(a) Debt due and payable. 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 Sec. 1956.130(b) or charged off under Sec. 1956.136 of this subpart.
(b) Disposition of security. 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,
(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 out 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 Sec. 1956.109(b)(1) of this subpart are met.
(3) Security can be retained under the compromise and adjustment offers as specified in Sec. 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 curtesy rights, and specific encumbrances on the property having priority over claims of the Government.
(c) Proceeds from the sale of security. 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 Sec. 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.
(d) County Committee review. Proposed settlement actions will be reviewed by the County Committee except for the cancellation of debts discharged in bankruptcy under Sec. 1956.130(b)(1) of this subpart or when a claim has been referred to a United States Attorney under Sec. 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). When necessary, State Directors will obtain advice from OGC in handling proposed debt settlement actions.
(f) Format. Form FmHA or its successor agency under Public Law 103-354 1956-1, ``Application for Settlement of Indebtedness,'' will be utilized for all settlement actions under this subpart.