SBA loan can lead to more than collection letters. Federal law lets an agency withhold money the government owes a borrower, such as a tax refund, to pay a debt. The same law gives the borrower defined rights first.
What Administrative Offset Means
Administrative offset is the withholding of funds payable by the United States to a debtor in order to satisfy a debt owed to the government. Title 31, section 3716 of the United States Code sets the conditions an agency must meet before it can use the tool. This is federal law, so it applies the same way to a business owner in Madison, Green Bay, or Milwaukee.
Four Rights Before Offset
Under subsection (a), the agency must give the debtor:
- Written notice of the type and amount of the claim, the agency’s intent to collect by offset, and the debtor’s rights
- An opportunity to inspect and copy the agency’s records on the claim
- An opportunity for review of the decision within the agency
- An opportunity to make a written agreement to repay the debt
An agency that skips one of them hasn’t met the statute’s requirements. A borrower can raise the omission in writing at the review stage.
Reading the Notice
The notice states the amount and the deadlines, so it should be read closely. Check the amount against the loan statements, the date the debt is said to have become delinquent, and the deadline for asking for review. Keep the envelope and any attachments, since the delivery date can matter.
A letter that arrives without any statement of rights is incomplete under the statute. The borrower can point that out in writing.
Inspecting the Records
The right to inspect and copy records is the practical center of the process. The loan file can show payments received, interest added, fees charged, and any guarantee that backs the debt. Borrowers can ask a Wisconsin SBA lawyer to compare those records with their own and flag differences before the review begins.
Loan terms feed into the amount demanded. Our overview of SBA loan business law helps a borrower see how.
A personal guarantee can bring a spouse or partner into the picture. Reading about loan cosigners and bankruptcy explains what that can mean.
Repayment Agreements and Other Options
The statute also lets a debtor try to arrange a written repayment agreement. A realistic proposal states a monthly amount the business can sustain and attaches supporting income records.
Pandemic loans follow the same process. Our Wisconsin EIDL lawyer team can review how an EIDL balance fits within it.
A broader restructuring changes how a federal debt is treated. The differences between Chapter 7 or 11 show what each path involves.
Bankruptcy can also affect an EIDL balance. The article on EIDL debt and bankruptcy explains how the two interact.
Timing and Referral to Treasury
Two parts of the statute set the timeline. Subsection (c)(6) requires agencies to notify the Treasury Secretary of past-due, legally enforceable nontax debts that are over 120 days delinquent. Subsection (e)(1) provides that offsets aren’t subject to any time limit, so an old debt can still be collected this way.
Because no time limit applies, a borrower who learns of a long-dormant balance should treat the notice as a current demand. Waiting does not reduce the exposure.
Putting the Rules to Work
A response has three parts: confirm that the debt is valid, ask for the records, and propose repayment terms if the debt stands. Each step should be documented in writing, with the dates noted.
Edward J. Gudeman, our founder and managing attorney, earned his law degree at the University of Michigan in 1971 and was admitted in Illinois in 1972 and Michigan in 1973. Gudeman & Associates, P.C. works from Royal Oak, Michigan, and this post describes federal law.
Offset rights are written into the statute, and each one gives a borrower something to use. Business owners in Wisconsin with a federal debt notice can reach out to us, and we’ll go through the notice and the agency’s records together.
