Some owners applied for an EIDL during COVID. Their businesses have closed or they are still struggling. They can’t meet the payments and now want to know if there is a chance that the SBA will ever accept less than the full amount owed. That leaves them stuck between a wall and a hard place. The answer is yes and that is what is known as the SBA offer in compromise, but there are specific requirements to go with it.
An offer in compromise (OIC) is an agreement that allows a borrower to settle a debt for less than the full amount owed. With an Economic Injury Disaster Loan, that agreement is made with the SBA. The SBA will only accept such an offer if they determine that they are unlikely to recover more money from you and that the offer you are making is fair and reasonable. For example, if you owe someone $100,000 and they agree to accept $50,000 as payment in full, that’s an offer in compromise. In other words, we are talking about the SBA taking less than the full amount owed. Once the agreed amount is paid, the SBA treats the loan as satisfied.
Compromise Amount
How much do you have to offer? The rule is that the compromise amount has to bear a reasonable relationship to what the SBA could recover through enforced collection proceedings, which covers litigation as well as liens and levies on collateral: bank account levies, wage garnishments, and liens on a house pledged as collateral. In plain English, the question means “if we have to sue you and take everything you have, how much are we likely to get?” The SBA estimates the amount they are likely to collect based on their assessment of your assets. If the offer bears an appropriate relationship to the amount the SBA believes it could recover, then the SBA may accept the offer. On the other hand, if the offer does not bear an appropriate relationship to the amount the SBA believes it could recover, then the SBA will reject the offer.
The process works much like an offer in compromise on a tax debt, and it is the route a borrower or guarantor takes to be released for less than the balance due after the business has closed. In most cases the business is closed and the assets sold or simply abandoned. An offer can be filed while the business is still open and operating, but that is rare. You usually pay one lump sum on a specific date, typically within 60 days of approval. Occasionally, payments can be extended in an installment plan, but this is not common. That short payment window is worth thinking about before you file, as it can be a challenge to secure the money. The assets of the business are gone so you can’t sell assets to make the offer.
Six Conditions
Not every borrower qualifies. Six conditions have to be met.
- The lender or the SBA needs to say your loan is in liquidation status.
- You can’t have filed for bankruptcy.
- The loan balance can’t be paid in full or recovered.
- The collection process can’t be stopped by a bankruptcy discharge or statute of limitations.
- There can’t be fraud, misrepresentation, or financial misconduct on the borrower’s part.
- The amount must be reasonably related to what collection could recover in a reasonable time.
Liquidation status comes first for a reason. An offer in compromise can’t be filed until this condition has been met.
Following a defaulted EIDL, the lender or SBA places the loan in ‘liquidation status’. Once in that status, the SBA sends the borrower a 60-day demand notice. It is usually within that 60-day period that the offer is submitted. If you didn’t respond at all, the SBA could sue you, take your IRS tax refunds, Social Security benefits, and wages. When you are in that 60-day period and an offer package needs to be filed, get started on it. Your offer package goes directly to the lender, who will review it, and then pass it along to the SBA for more review and to make the final decision. The process can take anywhere between 6 months and a year.
SBA Form 770
What paperwork do you need to include with your offer? The SBA Form 1150 (your offer), SBA Form 770 (financial statement detailing assets, liabilities, income and expenses), IRS Form 4506-T (tax transcript request), two years of federal tax returns for your business, and two years of personal tax returns for every personal guarantor. Add a copy of the most recent appraisal and mortgage statement if the house was used to secure the loan. Also provide your written statement explaining why you can’t repay the loan in full.
Form 770 is the heart of the package, because it is the lender’s and the SBA’s “workhorse” in determining your ability to pay. Do they think you can pay more than what you’re offering? That’s the issue. By sending them your written statement, Form 770 and your tax returns, that’s how you indicate that the full amount of the loan can’t be paid or recovered.
Can you pay over time? SBA loves to be paid in a lump sum. They’re willing to consider monthly payments from an individual. But there is a catch. You won’t get a release, a guaranty termination, or a lien release on your house until every single payment has been made. An offer in compromise is a good way for a guarantor to be released for less than the full balance due. Just know that the release comes at the end, not the beginning.
If your home secured the EIDL, there is one more rule. If the house was the collateral for a loan, then an offer must equal the amount of equity in the house: the fair market value, from a recent real estate appraisal, minus the mortgages owed, minus the broker fees associated with a sale, minus the state homestead exemption, minus the state and local transfer taxes. In other words, the SBA wants roughly what it would net if it forced a sale of the house. Each deduction lowers the offer amount because, say, the real estate agent will deduct his or her fees from the sale proceeds before passing it along to the SBA.
You might be able to settle your EIDL debt, but it’s not guaranteed. The process has specific rules, requires a lot of paperwork, and timing is critical. It takes patience and a strong stomach. But an offer is better than nothing. And it’s better than getting sued. The worst thing you can do is ignore the demand notice. Take action while you are still in the demand window.
