Forgivable Loans

Contrary to a Promissory Note, which is an unconditional promise to repay money, a Forgivable Loan Agreement, or FLA, states that a specified portion of the new employee’s loan balance will be “forgiven.” Presented at the time of recruitment, the FLA differs from a Promissory Note in that a certain percentage of the loan need not be repaid according to a set schedule, rather that percentage is forgiven on each anniversary of the signing date.

For example, if you received a lump-sum $500,000 forgivable loan check as part of your hiring deal, according to the FLA, one-fifth of the loan balance [$100,000] will automatically be forgiven on each anniversary of the date you signed the loan agreement. In order to receive payment forgiveness, you must still be employed by the firm on each anniversary date. Although its construction differs from that of a promissory note, an FLA is encoded with a similar employment incentive, rooted in the yearly repayment of a lump-sum loan check.

After five years, the loan is completely forgiven and you owe nothing to your employer. Additionally, this “forgiven debt” is considered “income” by the IRS and you will be required to pay income tax on the forgiven $100,000 each year. So what could go wrong? After three years, you may decide that you want to leave this firm. So you set your resignation date for Friday, May 1st because, according to your Central Registration Depository (CRD), that was the date of your hire three years prior. Unfortunately, you did not sign the FLA agreement until two weeks after your firm submitted your Form U-4. As a result, you unknowingly resign two weeks before the 3-year anniversary of signing the FLA, losing the next $100,000 of forgiveness by just 2 weeks.

Although you may attempt to leverage your years of hard work for the firm as a means to acquire the last loan forgiveness installment, you will likely stand little to no chance at receiving your last $100,000. In fact, your firm will seek to recover the remaining $300,000 from you pursuant to the letter of the FLA. Depending on the facts and circumstances of your recruitment, there may be defenses available to you such as failure of consideration, unclean hands or equitable estoppel. Since the economic crash of 2008, FINRA arbitration panels have been more receptive to forgivable loan agreement defenses; these panels maintain the power to eliminate or reduce your loan debt if an effective legal defense is presented by a skilled arbitration attorney like the ones at Lubiner, Schmidt & Palumbo.

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