Jackson Hewitt is running into the debt issue because its financial results for the quarter ended January 31, combined with the decline is stock price are leading to the likely breach of loan covenants. The company said it is starting talks with the lead agent of the credit facility and informing all banks in the lending syndicate that it would seek relief. Failure to modify those terms could trigger a default event which would allow leaders to drop commitments to lend more and to declare everything owed to be immediately due.

Besides facing the mandatory $25 million payment due on April 30, Jackson Hewitt anticipates paying $23 million to $25 million in interest over the next 12 months. The financial setbacks are also jeopardizing the company's ability to meet requirements to keep its stock listing on the New York Stock Exchange. While Jackson Hewitt's average market capital exceeded the more than $50 million required over a 30-day trading period, shareholder equity has fallen below the $50 million required in that category. Shareholder equity stood at a negative $74.8 million on January 31, compared to positive equity of $243.7 million a year earlier.

The company had a weak fiscal 2009, but the recent problems were set in motion when regulators forced Santa Barbara Bank & Trust out of the business of providing capital for Refund Anticipation Loans. Jackson Hewitt was able to get funding from Republic Bank, but for only 50 percent of its loan volume.

Lack of RALs drove customers away, leading to a sharp drop in the number of returns prepared during the third quarter ended January 31. The total decline is expected to range from 17 percent to 19 percent for the tax season. The problems led the company to take a $274.2 million charge for the impaired of good will for its company-owned and franchised store operations. The quarterly loss of $279 million for the quarter wiped out remaining shareholder equity.