RD Instruction 1956-C

Table of Contents

Page 1

(Revision 1)

PART 1956 - DEBT SETTLEMENT

Subpart C - Debt Settlement - Community and Business Programs

## [TABLE OF CONTENTS]{.underline}

[Sec]{.underline}. [Page]{.underline}

1956.101 Purpose. 1

1956.102 Application of policies. 1

\(a\) General. 1

\(b\) For hospital and health care facilities only. 1

1956.103 - 1956.104 \[Reserved\] 1

1956.105 Definitions. 1

\(a\) Settlement. 1

\(b\) Compromise. 1

\(c\) Adjustment. 2

\(d\) Cancellation. 2

\(e\) Chargeoff. 2

\(f\) Debtor. 2

\(g\) Security. 2

\(h\) Servicing official. 2

\(i\) United States Attorney. 2

\(j\) Independent Qualified Fee Appraiser. 2

1956.106 - 1956.108 \[Reserved\] 2

1956.109 General requirements for debt settlement. 2

\(a\) Debt due and payable. 2

\(b\) Disposition of security. 2A

\(c\) Proceeds from the sale of security. 3

\(d\) County Committee review. 4

\(e\) Assistance from Office of General Counsel

(OGC). 4

\(f\) Format. 4

1956.110 Joint debtors. 4

1956.111 Debtors in bankruptcy. 5

1956.112 Debts ineligible for settlement. 5

1956.113 - 1956.117 \[Reserved\] 5

1956.118 Approval authority. 6

1956.119 - 1956.123 \[Reserved\] 6

(09-07-94) PN 232

RD Instruction 1956-C

Table of Contents

Page 2

(Revision 1)

[Sec]{.underline}. [Page]{.underline}

1956.124 Compromise and adjustment. 6

\(a\) General provisions. 6

\(b\) Debtor\'s ability to pay. 6

\(c\) Debtor unable to pay in full. 7

\(d\) Debtor able to pay in full but refuses to

do so. 8

1956.125 - 1956.129 \[Reserved\] 9

1956.130 Cancellation. 9

\(a\) With application by debtor. 9

\(b\) Without application by debtor. 9

1956.131 - 1956.135 \[Reserved\] 11

1956.136 Chargeoff. 11

\(a\) Judgment debts. 11

\(b\) Nonjudgment debts. 11

1956.137 \[Reserved\] 12

1956.138 Processing. 12

\(a\) Approval. 12

\(b\) Requesting additional information. 12

\(c\) Rejection. 12

\(d\) Appeal rights. 13

1956.139 Collections. 13

1956.140 - 1956.141 \[Reserved\] 14

1956.142 Delinquent adjustment agreements. 14

1956.143 Debt restructuring - hospitals and health

care facilities. 15

\(a\) Definitions. 15

\(b\) Debtor notification. 16

\(c\) State Director\'s restructuring determination. 17

\(d\) National Office processing of State Director\'s

request. 21

\(e\) Debtor notification of debt restructuring and

net recovery value calculations. 21

\(f\) Debtor responses to debt restructuring and net

recovery value calculations. 22

\(g\) Collection and processing of recapture. 23

\(h\) No recapture due. 23

RD Instruction 1956-C

Table of Contents

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[Sec]{.underline}. [Page]{.underline}

1956.144 \[Reserved\] 23

1956.145 Disposition of essential Rural Development records. 24

1956.146 Reporting to the Internal Revenue Service (IRS). 24

1956.147 Debt settlement under the Federal Claims Collection Act. 24

1956.148 Exception authority. 26

1956.149 \[Reserved\] 27

1956.150 OMB control number. 27

Guide 1 Notice of Availability of Debt Restructuring for Delinquent

Hospital or Health Care Facility Borrowers

Guide 2 Notice of Debt Restructuring and Net Recovery Value Calculations

(Approval of Debt Restructuring)

Guide 3 Notice of Debt Restructuring and Net Recovery Value Calculations

(Debt Restructuring Not Approved)

Guide 4 Shared Appreciation Agreement

Guide 5 Net Recovery Buy Out Recapture Agreement

## oOo

(09-07-94) PN 232

RD Instruction 1956-C

PART 1956 - DEBT SETTLEMENT

Subpart C - Debt Settlement - Community and Business Programs

§ 1956.101 [Purpose]{.underline}.

This subpart delegates authority and prescribes policies and procedures
for debt settlement of Community Facility loans; Association Recreation
loans; Rural Renewal loans; direct Business and Industry loans; and
Shift-in-land-use loans. Settlement of Economic Opportunity Cooperative
loans, Claims Against Third Party Converters, Non-program loans, Rural
Business Enterprise/Television Demonstration Grants, Rural Development
Loan Fund loans, Intermediary Relending Program loans, Nonprofit
National Corporations Loans and Grants, and 601 Energy Impact Assistance
Grants, is not authorized under independent statutory authority, and
settlement under these programs is handled pursuant to the Federal
Claims Collection Joint Standards, 4 CFR parts 101-105 as described in §
1956.147 of this subpart. In addition, this subpart does not apply to
Water and Waste Programs of the Rural Utilities Service, Watershed
loans, and Resource Conservation and Development loans, which are
serviced under part 1782 of this title. (Revised 10-29-07, SPECIAL PN.)

§ 1956.102 [Application of policies]{.underline}. (Revised 09-07-94, PN
232)

\(a\) [General]{.underline}. If a debt is eligible for settlement, the
debt settlement authorities of the agency should be explained and the
privileges thereof extended to the debtor. All debtors are entitled to
impartial treatment and uniform consideration under this subpart.
Accordingly, agency personnel charged with any responsibility in
connection with debt settlement will adhere strictly to this subpart.

\(b\) [For hospital and health care facilities only]{.underline}. Loan
servicing and debt restructuring options according to § 1956.143 of this
subpart must be exhausted before other settlement authorities of this
subpart are applicable.

§§ 1956.103 - 1956.104 \[Reserved\]

§ 1956.105 [Definitions]{.underline}.

\(a\) [Settlement]{.underline}. The compromise, adjustment,
cancellation, or chargeoff of a debt owed to the agency. The term
\"settlement\" is used for convenience in referring to compromise,
adjustment, cancellation, or chargeoff actions, individually or
collectively.

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

DISTRIBUTION: WSAL Account Servicing

Debt Settlement

## 1

## (Revision 8)

(4-20-88) PN 82

RD Instruction 1956-C

§ 1956.105 (Con.)

\(b\) [Compromise]{.underline}. The satisfaction of a debt, including a
release of liability, by the acceptance of a lump-sum payment of less
than the total amount owed on the debt.

\(c\) [Adjustment]{.underline}. The satisfaction of a debt, including a
release of liability, when acceptance is conditioned upon completion of
payment of the adjusted amount at a specific future time or times, with
or without the payment of any consideration when the adjustment offer is
approved. An adjustment is not a final settlement until all payments
under the adjustment agreement have been made.

\(d\) [Cancellation]{.underline}. The final discharge of a debt with a
release of liability.

\(e\) [Chargeoff]{.underline}. To write off a debt and terminate all
servicing activity without a release of liability. This is not a final
discharge of the debt, but rather a decision upon the part of the agency
to remove the debt from agency receivables.

\(f\) [Debtor]{.underline}. The borrower of loan funds under any of the
agency programs specified in §1956.101 of this subpart.

\(g\) [Security]{.underline}. All that serves as collateral for the
agency loan(s), including, but not limited to, revenues, tax levies,
municipal bonds, and real and chattel property.

\(h\) [Servicing official]{.underline}. The Rural Development official
who is primarily responsible for servicing the account.

\(i\) [United States Attorney]{.underline}. An attorney for the United
States Department of Justice.

\(j\) [Independent Qualified Fee Appraiser]{.underline}. An individual
who is a designated member of the American Institute of Real Estate
Appraisers, Society of Real Estate Appraisers, or an equivalent
organization, requiring appraisal education, testing, and experience.\
(Added 11-15-89, SPECIAL PN.)

§§ 1956.106 - 1956.108 \[Reserved\]

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## (Revision 8) 

RD Instruction 1956-C

§ 1956.109 [General requirements for debt settlement]{.underline}.

\(a\) [Debt due and payable]{.underline}. The debt or any extension
thereof on which settlement is requested must be due and payable under
the terms of the note or other instrument, or because of acceleration by
written notice prior to the date of application for settlement, unless
the debt is to be cancelled without application under §1956.130 (b) or
charged off under §1956.136 of this subpart.

\(b\) [Disposition of security]{.underline}. Ordinarily, all security
will be disposed of prior to the date of application for settlement.
There are exceptions:

\(1\) It may be necessary to abandon security through the debt
settlement process. For example, a community may be rendered
uninhabitable by a toxic or hazardous substance. In such cases, debt
settlement may proceed provided the servicing official determines:

\(i\) That further collection efforts with respect to the security in
question would be ineffective or uneconomical.

\(ii\) That it is in the best interests of the Government to proceed
with debt settlement.

## 2A

## (Revision 2)

(4-20-88) PN 82

§1956.109(b)(l) (Con.) RD Instruction 1956-C

\(iii\) That the proposal otherwise meets the requirements appropriate
to the type of settlement under consideration, and

\(iv\) The approval of the Administrator is obtained.

\(2\) A servicing action may have been carried but which resulted in a
less than complete disposition of security. For example, the Government
may have consented to a voluntary sale of a debtor\'s real and chattel
property without reference to other security, which might include, but
is not limited to: an additional lien on revenue, a third party pledge
of security, or a pledge of personal liability. In such cases, debt
settlement may proceed provided the requirements of §1956.109(b)(l) of
this subpart are met.

\(3\) Security can be retained under the compromise and adjustment
offers as specified in §1956.124 of this subpart.

\(4\) Settlement of a claim against an estate will be based on the
recovery that may reasonably be expected, taking into consideration such
items as the security, costs of administration, allowances of minor
children and surviving spouse, allowable funeral expenses, dower and
courtesy rights, and specific encumbrances on the property having
priority over claims of the Government.

\(c\) [Proceeds from the sale of security]{.underline}. Proceeds from
the sale of security must be applied on the debtor\'s account, taking
into consideration the disposition requirements of any grant agreement,
prior to the date of application for settlement, except when security is
retained as provided for in §1956.109(b) of this subpart. Debtors will
not be allowed to sell security and use the proceeds as part or all of
the debt settlement offer.

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(4-20-88) PN 82

RD Instruction 1956-C

§1956.109 (Con.)

\(d\) [County Committee review]{.underline}. Proposed settlement actions
will be reviewed by the County Committee except for the cancellation of
debts discharged in bankruptcy under §1956.130(b)(l) of this subpart or
when a claim has been referred to a United States Attorney under
§1956.112(d)of this subpart. No settlement shall be approved if it is
more favorable to the debtor than recommended by the County Committee.

\(e\) [Assistance from Office of General Counsel (OGC)]{.underline}.
When necessary, State Directors will obtain advice from OGC in handling
proposed debt settlement actions.

\(f\) [Format]{.underline}. Form RD 1956-1, \"Application for Settlement
of Indebtedness,\" will be utilized for all settlement actions under
this subpart.

§1956.110 [Joint debtors]{.underline}.

Settlements may not be approved for one joint debtor unless approved for
all debtors. Joint debtors includes all parties, individuals, and
organizations, who are legally liable for payment of the debt.

\(a\) Individual settlement offers from joint debtors can be accepted
and processed only as a joint offer. A separate Form RD 1956-1 will be
completed by each debtor unless the debtors are members of the same
family and all necessary financial information on each debtor can be
shown clearly on a single application.

\(b\) If one of the joint debtors is deceased or has received a
discharge of the debt in bankruptcy, or if the whereabouts of one of the
debtors is unknown, or it is otherwise impossible or impractical to
obtain the signature of the debtor, the application for settlement may
be accepted without that debtor\'s signature if it contains adequate
information on each of the debtors to justify settlement of the debt as
to each of the debtors. The name of the debtor requesting settlement
will be shown at the top of Form RD 1956-1 followed by name and status
of the other debtor. For example, \"John Doe, joint debtor with Jane
Doe, deceased.\"

## 4 

§1956.110 (Con.) RD Instruction 1956-C

\(c\) Joint debtors must be advised in writing that all debtors will
remain liable for the balance of the debt until any payment(s) due under
the joint offer have been made.

§1956.111 [Debtors in bankruptcy]{.underline}.

Rural Development personnel will process reorganization plans of debtors
filing under Chapter 9, Chapter 11, or Chapter 13 as follows:

\(a\) Plans submitted by debtors under Chapters 9, 11, and 13 must be
sent by the servicing official to the State Director who will recommend
either acceptance or rejection of the plans and refer them to the United
States Attorney through OGC. When the plan calls for the adjustment of a
debt to Rural Development, the State Director will obtain the advice of
the Administrator before providing OGC with a recommendation on
acceptance or rejection of the plan.

\(b\) The United States Attorney will advise the State Director, through
OGC, as to approval or rejection of the debtor\'s reorganization plan.
The State Director will then notify the Finance Office by memorandum of
the terms and conditions of the bankruptcy reorganization plan,
including any adjustment of the debt.

§1956.112 [Debts ineligible for settlement]{.underline}.

Debts will not be settled:

\(a\) If referral to the Office of Inspector General (OIG) and/or to the
OGC is contemplated or pending because of suspected criminal violation,
or

\(b\) If civil action to protect the interests of the Government is
contemplated or pending, or

\(c\) If an investigation for suspected fiscal irregularity is
contemplated or pending, or

\(d\) When a claim has been referred to or a judgment has been obtained
by the United States Attorney and the debtor requests settlement, the
servicing official will explain to the debtor that the United States
Attorney has exclusive jurisdiction over the claim or judgment, and
therefore, Rural Development has no authority to agree to a settlement
offer. If the debtor wishes to make a settlement offer, it must be
submitted with any related payment directly to the United States
Attorney for consideration.

§1956.113 - 1956.117 \[Reserved\]

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(4-20-88) PN 82

RD Instruction 1956-C

§1956.118 [Approval authority]{.underline}.

District Directors cannot approve debt settlement actions. Therefore,
they will make no statements to a debtor concerning the action that may
be taken upon a debtor\'s application. Subject to this subpart, the
compromise, adjustment, cancellation, or chargeoff of debts will be
approved or rejected:

\(a\) By the State Director when the outstanding balance of the
indebtedness involved in the settlement is less then \$50,000, including
principal, interest, and other charges.

\(b\) By the Administrator or his designee when the outstanding balance
of the indebtedness involved in the settlement is \$50,000 or more,
including principal, interest, and other charges.

§1956.119 - 1956.123 \[Reserved\]

§1956.124 [Compromise and adjustment]{.underline}.

Nonjudgment debts may be compromised or adjusted upon application of the
debtor(s), or if the debtor is an individual and unable to act, upon
application of the guardian, executor, or administrator of the debtor\'s
estate.

\(a\) [General provisions]{.underline}. Debts, regardless of the amount,
may be compromised or adjusted subject to the following:

\(1\) The debt or any extension thereof on which compromise or
adjustment is requested is due and payable under the terms of the note
or other instrument, or because of acceleration by written notice, prior
to the date of application for settlement.

\(2\) The period of time during which payments on adjustment offers are
to be made cannot exceed five years without the approval of the
Administrator.

\(3\) Efforts will be made to avoid applications for settlement in which
debtors offer a specified amount payable upon notice of approval of the
proposed settlement.

\(b\) [Debtor\'s ability to pay]{.underline}. In evaluating the
debtor\'s settlement application, it is essential that reliable
information be obtained in sufficient detail to assure that the offer
accurately reflects the debtor\'s ability to pay. The debtor\'s income,
expenses, and nonsecurity assets are critical factors in determining the
type of settlement and the amount which the debtor can reasonably be
expected to offer. Critical information should include the following:

## 6 

§1956.124(b) (Con.) RD Instruction 1956-C

\(1\) The debtor\'s total present income from all sources will be
determined. In addition, careful consideration will be given to the
probable sources, amount, and stability of income to be received over a
reasonable period of years. For individuals, public welfare assistance
and pensions, including old age pensions and pensions received by
veterans for pensionable disabilities will not be considered as sources
of funds with which to make compromise and adjustment offers.

\(2\) The debtor\'s operation and maintenance expenses, and, in the case
of individuals, probable living expenses.

\(3\) The priority of payments on debts to third parties.

\(4\) When the debtor is largely dependent on income from an occupation
in which manual labor is required, age and health of the individual are
vital factors in determining the ability to pay. The number in the
debtor\'s family, their ages and condition of health, will also be
weighed in determining the ability to pay. However, when the debtor\'s
income is from investments, business enterprises, or management efforts,
age and health of both individual and family are of less importance.

\(5\) The value of the debtor\'s assets in relation to debts and liens
of third parties is important in determining the debtor\'s ability to
pay. It is recognized that debtors must retain a reasonable equity in
essential nonsecurity property in order to continue normal operations
and, in the case of an individual, to meet family living expenses over a
period of years. Under this policy a reasonable equity in a modest
nonsecurity homestead occupied by the debtor, whether or not exempt from
levy and execution will not be considered as available for offer in
settlement. Nonsecurity property which is in excess of minimum business
and/or family living needs and which is not exempt from levy and
execution should be considered when determining the debtor\'s ability to
pay.

\(c\) [Debtor unable to pay in full]{.underline}. Debts may be
compromised or adjusted and security property retained by the debtor,
provided:

\(1\) The debtor is unable to pay the indebtedness in full, and

\(2\) The debtor has offered an amount equal to the present fair market
value of all security or facility financed, and

\(3\) The debtor has offered any additional amount which the debtor is
able to pay, and

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(4-20-88) PN 82

RD Instruction 1956-C

§1956.124(c) (Con.)

\(4\) The total amount offered represents a reasonable determination of
the debtor\'s ability to pay.

\(d\) [Debtor able to pay in full but refuses to do so]{.underline}. If
the debtor has the ability to pay in full but refuses to do so, debts
may be compromised or adjusted and security property retained by the
debtor under certain conditions:

\(1\) The OGC advises that the Government is unable to enforce
collection in full within a reasonable time by enforced collection
proceedings, and the amount offered represents a reasonable settlement
considering:

\(i\) Availability of assets or income which may be realized by enforced
collection proceedings, considering the applicable exemptions available
to the debtor under State and Federal law, and

\(ii\) Inheritance prospects within 5 years, and

\(iii\) Likelihood of debtor obtaining nonexempt property or income
within 5 years out of which there could be collected a substantially
larger sum than the amount of the present offer, and

\(iv\) Uncertainty as to the price that the security or other property
will bring at forced sale, [or]{.underline}

\(2\) The OGC advises that there is a real doubt concerning the
Government\'s ability to prove its case in court for the full amount of
the debt, and the amount offered represents a reasonable settlement
considering:

\(i\) The probability of prevailing on the legal issues involved, and

\(ii\) The probability of proving facts to establish full or partial
recovery, with due regard to the availability of witnesses and other
pertinent factors, and

\(iii\) The probable amount of court costs and attorney\'s fees which
may be assessed against the Government if it is unsuccessful in
litigation, [or]{.underline}

## 8 

§1956.124(d) (Con.) RD Instruction 1956-C

\(3\) When the cost of collecting the debt does not justify enforced
collection of the full amount. In such cases, the amount accepted in
compromise or adjustment may reflect an appropriate discount for
administrative and litigious costs of collection. Such discount will not
exceed \$600 unless the OGC advises that in the particular case a larger
discount is appropriate. The cost of collecting may be a substantial
factor in settling small debts but normally will not carry great weight
in settling large debts.

§1956.125 - 1956.129 \[Reserved\]

§1956.130 [Cancellation]{.underline}.

Nonjudgment debts, regardless of the amount, may be cancelled with or
without application by the debtor.

\(a\) [With application by debtor]{.underline}. Debts may be cancelled
upon application of the debtor(s), or if the debtor is an individual and
unable to act, upon application of the guardian, executor, or
administrator of the debtor\'s estate. The following conditions apply:

\(1\) The servicing official furnishes a favorable recommendation
concerning the cancellation, and

\(2\) There is no known security for the debt and the debtor has no
other assets from which the debt could be collected, and

\(3\) The debtor is unable to pay any part of the debt and has no
reasonable prospect of being able to do so, and

\(4\) The debt or any extension thereof is due and payable under the
terms of the note or other instrument, or because of acceleration by
written notice prior to the date of application.

\(b\) [Without application by debtor]{.underline}. Debts may be
cancelled upon a favorable recommendation of the servicing official in
the following instances:

\(1\) [Debtors discharged in bankruptcy]{.underline}. If there is no
security for the debt, debts discharged in bankruptcy shall be cancelled
by the use of Form RD 1956-1 with a copy of the Bankruptcy Court\'s
Discharge Order attached. No attempt will be made to obtain the
debtor\'s signature and County Committee review is unnecessary. If the
debtor has executed a new promise to pay prior to discharge and has
otherwise accomplished a valid reaffirmation of the debt in accordance
with advice from OGC, the debt is not discharged.

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## (Revision 1)

(4-20-88) PN 82

RD Instruction 1956-C

§1956.130(b) (Con.)

\(2\) [Impossible or impractical to obtain debtor\'s
signature]{.underline}. Debts may be cancelled if it is impossible or
impractical to obtain a signed application and the requirements of
§1956.130(a) (1), (2), and (3) [only]{.underline} of this subpart are
met. Form RD 1956-1 will document:

\(i\) The sources of information obtained. (Revised 5-18-88, PN 85)

\(ii\) That a current effort was made to obtain the debtor\'s
application and the date of such effort. (Revised 5-18-88, PN 85)

\(iii\) The specific reasons why it was impossible or impracticable to
obtain the signature of the debtor and, if the debtor refused to sign,
the reason(s) given. (Revised 5-18-88, PN 85)

\(3\) [Deceased debtors (individuals only)]{.underline}. The following
conditions must exist:

\(i\) There is no known security,

\(ii\) An administrator or executor has not been appointed to settle the
debtor\'s estate but the financial condition of the estate has been
investigated and it has been established that there is no reasonable
prospect of recovery, [or]{.underline}

\(iii\) An administrator or executor has been appointed to settle the
estate of the debtor, and

\(A\) A final settlement has been made and confirmed by the probate
court and the Government\'s claim was recognized properly and the
Government has received all funds it was entitled to, or

\(B\) A final settlement has not been made and confirmed by the probate
court, but there are no assets in the estate from which there is any
reasonable prospect of recovery, or

\(C\) Regardless of whether a final settlement has been made, there were
assets in the estate from which recovery might have been effected but
such assets have been disposed of or lost in a manner which the OGC
advises will preclude any reasonable prospect of recovery by the
Government.

## 10

## (Revision 1) 

RD Instruction 1956-C

§ 1956.130(b) (Con.)

\(4\) [Disappeared debtor (individuals only)]{.underline}. The following
conditions must exist:

\(i\) The debtor has disappeared and cannot be found without undue
expense. Reasonable efforts either in person or in writing will be made
to locate the debtor. These efforts, including the names and dates of
contacts, and the information furnished by each person, will be fully
documented on Form\
RD 1956-1,

\(ii\) There is no known security for the debt and the debtor has no
other assets from which the debt could be collected, and

\(iii\) The debtor is unable to pay any part of the debt and has no
reasonable prospect of being able to do so.

§ 1956.131 - 1956.135 \[Reserved\]

§ 1956.136 [Chargeoff]{.underline}.

\(a\) [Judgment debts]{.underline}. Subject to the provisions of §
1956.112(d) of this subpart, judgment debts, regardless of the amount,
may be charged off without the debtor\'s signature upon a favorable
recommendation of the servicing official provided:

\(1\) The United States Attorney\'s file is closed, and

\(2\) The requirements of § 1956.130(b)(l), (2), (3), or (4) of this
subpart have been met, as appropriate, or two years have elapsed since
any collections were made on the judgment and the debtor(s) has no
equity in property on which the judgment is a lien or on which it can
presently be made a lien.

\(b\) [Nonjudgment debts]{.underline}. Debts which cannot be settled
under other sections of this subpart may be charged off without the
debtor\'s signature upon a favorable recommendation of the servicing
official in the following instances:

\(1\) When the OGC advises in writing that the claim is legally without
merit, or that evidence necessary to prove the claim in court cannot be
produced.

\(2\) When there is no known security for the debt, the debtor has no
other assets from which the debt could be collected, and the debtor:

\(i\) Is unable to pay any part of the debt and has no reasonable
prospect of being able to do so, or

## 11

## (Revision 2)

(4-20-88) PN 82

RD Instruction 1956-C

§ 1956.136(b)(2) (Con.)

\(ii\) Is able to pay part or all of the debt but refuses to do so, and
an opinion is received from OGC to the effect that the Government cannot
enforce collection of a significant amount from assets or income.

\(3\) When the debtor is deceased (individuals only), disappeared
(individuals only), or when it is impossible or impractical to obtain
the debtor\'s signature, and the conditions of\
§ 1956.136(b)(2) of this subpart are met.

§ 1956.137 \[Reserved\]

§ 1956.138 [Processing]{.underline}.

\(a\) [Approval]{.underline}. When a debt settlement application is
approved, the State Director will:

\(1\) Send the original approved Form RD 1956-1 to the Finance Office.

\(2\) Notify debtors in writing of settlement approval, including the
specific amount and terms of the offer that were accepted, for
compromise and adjustment offers under § 1956.124 and cancellations with
application under § 1956.130 (a) of this subpart.

\(3\) Not be required to notify debtors of settlement approval when
debts are cancelled without application under § 1956.130 (b) or charged
off under § 1956.136 of this subpart.

\(b\) [Requesting additional information]{.underline}. When rejection
appears to be necessary either because of lack of information or because
the amount of a compromise or adjustment offer is inadequate, the State
Director may request the servicing official to obtain the additional
information or make an effort to obtain a more acceptable offer, as the
circumstances justify. Notice of rejection of an offer will be withheld
in such cases until sufficient time has elapsed to enable the debtor to
present further information or a new offer.

\(c\) [Rejection]{.underline}. When a debt settlement application is
rejected, the State Director will:

\(1\) Insert the reasons for rejection on the Form RD 1956-1.

## 12

## (Revision 2) 

RD Instruction 1956-C

§ 1956.138(c) (Con.)

\(2\) Retain the original Form RD 1956-1 in the State Office and return
case files and copies of Form RD 1956-1 to the servicing official.

\(3\) Request the Finance Office to return any adjustment or compromise
payment held by the Finance Office to the borrower, in care of the
servicing official.

## 12A

## (Revision 2)

(04-20-88) PN 82

§1956.138 (c) (Con.) RD Instruction 1956-C

\(4\) Return any adjustment or compromise payment held by the State
Office to the borrower, in care of the servicing official.

\(5\) Notify the debtor in writing of the reasons for the rejection for
compromise and adjustment offers under §1956.124 and cancellations with
application under §1956.130 (a) of this subpart.

\(d\) [Appeal rights]{.underline}. In accordance with Subpart B of Part
1900 of this chapter, the debtor will be given the right to appeal the
rejection of any debt settlement offer made by the debtor under this
subpart.

§1956.139 [Collections]{.underline}.

\(a\) When the debtor offers a lump-sum payment in compromise or an
initial payment on an adjustment offer, that payment will accompany the
settlement application at the time the application is filed with the
servicing official.

\(b\) Except as provided in paragraph (c) of this section, debt
settlement payments will be deposited and transmitted as required in
Subpart B of Part 1951 of this chapter.

\(c\) Checks or check transmittal letters containing restrictive
notations such as \"Settlement in full\" or \"Payment in full,\" will be
forwarded to the State Office where they will be retained until approval
or rejection of the offer. The use of restrictive notations will be
discouraged to the fullest extent possible.

\(d\) All payments evidenced by Form RD 451-2, \"Schedule of
Remittances,\" bearing the legend \"Compromise Offer - Rural
Development\" or \"Adjustment Offer - Rural Development,\" will be held
in the Deposits Fund Account by the Finance Office until notification is
received from the State Office of the approval or rejection of the
offer.

\(1\) Upon receipt of an approved Form RD 1956-1, remittances will be
applied in accordance with established policies, beginning with the
oldest loan included in the settlement, except that when the request for
settlement includes loans made from different revolving funds, the
Finance Office will prorate the amount received on the basis of the
total principal balance due the respective revolving funds.

\(2\) Upon notification of a rejection of a debtor\'s offer and receipt
of a request from the State Director for a refund, the Finance Office
will refund to the debtor, in care of the servicing official, the amount
held in the Deposits Fund Account.

## 13

## (Revision 1)

(4-20-88) PN 82

RD Instruction 1956-C

§1956.139 (Con.)

\(e\) When a debtor\'s adjustment offer is approved, the accounts
involved will not be adjusted in the records of the Finance Office until
all payments have been made. Form RD 1956-1 will be held in a suspense
file pending payment of the full amount of the approved offer.

\(f\) If an approved debt settlement agreement is later voided by the
State Director in accordance with §1956.142 (e) of this subpart, any
payments which have been received shall be retained as payments on the
debt owed at the time the compromise or adjustment offer was approved.

§§1956.140 - 1956.141 \[Reserved\]

§1956.142 [Delinquent adjustment agreements]{.underline}.

\(a\) The servicing official is responsible for notifying debtors in
advance of the due dates of payments on debt settlement agreements and
for monitoring compliance with the terms of settlement agreements. If a
payment is delinquent, the servicing official should contact the debtor
promptly to determine the reason for the delinquency and the debtor\'s
plan for completing the agreement.

\(b\) Delinquencies of 30 days or more will be reported to the State
Director along with other pertinent information and the recommendation
of the servicing official regarding further handling of the case.

\(c\) The State Director may extend, for ninety days, the time for
making the payments when the circumstances of the case justify an
extension. Extensions for a greater period of time may be made by the
State Director upon the recommendation of the County Committee and the
servicing official.

\(d\) When the debtor is financially unable to meet the terms of the
debt settlement agreement, the State Director may void the existing
agreement and process a new settlement more consistent with the
debtor\'s repayment ability, provided the facts in the case justify such
action.

\(e\) If the State Director determines that the debtor cannot or will
not meet the terms of the settlement agreement and if the facts do not
justify approval of a new settlement agreement, the State Director will
void the existing agreement and direct the servicing official to take
other servicing actions appropriate to the circumstances of the case.

\(f\) When an adjustment agreement is voided, the State Director will
notify the debtor giving the reasons in writing, with a copy to the
Finance Office and to the servicing official. Upon receipt, the Finance
Office will return the original Form RD 1956-1 to the State Office.

## 14

## (Revision 1) 

RD Instruction 1956-C

§ 1956.143 [Debt restructuring - hospitals and health care
facilities]{.underline}. (Added 09-07-94, PN 232.)

This section pertains exclusively to delinquent Community Facility
hospital and health care facility loans. Those facilities which are
Nonprogram (NP) loans as defined in § 1951.203(f) of Subpart E of Part
1951 of this chapter are excluded. The purpose of debt restructuring is
to keep the hospital or health care facility in operation with
manageable debt.

\(a\) [Definitions]{.underline}. As used in this section, the following
definitions apply:

[Consolidation]{.underline}. The combining of two or more debt
instruments into one instrument, normally accompanied by reamortization.

[Debt writedown]{.underline}. A one-time reduction of the debt owed to
Rural Development including principal and interest. This reduction will
be the minimum amount necessary to meet the level of the facility\'s
ability to service the debt. The writedown will be applied first to
interest and then principal.

[Delinquency due to circumstances beyond the control of the
debtor]{.underline}. Includes situations such as: The debtor has less
money than planned due to unexpected and uncontrollable events such as
unexpected loss of service area population, unforeseeable costs incurred
for compliance with State or Federal regulatory requirements, or the
loss of key personnel.

[Delinquent debtor]{.underline}. For purposes of this section,
delinquency is defined as being 180 days behind schedule on the Rural
Development payments. That is, one full annual installment, or the
equivalent for monthly, quarterly, or semiannual installments.

[Eligibility]{.underline}. Applicants must be delinquent due to
circumstances beyond their control and have acted in good faith by
trying to fulfill the agreements with Rural Development in connection
with the delinquent loans.

[Interest rate reduction]{.underline}. The reduction of interest rate on
the restructured loan to as low as the poverty line interest rate in
effect on Community and Business Programs loans.

[Loan deferral]{.underline}. The temporary delay of principal and
interest payments for up to 6 months. The debtor must be able to
demonstrate the ability to pay the debt, as restructured, at the end of
this delay period.

## 15

## (Revision 4)

(4-20-88) PN 82

RD Instruction 1956-C

§ 1956.143(a) (Con.)

[Net recovery value]{.underline}. A calculation of the net value of the
collateral and other assets held by the debtor. This value would be
determined by adding the fair market value of Rural Development\'s
interest in any real property pledged as collateral for the loan, plus
the value of any other assets pledged or otherwise available for the
repayment of the debt, minus the anticipated administrative and legal
expenses that would be incurred in connection with the liquidation of
the loan. This value of the assets should be calculated based upon the
facility continuing to operate as a going concern. Therefore, the
facility should be valued not merely as an empty building, but as a
facility continuing to offer health care services which may, or may not,
be similar to that offered by the current operators.

[Operations review]{.underline}. A study of management and business
operations of the facility by an independent expert. For example, a
study of a hospital and nursing home would include such areas as:
general and administrative, dietary, housekeeping, laundry, nursing,
physical plant, social services, income potential, Federal, State, and
insurance payments, and rate analysis. Also, recommendations and
conclusions are to be included in the study which would indicate the
creditworthiness of the facility and its ability to continue as a going
concern. In analyzing a debtor\'s proposed restructuring plan, Rural
Development may contract for the completion of an operations review.
These reviews will be developed by individuals and entities who have
demonstrated an expertise in the analysis of health care facilities from
an operational and administrative standpoint. Rural Development will
consider the following criteria for selection: past experience in health
care facility analysis, a familiarity with the problems of rural health
care facilities, a knowledge of the particular area currently served by
the facility in question, and a willingness to work with both Rural
Development and the debtor in developing a final plan for restructuring.

[Restructured loan]{.underline}. A revision of the debt instruments
including any combination of the following: writing down of accumulated
interest charges and principal, deferral, consolidation, and adjustment
of the interest rates and terms, usually followed by reamortization.

\(b\) [Debtor notification]{.underline}. All servicing actions permitted
under Subpart E of Part 1951 of this chapter are to be exhausted prior
to consideration for debt restructuring under this section. To this end,
the servicing official must ensure that the case file clearly documents
that all servicing actions under Subpart E of Part 1951 of this chapter
have been exhausted and that the debtor is at least 1 full year\'s debt
service behind schedule for a minimum of 180 days. The debtor then
should be informed of the debt restructuring available under this
section by using language similar to that provided in Guide 1 of this
subpart (available in any Rural Development office) as follows:

## 16

## (Revision 4) 

RD Instruction 1956-C

§ 1956.143(b) (Con.)

\(1\) An introductory paragraph;

\(2\) A paragraph concerning prior servicing attempts;

\(3\) A discussion of eligibility, as defined in this section, including
the provision that the debtor acted in good faith in connection with
their Rural Development loan and that the delinquency was caused by
circumstances beyond their control;

\(4\) Two paragraphs that explain the goal of the debt restructuring
program;

\(5\) A paragraph stating that debt restructuring may include a
combination of servicing actions listed in paragraph (a) of this
section;

\(6\) Information that details what the debtor must do to apply for
restructuring. A response must be received within 45 days of receipt of
this letter to request consideration for debt restructuring and the
request must include projected balance sheets, budgets, and cash-flow
statements, which include and clearly identify funding of the Rural
Development reserve account for the next 3 years;

\(7\) A discussion of Rural Development\'s analysis and calculation
process; and

\(8\) A paragraph identifying the Rural Development official who may be
contacted for assistance.

\(c\) [State Director\'s restructuring determination]{.underline}. Upon
receipt of the delinquent debtor\'s request for debt restructuring
consideration, the State Director will:

\(1\) Within 15 days of receipt of debtor\'s request, if an operations
review is deemed necessary, send a memorandum to the Administrator
asking for authority to contract for the review in accordance with
Exhibit D of RD Instruction 2024-A (available in any Rural Development
office). The name of the debtor involved and projected amount of funds
anticipated to be spent for the contract should also be provided. It is
anticipated that an operations review will be necessary in most cases
and that the only exceptions would be for smaller health care facilities
or facilities that have developed a proposed plan that is comprehensive
and realistic. Upon receipt of the Administrator\'s program contracting
approval authority, a contract is to be awarded to an organization
qualified to perform an operations review, as defined in paragraph (a)
of this section. The operations review normally will be completed and
delivered to Rural Development within 60 days of the award date.

## 17

## (Revision 1)

(4-20-88) PN 82

RD Instruction 1956-C

§1956.143 (c) (Con.)

\(2\) Contract for an appraisal to be performed by an independent,
qualified fee appraiser. Note: To the extent possible, the appraisal
should be scheduled for completion no later than the completion date of
the operations review.

\(3\) Complete an analysis of the operations review, appraisal, and
other documented information, and make an eligibility determination.

\(i\) [Eligibility determination]{.underline}. The State Director must
conclude that the debtor is eligible for debt restructuring
consideration. This conclusion will be clearly documented in the case
file, based on a review of the following:

\(A\) The debtor acted in good faith with regard to the delinquent loan.
The case file must reflect the debtor\'s cooperation in exploring
servicing alternatives. The case file should contain no evidence of
fraud, waste, or conversion by the debtor, and no evidence that the
debtor violated the loan agreement or Rural Development regulations.

\(B\) The delinquency was caused by circumstances beyond the control of
the debtor. This determination will be based on the debtor\'s narrative
on this issue, which is a required part of the application for debt
restructuring, and a separate review of the debtor\'s case file and
operations.

\(C\) As part of the application for debt restructuring, the debtor
submitted a proposed operating plan that presents feasible alternatives
for addressing the delinquency.

\(ii\) [Debtor determined eligible]{.underline}. If the debtor is
determined to be eligible for debt restructuring, a determination of a
net recovery value and level of debt the facility will support will be
made. It is anticipated that meetings with the debtor, the contractor
who performed the operations review, and others, as appropriate, could
be necessary to develop these values; although it should be emphasized
throughout these meetings that any calculations and conclusions reached
are preliminary in nature, pending final review by the Administrator.
For debt restructuring calculations and computing a feasible cash-flow
projection, the following order and combinations of loan servicing
actions will be followed:

## 18

## (Revision 1) 

RD Instruction 1956-C

§ 1956.143(c)(3)(ii) (Con.)

\(A\) Loan deferral for up to 6 months.

\(B\) Interest rate reduction to not less than the poverty line interest
rate as determined by RD Instruction 440.1, exhibit B (available in any
Rural Development Office). Interest rate reduction will be considered
only in conjunction with an extension of the term of the loan to the
remaining useful life of the facility or 40 years, whichever is less.

\(C\) Debt writedown. Other creditors of the debtor, representing a
substantial portion of the total debt, are expected to participate in
the development of a restructuring plan which includes debt writedown.
Debt writedown participation by other creditors should be on a pro rata
basis with the Rural Development writedown. However, failure of these
creditors to agree to participate in the plan shall not preclude the use
of principal and interest writedown by Rural Development if it is
determined that this option results in the least cost to the Federal
Government.

\(iii\) [Debtor determined ineligible]{.underline}. If the State
Director concludes that the debtor is not eligible for debt
restructuring consideration for any of the reasons listed in paragraph
(c)(3)(i) of this section, then the debtor will be notified by a letter
that includes the following information:

\(A\) The basis for the determination;

\(B\) The next step in servicing the loan: possible acceleration if the
delinquency is not cured; and

\(C\) The debtor may appeal this determination in accordance with
Subpart B of Part 1900 of this chapter.

\(iv\) [State Director\'s recommendation]{.underline}. Upon completion
of the determination of net recovery value and restructured debt in
accordance with paragraph (c)(3)(ii) of this section and prior to formal
presentation to the borrower, the State Director will forward a
recommendation to the National Office with the following documentation:

\(A\) That all other servicing efforts have been exhausted as required
in paragraph (b) of this section.

## 19

## (Revision 1)

(4-20-88) PN 82

RD Instruction 1956-C

§ 1956.143(c)(3)(iv) (Con.)

\(B\) Financial statements including balance sheets, income and expense,
cash-flows for the most recent actual year, and projections for the next
3 years. The amount of Rural Development\'s restructured debt and
reserve account requirements are to be clearly indicated on the
projected statements. Also, operating statistics, including number of
beds, patient days of care, outpatient visits, occupancy percentage,
etc., for the same periods of time must be included.

\(C\) Copies of the operations review, developed for the particular
loan, and appraisal.

\(D\) Calculations of the net recovery value.

\(E\) Debt restructuring calculations including a listing of the various
servicing combinations used in these calculations as contained in
paragraph (c)(3)(ii) of this section. For example:

([1]{.underline}) Interest rate reduced from the applicant\'s current
rate on all loans to the poverty line rate as determined by RD
Instruction 440.1, exhibit B (available in any Rural Development Office)
and

([2]{.underline}) Extension of the terms from 25 to 30 years.

\(F\) Information concerning discussions with the debtor and their
agreement or disagreement with the calculations and recommendations.

\(G\) If debt restructuring is proposed:

([1]{.underline}) A draft of Form RD 3560-15, if applicable, and any
other necessary comments or requirements that may be required by OGC and
Bond Counsel in §1951.223 (c)(3) and (4) of Subpart E of Part 1951 of
this chapter.(Revised 02-24-05, SPECIAL PN.)

([2]{.underline}) A draft of Form RD 1956-1, if applicable. Complete
only Parts I, II, VI, and VIII. Part VI, \"Debtor\'s Offer and
Certification,\" will be made in a separate attachment and contain the
adjusted unpaid principal amount for which Rural Development approval is
requested. In Part VI of the form, type \"see attached.\"

## 20

## (Revision 1) 

RD Instruction 1956-C

§ 1956.143(c)(3)(iv) (Con.)

\(H\) If the proposed restructured debt will not cash-flow or is less
than the net recovery value, omit the items in paragraph (c)(3)(iv)(G)
of this section.

\(d\) [National Office processing of State Director\'s
request]{.underline}.

\(1\) After reviewing the recommendation to either debt restructure or
liquidate for the net recovery value, the Administrator, after
concurring, modifying, or not concurring in the recommendation, will
return the submission for further processing.

\(2\) If a debt writedown is used in the restructuring process, the
amount will be included in the National Office transmittal memorandum.
The [draft]{.underline} Form RD 1956-1 will not need to be finalized and
returned to the Administrator for signature. The State Director\'s
signature on the final copy will be sufficient. However, a copy of the
National Office memorandum is to be attached to the form when completed.

\(e\) [Debtor notification of debt restructuring and net recovery value
calculations]{.underline}. The State Director will provide a copy of the
basis for the debt restructuring or net recovery determination to the
debtor.

\(1\) If the value of the restructured loan is equal to, or greater
than, the recovery value, the debtor will be made an offer to accept the
restructured debt by using language similar to that provided in Guide 2
of this subpart (available in any Rural Development Office) and
including the following paragraphs:

\(i\) An introductory paragraph indicating that Rural Development has
concluded its consideration of the debtor\'s request;

\(ii\) A paragraph indicating Rural Development\'s approval of the debt
restructuring request and that acceptance must be received by Rural
Development within 45 days from receipt of this letter; and

\(iii\) That the debtor\'s acceptance will require the execution of a
Shared Appreciation Agreement similar to Guide 4 of this subpart
(available in any Rural Development office) and possible new debt
instruments accompanied by Bond Counsel opinions.

\(2\) If the debt analysis calculations indicate that a restructured
debt would be less than the net recovery value of the security, a letter
using language similar to that provided in Guide 3 of this subpart
(available in any Rural Development Office), will be sent to the debtor
that includes the following paragraphs:

## 21

## (Added 09-07-94, PN 232)

(4-20-88) PN 82

RD Instruction 1956-C

§ 1956.143(e)(2) (Con.)

\(i\) An introductory paragraph indicating that Rural Development has
concluded its consideration of the debtor\'s request;

\(ii\) Paragraphs indicating that:

\(A\) The debtor may pay Rural Development the net recovery value of the
loan. The debtor will be given 30 days from receipt of this letter to
inform RD of its intent, 90 days to finalize the payoff, and will be
notified that an election to pay off Rural Development would require the
execution of a Net Recovery Buy Out Recapture Agreement, similar to that
provided in Guide 5 of this subpart (available in any Rural Development
office) or

\(B\) If the debt is not paid off at the net recovery value, Rural
Development will proceed to liquidate the loan.

\(f\) [Debtor responses to debt restructuring and net recovery value
calculations]{.underline}. Responses from the debtor will be handled as
follows:

\(1\) [Acceptance of Rural Development\'s restructured debt
offer]{.underline}. When a debtor accepts the offer for debt
restructuring, processing will be in accordance with § 1951.223(c) of
Subpart E of Part 1951 of this chapter using the adjusted unpaid
principal and outstanding accrued interest at the Administrator\'s
approved interest rate and terms. The debtor will be required to execute
a Shared Appreciation Agreement which will provide that, should the
debtor sell or transfer title to the facility within the next 10 years,
Rural Development is entitled to a portion of any gain realized. This
agreement will include language similar to that found in Guide 4 of this
subpart (available in any Rural Development Office). The original of
Form RD 1956-1, with appropriate attachments signed by the State
Director, and a copy of the Shared Appreciation Agreement will be sent
to the Finance Office. Note: All documents pertaining to this
transaction will be sent to the Finance Office in one single complete
package; and (Revised 01-07-05, SPECIAL PN.)

\(2\) [Acceptance by debtor to pay off loan at the recovery
value]{.underline}. Processing of this transaction will be in accordance
with §1956.124 of this subpart. However, the account does not need to be
accelerated. The debtor will be required to execute a Net Recovery Buy
Out Recapture Agreement, similar to that found in Guide 5 of this
subpart (available in any Rural Development Office). The original of
Form RD 1956-1, with appropriate attachments signed by the State
Director, and a copy of the recorded Net Recovery Buy Out Recapture
Agreement will be sent to the Finance Office. The executed Net Recovery
Buy Out Recapture Agreement will be recorded in the county in which the
facility is located. The Finance Office will credit the

## 22

## (Added 09-07-94, PN 232) 

RD Instruction 1956-C

§1956.143 (f)(2) (Con.)

accounts of debtors who entered into Net Recovery Buy Out Recapture
Agreements with the amount paid by the debtor (net recovery value).
Note: All documents pertaining to this transaction will be sent to the
Finance Office in one single complete package.

\(g\) [Collection and processing of recapture]{.underline}.

\(1\) When the servicing Agency becomes aware of the sale or transfer of
title to the facility on which there is an effective Net Recovery Buy
Out Recapture Agreement (Guide 5 of this subpart available in any Agency
office) or a Shared Appreciation Agreement (Guide 4 of this subpart
available in any Agency office) outstanding and a determination is made
that a recapture is appropriate, the servicing Agency will notify the
debtor of the following:

\(i\) Date and amount of recapture due, and

\(ii\) Action to be taken if debtor does not respond within the
designated timeframe with the amount of recapture due.

\(2\) When the recapture is received, the payment will be processed on
Form RD 451-2 as a miscellaneous collection in accordance with Subpart B
of Part 1951 of this chapter. The Form RD 451-2 along with a copy of the
Net Recovery Buy Out Recapture Agreement (Guide 5 of this subpart
available in any Agency office) or Shared Appreciation Agreement (Guide
4 of this subpart available in any Agency office), as appropriate, will
be forwarded to the Finance Office.

\(3\) When the amount of the recapture has been paid and credited to the
debtor\'s account, the debtor will be released from liability by using
Form RD 1965-8 \"Release from Personal Liability,\" modified as
appropriate.

\(h\) [No recapture due]{.underline}. If the servicing Agency determines
there is no recapture due, the Net Recovery Buy Out Recapture Agreement\
(Guide 5 of this subpart available in any Agency office) or Shared
Appreciation Agreement (Guide 4 of this subpart available in any Agency
office) will be appropriately annotated, the Recapture Agreement
released from the record, and the Agreement returned to the debtor.

§1956.144 \[Reserved\]

## 23

## (Revision 1)

(04-20-88) PN 82

RD Instruction 1956-C

§1956.145 [Disposition of essential Agency records]{.underline}.

RD Instruction 2033-A (available in any Agency office), identifies an
\"essential Agency record\" as the original of any document or record
which provides evidence of indebtedness or obligation to a USDA Agency
and includes, but is not limited to: promissory notes, assumption
agreements and valuable documents, such as bonds fully registered as to
principal and interest.

\(a\) Essential Agency records evidencing debts settled by compromise,
completed adjustment or cancelled with application will be returned to
the debtor or to the debtors\' legal representative. The appropriate
legend, such as \"Satisfied by Approved Compromise,\" and the date of
the final action will be stamped or typed on the original document. This
same information plus the date the original document is returned to the
debtor will be shown on a copy to be placed in the debtor\'s case
folder.

\(b\) Essential Agency records evidencing debts cancelled without
application will be placed in the debtor\'s case folder and disposed of
pursuant to RD Instruction 2033-A (available in any Agency office).
However, if the debtor requests the document(s), they may be stamped
\"Satisfied by Approved Cancellation\" and returned.

\(c\) Essential Agency records evidencing charged off debts will be
retained in the servicing office and will not be stamped or returned to
the debtor. They will be destroyed six years after chargeoff pursuant to
RD Instruction 2033-A (available in any Agency office).

§1956.146 [Reporting to the Internal Revenue Service
(IRS)]{.underline}.\
(Revised 05-31-95, PN 246.)

Pursuant to a requirement of the Internal Revenue Service (IRS), RHCDS,
RBCDS, RUS, and CFSA will report to the IRS debts which have been
determined to be uncollectible. After reporting the debt to IRS, no
further efforts to collect the debt will be made. The Finance Office
will report to the IRS on IRS Form 1099-C, \"Cancellation of Debt,\" any
debt settled through cancellation, compromise, or adjustment.

§1956.147 [Debt settlement under the Federal Claims Collection
Act]{.underline}. (Added 7-25-90, PN 140.)

The U.S. Department of Justice (DOJ) and the General Accounting Office
are charged with the responsibility for implementing the Federal Claims
Collection Act and have promulgated the Federal Claims Collection Act
Joint Standards (FCCAJS) (4 CFR Parts 101-105) to inform Government

## 24

## (Revision 1) 

RD Instruction 1956-C

§1956.147 (Con.)

Agencies on how to settle debts and claims which the Agency does not
have independent statutory authority to settle. With the exception of
loans and claims with outstanding balances of \$20,000 or less,
exclusive of interest, penalties, and administrative costs, settlements
must be submitted to and approved by the United States Attorney or the
DOJ. Debt settlement of Economic Opportunity Cooperative loans, Claims
Against Third Party Converters, Nonprogram loans, Industrial Development
Grants, Rural Development Loan Fund loans, Intermediary Relending
Program loans, Nonprofit National Corporation Loans and Grants, and 601
Energy Impact Assistance Grants are programs that must be settled under
the FCCAJS.

\(a\) Debt settlement of the subject loans and claims falls in the
following categories:

\(1\) Settlement of loans and claims may be approved by the
Administrator when the outstanding balance of the indebtedness involved
in the settlement is \$20,000 or less, exclusive of interest, penalties,
and administrative costs. These loans and claims will be submitted to
the National Office on Form\
Rural Development 1956-1, \"Application for Settlement of
Indebtedness,\" for debt settlement. Subsequent to approval, Form RD
1956-1 will be distributed in accordance with the Forms Manual Insert
(FMI).

\(2\) Loans and claims with an outstanding balance of \$200,000 or less,
inclusive of interest, penalties, and administrative costs, but with an
outstanding balance greater than \$20,000, exclusive of interest,
penalties, and administrative costs, after approval by the State
Director will be referred to your Regional Office of the General Counsel
(OGC) for referral to the United States Attorney in whose judicial
district the debtor can be found. The form to be used is the Claims
Collection Litigation Report (CCLR). This form should be available
through the U.S. Attorney. A memorandum from the State Director should
be attached to the CCLR recommending acceptance of the debt settlement.
If the State Director after reviewing the CCLR does not recommend
acceptance, the State Director has the authority to reject the debt
settlement.

\(3\) Loans and claims with an outstanding balance over \$200,000,
inclusive of interest, penalties, and administrative costs, will be
referred to the Administrator and will include the following:

\(i\) The case file(s).

\(ii\) A completed CCLR.

\(iii\) Copies of the notes, security agreements, and mortgages.

## 25

## (Added 09-07-94, PN 232)

(4-20-88) PN 82

RD Instruction 1956-C

§1956.147 (a)(3) (Con.)

\(iv\) A current appraisal of any security owned by the debtor.

\(v\) A narrative which will include:

\(A\) Recommendation for the acceptance of the debt settlement.

\(B\) Why the debtor failed.

\(C\) Steps taken to collect the loan(s).

\(D\) An analysis of the debtor\'s future repayment ability.

\(E\) Why acceptance of the debt settlement offer is in the best
interest of the Government.

\(4\) If the administrator concurs with the recommendation for the debt
settlement, it will be referred to the Rural Development National Office
OGC for referral to the Commercial Litigation Branch, Civil Division,
U.S. Department of Justice, Washington, D.C. 20530.

\(b\) When a debtor has a Community Programs or Business and Industry
loan(s) as defined in this subpart, these loan(s) will be debt settled
under the authority of the Consolidated Farm and Rural Development Act.
In such cases, the subject loans and claims should be listed under Part
II(B) on Form RD 1956-1 as other debts owed Rural Development. Normally,
all the security for the subject loans and claims should be disposed of
prior to the submission for debt settlement.

\(c\) It is not necessary to obtain approval of the United States
Attorney or the DOJ (as the case may be) in cases where Rural
Development decides not to settle a loan or claim.

§1956.148 [Exception authority]{.underline}.

The Administrator may make an exception to any requirement or provision
of this subpart which is not inconsistent with the authorizing statute
or other applicable law if the Administrator determines that application
of the requirement or provision would adversely affect the Government\'s
interest. Requests for exceptions must be made in writing by the State
Director and supported with documentation to explain the adverse effect
on the Government\'s interest, propose alternative courses of action,
and show how the adverse affect will be eliminated or minimized if the
exception is granted. Any settlement actions approved by the
Administrator under this section will be documented on Form RD 1956-1
and returned to the State Office for submission to the Finance Office.

## 26

## (Added 09-07-94, PN 232) 

RD Instruction 1956-C

§1956.149 \[Reserved\]

§1956.150 [OMB control number]{.underline}.

The collection of information requirements in this regulation have been
approved by the Office of Management and Budget and assigned OMB control
number 0575-0124. Public reporting burden for this collection of
information is estimated to be 1/2 hour to 30 hours with an average of
8.14 hours per response, including the time for reviewing instructions,
searching existing data sources, gathering and maintaining the data
needed, and completing and reviewing the collection of information. Send
comments regarding this burden estimate or any other aspect of this
collection of information, including suggestions for reducing this
burden, to Department of Agriculture, Clearance Officer, OIRM, Ag Box
7630, Washington, D.C. 20250; and to the Office of Information and
Regulatory Affairs, Office of Management and Budget, Washington, D.C.
20503. (Revised 09-07-94, PN 232.)

Attachments: Guides 1, 2, 3, 4, and 5.

## 27

## (Added 09-07-94, PN 232)

(4-20-88) PN 82

RD Instruction 1956-C

Guide 1

## Notice of Availability of Debt Restructuring

## For Delinquent Hospital or Health

## Care Facility Debtors

Dear (Debtor Name):

\(1\) An introductory paragraph, as follows:

\"This notice is to inform you that ([name of debtor]{.underline}) is
seriously behind with its loan payments and to inform you of your
options. Please consider these options carefully. If you wish to be
considered for these options, you must develop and submit to Rural
Development the required documentation within [45]{.underline} days of
receiving this notice.\"

\(2\) A paragraph that outlines prior attempts to service the loan, as
follows:

\"Before ([name of debtor]{.underline}) can be considered for debt
restructuring, you must already have been unsuccessful at alleviating
the delinquency through a variety of servicing alternatives, including
reamortization, third-party agreements, and transfer and assumptions. In
providing information to establish that ([name of debtor]{.underline})
has acted in good faith with regard to Rural Development loans, you must
include the following statement in your request for consideration for
loan servicing:

\`On behalf of ([name of debtor]{.underline}), I certify that a good
faith effort was made to cure the Rural Development loan delinquency
through reamortization, third party agreements, and transfer and
assumptions, but that these efforts to cure the delinquency were
unsuccessful.\'

If you are unaware of these efforts to cure the delinquency, please
contact your Rural Development servicing official listed below, because
debt restructuring cannot be considered until these options are first
eliminated.\"

\(3\) In discussing eligibility, the following should be inserted in the
notice:

\"Before Rural Development can consider your request for debt
restructuring, it must first be established that ([name of
debtor]{.underline}) has acted in good faith with respect to the
delinquent Rural Development loan. Rural Development will make this
determination by analyzing the case file for evidence of fraud, waste,
or conversion, and for evidence that all loan agreements and regulations
were complied with. It must also be established that the delinquency was
caused by circumstances beyond your control. In order to aid in this
determination, please include in your request for debt restructuring a
narrative on the following:

\`The Rural Development loan became delinquent due to the following
circumstances, which were beyond our control:
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_.\'\"

(09-07-94) PN 232

RD Instruction 1956-C

Guide 1

Page 2

\(4\) Two paragraphs that explain the goal of the debt restructuring
program, as follows:

\"If your project is determined eligible for restructuring, a detailed
financial and operational analysis will be required. This analysis will
focus on two value determinations, which will dictate which servicing
options are available. First, an analysis of the facility will be
conducted in order to determine, after Rural Development loan
restructuring, if the facility can operate in an economically viable
manner. Second, the net recovery value of the delinquent loan will be
calculated, based upon the fair market value of the property pledged as
collateral, and any other assets pledged by ([name of
debtor]{.underline}) in consideration for receiving the loan, less the
administrative costs that would be incurred if the loan was liquidated.
This value will be determined, in part, based on an appraisal performed
by an independent qualified fee appraiser as defined in §1956.105 (j) of
this instruction, and paid for by Rural Development.\"

\"Once the analysis is completed, the two values will be compared. If
the restructured debt provides sufficient cash-flow to continue
operations, make the adjusted debt service payments, and fund the Rural
Development reserve account, [and]{.underline} the value of the debt is
greater than the net recovery value of the restructured debt, you will
be given the opportunity to pay off the delinquent loan at the net
recovery value. If you do not pay off at this value, then your account
may be accelerated.\"

\(5\) A paragraph which emphasizes that restructuring options will be
considered according to the following priorities: (1) loan deferral;\
(2) interest rate reduction and extension of the term of the loan; and\
(3) debt writedown. Each of these options will be considered with the
goal of developing a feasible operating plan for the facility.

\(6\) In addition to the statement regarding prior servicing options as
required in paragraph (2) of this guide and the narrative with respect
to the circumstances causing the delinquency, the debtor must also
submit the following:

> Balance sheets, budgets, and cash-flow statements for the next 3 years
> which clearly indicate the amount of cash available to cover some
> restructured amount of Rural Development debt, plus an amount to
> sufficiently fund the Rural Development reserve account.

A proposed operating plan that projects cash-flow sufficient to

support the facility in an economically viable manner.

This proposal should be based on realistic projections and assumptions
and should provide methods for alleviating the circumstances that
initially caused the delinquency. In order to develop a feasible
proposal, significant changes in the current operation may be necessary.
Nevertheless, the proposal should be in sufficient detail so that both
large and small changes are reflected.

RD Instruction 1956-C

Guide 1

Page 3

\(7\) A paragraph that discusses Rural Development\'s analysis and
calculation process, as follows:

\"Once you have submitted all the information requested in this notice,
Rural Development can begin processing your request. This processing
will involve several steps, including the calculation of your debt\'s
net recovery value and a thorough analysis of your facility\'s
operations. Rural Development will start this analysis by reviewing the
proposed operating plan that you submit with your request. In addition
to this, Rural Development may contract for the completion of an
\`operations review.\' This review, as completed by an independent
expert in the operation of health care facilities, could enhance,
supplement, or extend your proposal. Based upon your proposal, the
analysis developed in the operations review and all other relevant
information, including additional consultations with you, Rural
Development will complete the debt restructuring and net recovery value
calculations. You will be notified of the results of these calculations
as soon as they are finalized.\"

\(8\) A paragraph that provides the name and phone number of the Rural
Development official available to answer questions or assist the debtor
as they develop the information needed to request debt restructuring,
and a statement that all of the above information must be submitted
within\
45 days of receipt of this letter.

## oOo

(09-07-94) PN 232

RD Instruction 1956-C

Guide 2

## Notice of Debt Restructuring and

## Net Recovery Value Calculations

## ([Approval of Debt Restructuring]{.underline})

Dear (Debtor Name):

\(1\) An introductory paragraph, as follows:

\"Rural Development has concluded its consideration of ([name of
debtor]{.underline}) request for debt restructuring. Attached, you will
find a detailed analysis of our calculations, including our
determination of the loan\'s restructured value and the net recovery
value.\"

\(2\) A paragraph outlining the results of Rural Development\'s
calculations, and what the debtor must do to accept, as follows:

\"To summarize, we have concluded that Rural Development can approve
your request for debt restructuring. Our calculations indicate that
([name of debtor]{.underline}) will be able to make necessary payments
on the Rural Development loan and fund the Rural Development reserve
account if the delinquent loan is restructured. Therefore, we are
offering to restructure your Rural Development debt in the following
fashion: \_\_\_\_\_\_. If you want Rural Development to restructure
([name of debtor]{.underline}) debt as identified, you must accept this
offer in writing. Your acceptance must be received by Rural Development
not later than 45 days from your receipt of this letter. If you do not
accept this offer, Rural Development will proceed to liquidate the
account.\"

\(3\) A paragraph explaining the procedures, once the debtor accepts, as
follows:

\"Upon receiving your acceptance of the offer to restructure the
delinquent loan, Rural Development will contact you with regard to
formally processing the restructured loan. This may require the
execution of new debt instruments. If the loan to be restructured was
initially accompanied by Bond Counsel opinion, it will be necessary for
you to obtain a new Bond Counsel opinion pertaining to the restructured
loan. In addition to the execution of any necessary revised debt
instruments, you will also be required to execute a Shared Appreciation
Agreement (Guide 4 of this Instruction, available in any Rural
Development Office). This document will specify that, in consideration
of Rural Development writing down your debt, you agree to repay to Rural
Development a portion of any appreciation in the value of the collateral
securing the debt remaining after the writedown if you convey the
collateral in the next 10 years.\"

## oOo

(09-07-94) PN 232

RD Instruction 1956-C

Guide 3

## Notice of Debt Restructuring and 

## Net Recovery Value Calculations

## ([Debt Restructuring Not Approved]{.underline})

Dear (Name of Debtor):

\(1\) An introductory paragraph as follows:

\"Rural Development has concluded its consideration of ([name of
debtor]{.underline}) request for debt restructuring. Attached, you will
find a detailed analysis of our calculations, including our
determination of the loan\'s restructured value and the net recovery
value.\"

\(2\) Paragraphs explaining the options available to the debtor, as
follows:

\"To summarize, we have concluded that Rural Development cannot approve
your request for debt restructuring, because our calculations indicate
that ([name of debtor]{.underline}) would not be able to make necessary
payments on the Rural Development loan and fund the Rural Development
reserve account, even if the delinquent loan was restructured. Since we
cannot approve your request, you may satisfy the loan by paying to Rural
Development the net recovery value of the loan which is
\$\_\_\_\_\_\_\_\_. You have 30 days from the receipt of this letter to
inform RD of your intent to pay off at the net recovery value, and you
have 90 days to finalize this payoff. If you elect to pay off Rural
Development at the net recovery value, you will be required to execute a
Net Recovery Buy Out Recapture Agreement (Guide 5 of this Instruction,
available in any Rural Development Office). This document will specify
that, in consideration of Rural Development allowing you to pay off the
debt at the reduced amount, you agree to repay to Rural Development a
part or all of the difference between the net recovery value and the
fair market value of the collateral securing the loan at the time the
Agreement is executed, if, within 10 years, you convey the collateral
property and realize a gain on such sale.\"

\"If you do not pay off the debt at the net recovery value, Rural
Development will proceed to liquidate the account.\"

## oOo

(09-07-94) PN 232

Instruction 1956-C

Guide 4

## SHARED APPRECIATION AGREEMENT

This Agreement is entered into between Rural Development and ([debtor\'s
name]{.underline}) (called \"debtor\") on
\_\_\_([Date]{.underline})\_\_\_ and expires on \_\_\_
([Date]{.underline})\_\_\_ (maximum term of 10 years).

Debtor is indebted to Rural Development for loan(s) as evidenced by the
debt instruments described below:

[Date]{.underline} [Principal Amount]{.underline} [Interest
Rate]{.underline} [Due Date]{.underline}

This Agreement is attached to the debt instruments described above. As
of the date of this Agreement before writedown, the unpaid principal
balance on these debt instruments was \$\_\_\_\_\_\_\_\_\_\_\_ and the
unpaid interest balance was \$\_\_\_\_\_\_\_\_. These debt instruments
were modified by the following debt instruments which are attached to
the debt instruments described above.

[Date]{.underline} [Principal Amount]{.underline} [Interest
Rate]{.underline} [Due Date]{.underline}

The debt instruments described above are secured by the following real
estate security instruments:

Date of Security Records of Book or

[Grantor]{.underline} [Instrument]{.underline} [County]{.underline}
[State]{.underline} [Reel]{.underline} [Page]{.underline}

As a condition to, and in consideration of, Rural Development writing
down the above amounts and restructuring the loan, debtor agrees to pay
Rural Development an amount according to the following:

Seventy-five (75) percent of any appreciation in the market value of

the property securing the loan as described in the above security

instrument(s) not to exceed the sum of the unpaid principal and

interest balance as of the date of this Agreement and either the

expiration date of this Agreement or the date the debtor pays the

loan in full, or transfers title of the security if such event

occurs 10 years or less from the date of this Agreement.

The amount of recapture by Rural Development will be based on the
difference between the value of the security at the time of disposal by
debtor and the value of the security at the time this Agreement is
entered into. If the debtor violates the term of this Agreement, Rural
Development will liquidate after the debtor has been notified of the
right to appeal.

Market value of the property securing loan(s) \$\_\_\_\_\_\_\_\_\_\_.

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Borrower\'s signature Rural Development

## oOo

(09-07-94) PN 232

RD Instruction 1956-C

Guide 5

## Net Recovery Buy Out

## Recapture Agreement

This Agreement is entered into between Rural Development and ([debtor\'s
name]{.underline}) (called \"debtor\") on ([date]{.underline}) and
expires 10 years from the aforesaid date.

In consideration of Rural Development allowing the purchase of real
estate and/or chattel property financed by an Rural Development loan
obligation at the net recovery value of \$\_\_\_\_\_\_\_ in accordance
with RD Instruction 1956-C, the undersigned agrees to pay 75 percent of
the difference between the net recovery value of the real and/or chattel
property at the time of execution of this document as stated above and
the fair market value of the real and/or chattel property of
\$\_\_\_\_\_\_\_ as of the date the property is sold or title
transferred for a period of 10 years from the date of this Agreement.
The unpaid loan balance is \$\_\_\_\_\_\_\_.

The undersigned understands that the amount calculated above will be due
and payable on the day of sale or conveyance if the real and/or chattel
property is conveyed within 10 years from the date of this Agreement.

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Debtor\'s signature Rural Development

## oOo

(09-07-94) PN 232