HB-3-3560

CHAPTER 12: ACCOUNT 

LIQUIDATION [7 CFR 3560.456]

12.1 INTRODUCTION 

This chapter covers Agency procedures regarding account acceleration, foreclosure, and 

liquidation for projects in default. 

Loan Servicers should offer all appropriate special servicing tools to help borrowers with 

financial problems bring the account current. However, if it is clear that a borrower cannot 

continue with the loan, the Loan Servicer should analyze the feasibility of liquidation options 

and recommend the option that is in the Government’s best interest, defined as the option that 

will result in the greatest net recovery. 

Section 1 of this chapter describes how the Agency determines whether or not to 

liquidate, and if so, which of the available options would be least costly for the Government. 

This section provides a brief catalogue of liquidation options, a discussion of net recovery value 

and basic security loss, and an outline of how decisions to liquidate are ultimately made. 

Section 2 of the chapter contains information on liquidation procedures for voluntary 

liquidation and foreclosure. A discussion about the acquisition of chattel property is also 

included. Section 3 discusses debt settlement. 

SECTION 1: MAKING THE DECISION TO LIQUIDATE 

12.2 AN OVERVIEW OF LIQUIDATION OPTIONS 

When the Agency determines that liquidation is appropriate, it may accelerate the loan. 

The borrower must pay the full account balance and meet the other terms of the loan within the 

prescribed time frame, or the Agency may initiate foreclosure proceedings. Once the loan has 

been accelerated, the Agency will not accept partial payment unless required to do so by State 

law. 

A. Voluntary Liquidation 

1. Voluntary Sale 

Sale of the security property is generally the most desirable option for both the 

Agency and a borrower who is unable to continue the loan. For the Agency, a sale to 

another party avoids the costs of foreclosure, as well as the costs related to owning and 

disposing of a property. For the borrower, it offers the best opportunity for being 

released from the debt without a major credit history blemish. A borrower may sell the 

property to a third party even after the account is accelerated.

If the borrower sells or transfers title of a security property on which the loan has 

been accelerated, the Agency requires payment in full to release any Agency liens or to 

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stop foreclosure action. However, to facilitate a sale after acceleration, the Agency may 

agree to release Agency liens in return for payment of the estimated net recovery value. 

2. Deed in Lieu of Foreclosure 

After the account has been accelerated, the borrower can offer to convey the security 

property to the Agency. The Agency will accept the deed in lieu of foreclosure only if

the Agency will realize a greater net recovery value than would be obtained if foreclosure 

proceedings continued. 

3. Assignment to Junior Lien Holder 

The Agency may assign the note and mortgage to a junior lien holder, if such a lien 

holder makes an offer for the property in the amount of at least the net recovery value, 

and all appeal rights have expired. 

B. Foreclosure 

1. Agency Foreclosure 

When all reasonable efforts have failed to encourage the borrower to voluntarily 

liquidate the loan through sale of the property, deed in lieu of foreclosure, or by entering 

into an accelerated repayment agreement, the Agency may initiate foreclosure 

proceedings.

2. Foreclosure by a Another Lien Holder 

If there is a prior lien holder, the Agency must determine if the prior lien holder 

should have the opportunity to foreclose. Foreclosure by a prior lien holder may be a less 

costly alternative to Agency foreclosure. If the Agency intends to foreclose in cases in 

which there is a prior lien, the Agency must decide either to settle the lien or foreclose 

subject to the lien. 

C. Acquisition of Chattel Property 

The Agency will make determinations regarding disposition of chattel property that 

are in the best interest of the government. The Agency will make every effort to avoid 

acquiring chattel property by having the borrower or Field Office Staff liquidate the 

property. 

12.3 NET RECOVERY VALUE 

Estimated net recovery value represents the amount that the Agency could expect to 

recover from a property if it was liquidated after considering all costs associated with liquidating, 

holding, and selling the property. Attachment 12-A contains a net recovery value worksheet to 

aid in this calculation. Actual net recovery value is the amount the Agency does in fact recover 

from the sale of a property, after accounting for all costs. 

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The following sections provide guidance in estimating net recovery value. 

A. Establishing Market Value 

The market value of the property is the fundamental basis for establishing the 

estimated net recovery value. All calculations undertaken on the net recovery value 

worksheet provide additions or deductions from market value. 

Depending upon the likely method of liquidation and at what point in the process the 

calculation is being made, market value may be based on an estimated value, on an 

appraisal or on the actual sale price. Early in the process of determining which 

liquidation method should be followed, the Loan Servicer may need to make a rough 

estimate of the market value based on any available information. 

B. Environmental Considerations 

The Loan Servicer’s estimate of market value must take into consideration potential 

environmental hazards that may pose a liability issue for the Agency, and the presence of 

environmental resources for which the Agency will have an affirmative responsibility to 

take protective measures once it owns the property. Exhibit 12-1 provides a partial list of

environmental factors for consideration. 

To minimize Agency liability, the Agency must ensure, prior to acquiring property 

through foreclosure, that the property has been examined for potential contamination 

from hazardous substances, hazardous wastes, and petroleum products, including 

underground storage tanks. This should be accomplished by requesting that Field Office 

Staff complete the ASTM Standard E-1528 Transaction Screen Questionnaire, (TSQ). If 

the completed form raises any concerns it should be submitted to the State Environmental 

Coordinator for further evaluation and guidance. 

The Agency also should examine the property prior to acquisition and consider any 

costs associated with environmental resources the Agency might be required to protect. 

For additional information, see RD Instruction 1940-G. 

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Exhibit 12-1 

Environmental Considerations

Environmental Factors 

• Traffic or noise; 

• Hazardous materials or waste; 

• Radon, asbestos, or urea formaldehyde; and 

• Lead-based paint or other lead contaminants. 

Environmental Resources

• Aquifer recharge areas; 

• Coastal barrier resources; 

• Coastal zone management areas; 

• Endangered/threatened species or critical habitat; 

• Floodplains, wetlands, or flood hazard areas; 

• Historical or archaeological sites; 

• Important farmland, prime forestland, or prime rangeland; 

• National landmarks; 

• Wild and scenic rivers; and 

• Wilderness areas. 

C. Ordering an Appraisal 

Guidance about ordering appraisals is presented in Chapter 4 of HB-1-3560. The 

point at which a formal appraisal is actually conducted will vary. 

1. Valueless Lien 

If the Loan Servicer’s estimate suggests that the lien may be valueless, an appraisal 

should be obtained immediately. If the appraisal indicates that the lien is in fact 

valueless, it should be released without incurring servicing costs. 

2. Deed in Lieu of Foreclosure 

If, after acceleration, the borrower offers a deed in lieu of foreclosure, an appraisal 

should be obtained immediately so the Loan Servicer can determine whether it is in the 

government’s interest to accept the deed. 

3. Foreclosure 

If the property will be going to foreclosure, no appraisal should be obtained until 

shortly before the sale is scheduled to take place. In areas where the foreclosure process 

can be lengthy, the value of the property could change before the sale if the appraisal is 

conducted too far in advance. 

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D. Holding Period 

Nearly all costs and income used in the net recovery value calculation are affected by 

the holding period. For estimated net recovery value, the length of the holding period is 

estimated differently, depending on the likely method of disposition. The holding period 

should be estimated as the time between the date the net recovery worksheet is being 

filled out and the anticipated date for:

• Filing of the deed and the expiration of redemption rights (foreclosure); 

• Filing the warranty deed (deed in lieu of foreclosure); 

• Filing the release (release of valueless lien); or

• Payoff and release (debt settlement offer subsequent to acceleration). 

The time for marketing and disposition, if the property is acquired, should also be 

considered when estimating the holding period. 

E. Deductions from Market Value 

Numerous costs associated with liquidation must be considered when determining the 

net recovery value, including the following costs. 

• Prior liens to be paid by the Agency. In a case where a prior lien is involved, the 

amount required to repay the prior lien holder must be included in the calculation; 

• Junior liens to be paid by the Agency. If the Agency pursues foreclosure, junior 

liens are not paid. However, in the case of a deed in lieu of foreclosure, it may be to 

the Agency’s advantage to pay off a junior lien holder. The agency should conduct a 

title search to identify the position and the amount of each lien against the property;

• Selling expenses to be paid by the Agency. All transaction costs involved in selling

the property, including advertising, commissions for selling agents, required seller 

certifications, surveys, points, and closing costs paid by the Agency, whether on 

behalf of the borrower in a voluntary liquidation, or as an Agency expense for a real 

estate owned (REO) sale; 

• Holding costs. During the time that the Agency owns the property, the monthly 

interest accrued is multiplied by the number of months in the holding period; 

• Depreciation during the holding period. The property may depreciate in value 

while it is being held by the Agency; 

• Administrative costs. The administrative burden associated with holding a property 

includes the cost of liquidation, such as attorney fees, filing, recordation, advertising, 

and document service fees, that are customarily incurred in a foreclosure action; and 

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• Management costs. During the period the Agency holds the property it will accrue 

costs related to cleaning, securing, and maintaining the property such as utilities and 

real estate taxes. 

F. Additions to Market Value 

Although most of the adjustments to market value involve deductions to reduce the 

recovery amount, there are a few factors that can increase the market value. 

• Appreciation during the holding period. In markets that are strong, the property 

may appreciate while it is being held by the Agency; and 

• Income during the holding period. In general, the Agency does not lease 

properties. However, REO properties may be leased in limited circumstances, such 

as a property located in an area where keeping the property occupied could greatly 

reduce vandalism, or if there are tenants living in the property whom the Agency does 

not wish to displace. 

12.4 BASIC SECURITY LOSS 

The basic security loss is the difference between the property’s market value and the 

outstanding Agency debt on the property, including principal, and other recoverable costs. 

It is important for the Loan Servicer to consider the basic security loss in determining 

how to work with the borrower. For example, the debt settlement arrangements the Agency 

agrees to might be more lenient in the case of a borrower with a property that lost value through 

no fault of the borrower. This information can be used for portfolio analysis to help the Agency 

originate loans more effectively in the future. 

12.5 ACCOUNT LIQUIDATION 

A. Making the Decision to Liquidate 

In all liquidation cases, the State Director will be responsible for the final decision to 

liquidate the borrower’s account based on advice and counsel from the Office of General 

Counsel (OGC) and the following information supplied by the Loan Servicer: 

• An opinion by the Loan Servicer about whether the borrower is forcing an

acceleration to circumvent the prepayment process; 

• The specific recommendations of the Loan Servicer on the method of carrying out the 

liquidation;

• The case file and any other pertinent information developed in support of the 

accusations; 

• A summary of Agency efforts to work out an acceptable solution short of liquidation; 

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• A current appraisal of the security property will be completed by an Agency official 

authorized to make that particular type of appraisal and an estimate of the net amount 

that may be realized from the sale of the assets; 

• The most recent balance sheet or financial statement from the borrower; 

• A current statement of account from the St. Louis Office; and 

• A problem case report. 

• The Agency will handle liquidation, whether by voluntary liquidation or foreclosure, 

in accordance with the requirements at 7 CFR 3560.456(c) and (d). 

In all liquidation cases, the State Director is responsible for the final decision to 

liquidate the account based on an opinion from OGC and relevant information supplied 

by the Field Office (e.g., case files, summary of efforts to work out an acceptable 

solution, appraisals of the property, borrower’s financial statements and balance sheets, 

specific recommendations). If the Agency determines that the borrower has taken action 

to bring about the acceleration in an effort to avoid the prepayment process, the Agency 

will consider alternatives to acceleration, such as suing for specific performance under 

the loan and management documents. 

B. Possible Outcomes of Agency’s Decision to Liquidate 

If the Agency decides to liquidate, there are several possible outcomes, which are as 

follows: 

• The borrower may cure the default by developing and submit to the Agency for 

approval a workout agreement that proposes actions to be taken over a period of time 

to prevent or correct a default; 

• The borrower can voluntarily convey the property to the Agency; 

• Transfer (sale or transfer and assumption of mortgage); 

• Foreclosure; 

• Payoff with use restriction; or 

• Debt settlement (cash only) for minimum bid or greater.

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SECTION 2: LIQUIDATION PROCEDURES 

12.6 OVERVIEW 

After the Loan Servicer exercises special servicing options and the borrower is still 

unable to continue with the loan, the Loan Servicer must determine the feasibility of liquidating 

the borrower's account. Any recommendation should result in the greatest net recovery to the 

Government. 

The borrower may liquidate voluntarily, either through sale of the property or deed in lieu 

of foreclosure. If it determined that the borrower’s account must be liquidated, the Agency may 

recommend foreclosure and accelerate the loan. 

12.7 VOLUNTARY CONVEYANCE 

After acceleration, borrowers may voluntarily liquidate through deed in lieu of 

foreclosure or an offer by a junior lien holder. In the case of voluntary liquidation, the borrower 

is responsible for all expenses associated with liquidation and acquisition. The Agency will only 

consider acceptance of an offer of voluntary conveyance if it is likely to receive a recovery on its 

investment. The Agency will not accept a voluntary conveyance offer if it is not in the 

Government’s best interest to do so. The Agency should refuse the voluntary conveyance if the 

Agency lien has neither present nor prospective value or recovery of the value would be unlikely 

or uneconomical. 

Voluntary sale of the security property may be the least onerous option for the borrower 

and the least costly option for the Government. If there is an interested buyer, procedures for 

property transfer that should be followed are described in Chapter 7 of this handbook. 

A. Payment of Liens 

If the Agency accepts a deed in lieu of foreclosure, it will pay prior liens if the 

Government’s investment and payment of the lien may be recovered. The Agency will 

accept conveyance subject to prior liens if the lien holder does not object. In this case, 

the Agency will make installment payments on the lien. 

Junior liens must be paid by the borrower. If the borrower does not agree to pay these 

obligations, the Government will do so if it is in its best interest in the long run. The 

State Director determines whether the Agency will settle junior liens. 

B. Required Components of an Offer of Voluntary Conveyance 

An offer of voluntary conveyance will consist of the following documentation:

• Form RD 3560-22, Offer to Convey Security; 

• Warranty Deed, which will be recorded only when the voluntary conveyance is 

accepted; 

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• A current financial statement, balance sheet, and information on present income and 

potential earning ability; 

• For organization borrowers, a resolution by the Board of Directors that authorizes 

conveyance of the property; and 

• Assignment of Housing Assistance Payments (HAP). 

C. Appraisals 

Prior to the Agency’s acceptance of an offer of a deed in lieu of foreclosure, the 

current market value of the property must be obtained through an appraisal by a qualified 

appraiser. 

D. Decisions 

The Loan Servicer will submit the case file of the borrower to the State Office. The 

State Office will review the file and make a decision, after having obtained advice from

the OGC. When the market value of the property is less than the Agency debt, the 

Agency must consider the borrower’s current situation and future prospects for paying 

this debt. 

Items to be included in the borrower’s case file are shown in Exhibit 12-2. 

Exhibit 12-2 

Liquidation Option - Borrower’s Case File 

• Report on Multi-family Housing Problem Case; 

• Liquidation and management plan; 

• Form RD 3560-22; 

• Resolution authorizing conveyance, if applicable; 

• Current title search; 

• Environmental review; 

• Form RD 3560-7;

• Form RD 3560-10;

• Current appraisal prepared by a qualified appraiser; 

• Due diligence report; 

• Balance of Rural Development account and other liens, if any;

• Assignment of HAP contracts, if applicable; 

• Current statement of account from the St. Louis Office; 

• Development plan with breakdown of costs, if applicable; and 

• Form RD 402-2, Statement of Deposits and Withdrawals, if applicable. 

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E. Closing of Conveyance 

Closing of conveyance will be complete when the recorded deed has been returned to

the Agency with no outstanding encumbrances other than Agency liens and/or previously 

approved prior liens. Costs incurred prior to the completion of the transaction will be 

charged to the borrower as recoverable costs. 

Upon closing of the transaction, if applicable, the Loan Servicer will release liens and 

inform the borrower of the release from liability. Borrowers must be notified whether or 

not they have been released from liability. 

The State Director will cancel any interest credit and suspend any rental assistance. 

Tenants must be informed of the possible consequences of liquidation. If the property 

will no longer participate in the Section 515, 514/516, or 521 programs, the tenants must 

be given a minimum of 180 days’ written notice. 

12.8 FORECLOSURE 

State laws pertaining to acceleration and foreclosure will affect the procedures the 

Agency is required to follow. OGC should be consulted to ensure that appropriate procedures 

are followed.

A. Making the Acceleration Decision 

The Agency must decide whether to accelerate the account and begin the foreclosure 

process. The decision to accelerate involves numerous considerations, many of which 

will vary case by case. The following issues should always be considered. 

1. OGC Concurrence 

Advice and counsel should be obtained from OGC before beginning the foreclosure 

process if: 

• The foreclosure is based on a nonmonetary default; or

• The property also serves as security for a loan under another USDA program, such as 

the FSA, since this may trigger liquidation of the other loan. 

2. Tribal Land 

If the security property is on tribal-allotted or trust land, the acceleration may be 

approved only after the Agency has offered, in writing, to transfer the account to an 

eligible tribal member, the tribe, and the Indian Housing Authority serving the tribe or

tribes. 

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3. Role of Other Lien Holders 

Depending upon the status of other liens on the security property, the Agency may 

invite other lien holders to join in the foreclosure action, or join in a foreclosure action 

initiated by another lien holder. 

B. Acceleration 

1. Acceleration Notice 

If the Agency determines that the appropriate approach to liquidation is foreclosure, 

the process begins with an acceleration notice (Guide Letter 1955-A-1, Notice of 

Acceleration to MFH Borrowers Liable for the Debt (Excludes Borrowers Who Were 

Discharged in Bankruptcy) or Guide Letter 1955-A-2, Notice of Acceleration to MFH 

Borrowers Discharged in Bankruptcy Who Have Not Reaffirmed the Debt). The 

acceleration notice demands full payment of the account, including unpaid principal and 

interest, advances, and subsidy subject to recapture. It notifies the borrower of: (1) the

reason for the acceleration, (2) the amount due, (3) the method of payment, (4) the 

opportunity for an informal review with the decision maker to seek mediation or 

alternative dispute resolution or to request an administrative appeal hearing, (5) and 

prepayment restrictions. The notice gives the borrower 30 days to pay in full or request a 

hearing. 

The acceleration notice must also include language regarding prepayment restrictions.

If a borrower prepays an Agency loan made before December 21, 1979, the tenants must 

be given 180 days’ notice that the project can be removed from the program. For 

information on these loans, see Chapter 15. 

The notice must be sent to the borrower and any cosigners simultaneously by both 

regular mail and certified mail, return receipt requested. If the property address is 

different from the address of the borrower, the notice should be sent to the property 

address as well. 

 2. Payment Subsidy 

If a borrower is receiving payment subsidy, the payment subsidy agreement will not 

be canceled when the debt is accelerated, but it will not be renewed unless the account is 

reinstated. 

3. Offers to Pay 

The decision to accelerate the account must not be made until the Loan Servicer has

made all reasonable efforts to help the borrower become successful. Therefore, once the 

account has been accelerated, borrower efforts to cure the default will not be accepted 

unless required by state law. If state law requires that foreclosure actions be halted if an 

account is brought current, partial payment of the accelerated amount must be accepted. 

Otherwise, any payment for less than the full amount required to close the account should 

be returned to the borrower. 

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The borrower’s account may be paid off by cash, transfer and assumption, sale of the 

property, or voluntary conveyance. The Agency may grant the borrower additional time

to voluntarily liquidate. If an offer is deemed unacceptable, the Agency’s denial is not 

appealable. 

C. Review of the Acceleration Decision 

Several remedies are available to borrowers who believe their accounts should not 

have been accelerated. These include an informal review, mediation or dispute 

resolution, and a formal appeal with the National Appeals Division (NAD) of the 

Department of Agriculture. Foreclosure actions will be held in abeyance while an appeal 

is pending. 

D. Transfers and Subsequent Loans During Foreclosure 

Properties can be transferred during the foreclosure process. However, the 

foreclosure process should not be stopped until the applicant is determined eligible and 

the transfer is determined to be feasible and in the best interest of the government. For a 

discussion of how the value of a property is determined, see Chapter 7, Section 7.26. 

E. Foreclosure Notice 

A foreclosure notice that includes the following must be published: 

• Projected sale date and location; 

• Fair market value of the property; 

When a property is liquidated through foreclosure action or other debt settlement 

actions, the property may be released without restrictive-use provisions. The appraiser 

will be given instructions to value the property as conventional nonsubsidized property 

without restrictive-use provisions. The encumbering restrictive-use provisions in the loan 

documents will be nullified by the foreclosure sale or debt settlement unless ownership is 

continued by the current borrower, and that borrower is currently subject to restrictiveuse as part of the original loan obligation or a subsequent servicing action. 

• The amount to be bid by the Agency; 

• The amount of Agency debt against the property; and 

• Use restriction provisions. 

For judicial foreclosure states, notices are to comply with State laws. 

Servicing Officials should take an aggressive approach to advertising foreclosure 

sales and marketing inventory properties. A list of potential buyers who would be 

interested in purchasing projects at foreclosure sale or inventory properties should be 

developed. Notices of scheduled foreclosure sales can then be sent to those interested 

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parties in addition to advertising in newspapers, notifying local real estate agents, and 

posting advertisements on the Agency’s Multi-Family Housing REO website at 

https://mfhreo.sc.egov.usda.gov. 

F. Determining the Government’s Bid at Foreclosure Sale

The Government’s bid should equal the amount of the Agency’s net recovery value or 

the market value of the security, whichever is less. 

The State Director will designate an individual to bid at foreclosure, unless prohibited 

by State law. If the Agency is the senior lien holder, it can only submit one bid. If the 

Agency is not the senior lien holder, the designated bidder may make incremental bids in 

competition with other bidders. 

If a project that is subject to restrictive-use provisions is sold outside the program at 

the foreclosure sale, the Agency has no means to continue to enforce the restrictive-use 

provisions after the purchase. 

G. After Foreclosure 

1. Agency Reporting 

After the property has been acquired, the Field Office must furnish the State Director 

with a report on the sale. Two forms must be filed: Form RD 3560-19, Status of REO 

Property, and, if applicable, Form RD 3560-55. 

2. The Property 

Upon acquisition, any existing leases must be transferred, and management

agreements must either be extended or canceled. 

3. The Borrower 

If the property is acquired by the Agency, the Agency must credit the borrower’s 

account with the Government’s maximum bid. If the property is not acquired by the 

Agency, the borrower’s account must be handled in accordance with State law. 

The Agency must make attempts to collect any unsatisfied balances. When deficiency 

judgments are sought, the State Director must prepare Form RD 1962-20, Notice of 

Judgment, which establishes how the account is to be handled by the Field Office. 

12.9 ACQUISITION OF CHATTEL PROPERTY 

The Agency will make every effort to avoid acquiring chattel property by having the 

borrower or Field Office Staff liquidate the property according to RD Instruction 1962-A, and 

applying the proceeds to the borrower’s accounts. Authorized methods of acquisition of chattel 

property include: 

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• Sales, including execution sales, Agency foreclosure sales, sale by trustee in 

bankruptcy, public sale by prior lien holder, and public sale conducted under 

voluntary liquidation. 

• Voluntary conveyance, which is acceptable only when the borrower can convey 

ownership free of other liens and the borrower can be released from liability under the 

conditions set forth in 7 CFR 3560.457. Payment of other lien holders’ debts by the 

Agency in order to accept voluntary conveyance of chattels is not authorized. If the 

Agency declines an offer of voluntary conveyance of chattels, the Loan Servicer will 

provide a copy of the rejection to the borrower. 

• Attending sales, which the Loan Servicer will attend unless it is deemed to be 

physically unsafe to do so or if attending the sale would cause unfavorable publicity. 

The Loan Servicer will attend a sale held by a prior lien holder if the market value of 

the chattel is significantly greater than the amount of the prior lien. 

• Appraising chattel property, which is the Loan Servicer’s responsibility prior to the 

sale. An outside contractor in accordance with RD Instruction 2024-A may conduct 

an appraisal. 

• Abandonment of security interest, should the chattel property have no market value 

and obtaining title would not be in the best interest of the Government. Such a 

situation might occur if costs of moving or rehabilitation are excessive. 

• Bidding at sale, which the Loan Servicer might do if there are no other bids or if the 

property may be sold at an amount which is less than the Government’s authorized 

bid. The Loan Servicer may not bid if the chattel property under prior lien is 

significantly less than the amount owed to the prior lien holder or if the Agency debt 

has been satisfied. Loan Servicers may not bid at a sale held by a junior lien holder 

or at a private sale.

Unless costs are incurred after the government acquires title to the chattel property, the 

borrower will pay all costs related to acquisition of the property. The Loan Servicer will use 

Form RD 3560-19, Status of REO Property, to report acquisition of chattel property. 

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SECTION 3: DEBT SETTLEMENT 

Debt settlement is a process in which the Agency attempts to maximize repayment of 

outstanding debts that are not satisfied through voluntary or involuntary liquidation. There are 

four types of debt settlement: compromise, adjustment, charge-off, and cancellation. The 

Agency complies with the Debt Collection and Improvement Act of 1996 in pursuing 

outstanding debt. However, a majority of MFH loans are to non-recourse borrowers for which 

no additional recovery is possible after liquidation. Therefore, the Agency primarily uses debt 

settlement in conjunction with voluntary liquidation. 

The State Director may approve or reject proposed debt settlements when the outstanding 

balance of the indebtedness amount in the offer is less than $1 million. The National Office must 

approve or reject any settlements totaling $1 million or more. 

12.10 BORROWER ELIGIBILITY 

A borrower may request debt settlement in conjunction with or after voluntary liquidation 

of security. The Agency may agree to settle a borrower’s debt if: 

• All liable parties apply for debt settlement; 

• The loan security is sold for cash or transferred to a third party; 

• The borrower pays a compromise or adjustment offer of the current market value of 

the security, less prior liens, plus any additional amount the Agency determines the 

borrower can pay; and 

• The initial payment, with a compromise or adjustment offer must be equal to or

greater than the value of the security, less prior liens. 

The Agency will not debt settle a borrower’s debt if: 

• The borrower possesses another Agency loan for which he or she cannot or will not 

settle the debt; 

• The Department of Justice has jurisdiction over the borrower’s loans or has a case 

pending against the borrower because of a suspected criminal violation in connection 

with the debt or security for the debt; or 

• The Agency requests the Department of Justice to institute a civil action against the 

borrower to protect its interests. 

12.11 APPLICATION REQUIREMENTS 

The Agency considers a borrower’s financial status when evaluating the borrower’s 

request for debt settlement. A borrower must submit complete and accurate information from

which the Agency can make a full determination of the borrower’s financial condition. This 

information must include the following items from all liable parties: 

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• A completed Form RD 3560-57, Application for Settlement of Indebtedness; 

• A current financial statement and cash flow projections; 

• Verification of income; 

• Verification of assets for the past 12 months; 

• Verification of debts greater than $1,000; 

• Tax returns for the past three years; and 

• Any other items requested by the Agency. 

12.12 COMPROMISE AND ADJUSTMENT 

A borrower is not required to dispose of security prior to application for debt settlement. 

However, if a borrower has disposed of security prior to applying for debt settlement, proceeds 

from the disposed security must first be applied to the borrower’s account. If the Agency 

approves a compromise or adjustment offer, the Agency will cancel any debt remaining after the 

compromise or adjustment offer is paid and applied to the debt. 

A. Secured Debts 

Secured debts may be compromised or adjusted as follows: 

• The debt is fully matured under the terms of the note or other instrument, or has been 

accelerated by the Agency prior to the settlement application;

• A compromise offer must at least equal the net recovery value of the security as 

determined by the Agency, less prior liens, plus any additional amount the Agency 

determines the borrower is able to pay based on a current financial statement; and 

• An adjustment offer must meet the requirements of a compromise offer, except the 

payments may be made over the shortest period the Agency determines is feasible, 

not to exceed five years 

B. Unsecured Debts 

Unsecured debts are most frequently account balances remaining after the borrower 

has voluntarily liquidated security property. The borrower’s compromise or adjustment 

offer must represent the maximum amount the Agency determines the borrower can pay 

based on a current financial statement and any other available information. An 

adjustment agreement may not exceed five years. 

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C. Handling Payments 

All compromise or adjustment payments will be recorded. The St. Louis Office will 

hold payments in the Deposits Fund Account until notification is received from the State 

Office of the approval or rejection of the offer. For approved offers, payments will be

applied in accordance with established policies, beginning with the oldest loan in the 

settlement. When the Agency accepts an adjustment offer, the St. Louis Office does not 

adjust the accounts involved until the borrower makes all the payments to the Agency. 

D. Delinquent Adjustment Agreement 

Adjustment payments that are more than 30 days past due are referred to the State 

Director. The State Director may: 

• Void the agreement; 

• Process a new debt settlement agreement; or 

• Grant a time extension. 

The borrower may appeal the cancellation of the adjustment agreement. 

12.13 CHARGE-OFF 

Charge-off is an administrative tool the Agency uses to write off nonperforming debt 

from the Agency’s portfolio. However, borrowers remain liable for charged-off debt, and the 

Government may continue to pursue collection. The Agency may charge off nonjudgment debt 

when: 

• The principal balance is $2,000 or less, and efforts to collect the debt have been 

unsuccessful or would not be economical; 

• OGC advises in writing that the Agency’s claim is legally without merit; 

• Efforts to induce voluntary repayment are unsuccessful and OGC advises in writing 

that evidence to prove the Agency’s claim in court cannot be produced; 

• The borrower is unable to pay any part of the debt and has no apparent future debt 

repayment ability; or

• There is no security for the debt. 

12.14 CANCELLATION 

When the Agency administratively extinguishes a debt owed to it, a cancellation occurs. 

Under these circumstances, the Agency releases the borrower from liability for the debt. 

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A. Cancellation with Application

When the borrower applies for debt settlement, the Agency may approve the request 

if the borrower’s application shows that the borrower cannot make any compromise or 

adjustment offer. The Loan Servicer must obtain documentation from the borrower that, 

due to unusual or extenuating circumstances, a compromise or adjustment offer is not 

feasible. 

B. Cancellation without Application 

The Loan Servicer may make a recommendation to cancel debt, without an 

application from the borrower in the following circumstances: 

• All liable entities no longer exist; 

• The 6-year statute of limitations of offset expires; 

• The borrower has been discharged of the debt in bankruptcy; 

• The debt, including a deficiency judgment, is otherwise legally without merit; or 

• The account has been returned to the Agency after cross-servicing by the Department 

of Treasury. 

C. Processing and Approving Cancellations 

The Loan Servicer must execute the completed Form RD 3560-57 and process the 

cancellation in accordance with the FMI. 

The Loan Servicer must notify the borrower in writing of the debt settlement approval 

and the approximate amount that the Agency will report to the IRS. When the Agency 

cancels debt without application from the borrower, the Agency must send a letter 

regarding the debt cancellation to the borrower’s last known address. 

The Agency must cancel any requests for offsets against the borrower after debt 

settlement approval. 

12.15 REFERRAL TO THE DEPARTMENT OF TREASURY 

Because most borrowers are nonrecourse borrowers, the Agency does not often refer 

accounts to the Department of Treasury for cross-servicing or offset as there are no liable parties 

for the debt. However, there may be times when it is appropriate to refer an account to the 

Department of Treasury for debt collection. The Agency should refer an account to the 

Department of Treasury when: 

• The debt is 180 days past due; 

• The security has been liquidated; and

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• The balance is due and payable. 

The Agency should not refer an account to the Department of Treasury when: 

• There are no liable entities to pursue; 

• An internal offset is sufficient to collect the debt within three years after the debt 

becomes past due; 

• The borrower is in compliance with an adjustment agreement; 

• The debt is in litigation or bankruptcy action is pending; or 

• The borrower is deceased. 

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Attachment 12-A 

Page 1 of 1 

ATTACHMENT 12-A 

NET RECOVERY VALUE WORKSHEET 

I. BACKGROUND

(1) Case Number: (2) Borrower Name/ID: 

(3) Proposed Liquidation Option: (4) Calculation Date: 

(5) Estimated Holding Period: 1

II. CALCULATION OF NET RECOVERY VALUE

(6) Market Value (use current appraisal)

(7) Deductions from Market Value 

 A. Liquidation costs $_________ 

 B. Acquisition cost $_________ 

C. Settlement cost of prior liens $_________ 

D. Estimated cost to operate during appraisal period2

 $_________

E. Cost to correct health and safety violations $_________ 

F. Cost to address environmental hazards (if different from E) $_________ 

 G. Selling costs $_________ 

(8) Additions to Present Market Value 

A. Appreciation during holding period 

B. Income during holding period 

C. Total Additions (sum of items 8A and 8B) 

 $________ 

 $________ 

 $________ 

(9) NET RECOVERY VALUE (6 minus Item 7G plus Item 8C) 

 

1

 The estimated inventory holding period prior to resale should be based upon previous experience in selling nonprogram property in the state and the availability of current funding for non-program inventory properties. If a state 

has not had experience in marketing non-program properties, the Multi-Family Housing Portfolio Management

(MFHPM) Division in the National Office should be contacted. 

2

 The cost to operate the project during the inventory holding period prior to resale should be based upon typical

operating costs, excluding debt payments to the government, for similar projects in the servicing jurisdiction. 

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