When a small business doesn’t succeed and its owner is personally on the hook for an SBA loan, the owner may want to know whether he or she can pay less than the full amount due. The answer is yes, through an offer in compromise, but the circumstances are constrained, the request is vetted first by the lender and then by the SBA, and mere difficulty in making payments does not qualify.
After a liquidation, if you still can’t pay the full amount that’s left, you can offer to pay a partial amount, called an “offer in compromise.” If the SBA accepts, it means you’ve satisfied the debt and it is no longer considered outstanding. There must also be a reasonable relationship between the settlement and the amount that could be recovered through enforced collection within a reasonable time. You can’t just make an offer for pennies on the dollar. The amount can’t be so low that it will hurt the program and in practice it should be over $5,000, unless a larger amount would cause you financial hardship. Payment should generally be due as a lump sum at a specified date, usually within 60 days from approval. In some cases it’s allowed to be paid over time, but that’s usually only done if it will help the lender recover more money.
You do not send the offer to the SBA yourself. Every borrower in the loan has to submit their own offer in compromise to the lender or CDC. If the lender or CDC agrees, it will submit the offer to SBA for approval. If the SBA approves it, the loan will be reclassified as Compromise/Closed and the borrower will be released from the debt unless the compromise was fraudulently induced or secured by misrepresentation or mutual mistake of fact.
Make an Offer in Compromise
You can make an offer in compromise when you close your business and have liquidated all of the collateral. Or you can submit an offer where your business is still open and operating, but it is in jeopardy. However, if you are in a temporary cash flow crunch, you cannot offer in compromise.
There are also general requirements.
- First, the lender needs to have your loan in liquidation.
- Second, your business cannot be in bankruptcy unless the court has authorized you to reach a compromise.
- Third, you cannot have a legal right not to pay, for example if the debt were discharged in bankruptcy or if the statute of limitations had run.
- Fourth, you have not committed fraud or misrepresentation or committed other financial misconduct.
- And the full balance has to be out of reach, either because the debtor can’t pay it within a reasonable time; it can’t be collected by enforced collection proceedings within a reasonable time; the expense of collection is not warranted; the possibility of successful collection is substantially compromised due to a significant degree of legal or factual uncertainty; or, because of special circumstances, such as a state of health, the debtor would experience an economic hardship were the debt collected.
When you negotiate a compromise with the SBA while your business is still operating, you have to show that closing would otherwise be unavoidable, that you will be able to continue the business successfully, that the compromise is part of an overall debt restructuring deal with your other creditors, that you have a written agreement with all of your creditors in which each agrees on the reduction it will get, and that you will treat the SBA loan in a way that is fair and equitable when compared to the treatment of all of the other creditors. The second of those is measured by the SBA’s feasibility test for a successful workout.
Your Offer Should Include
Your offer should include SBA Form 1150, or some other written document, and it must be signed under the penalties for false statements in 18 U.S.C. § 1001. You need to explain where the money that you are offering comes from, and if there are any unusual circumstances like sickness. Your offer also needs to include SBA Form 770, or some other up-to-date financial statement, and this one must be signed under penalty of perjury. It must show assets, liabilities, income and expenses. If your business is still operating you must also include your last year-end financial statements, and if the business has any affiliates you need to include a current consolidated financial statement as well. You have to send the lender your personal tax returns from the last two years, along with an IRS Form 4506-T. If you don’t have the returns, you have to explain why. And you must give copies of the last two years of business returns for the company (if still active) and any affiliated companies.
Lenders Have a Job
Lenders have a job to make sure you have been truthful about your financial picture. At the very least the lender has to get a current credit report, and has to compare what you have told them before, what you have told them now, and what the credit report says, looking for any inconsistencies and keeping a record of its work. Your lender has to estimate how much it can collect from you within a reasonable time using legal enforcement, after factoring in the value of any collateral you still own; state and federal exemptions; assets you own but didn’t pledge as collateral; current and future earnings; legal risk; enforcement costs and litigation; how long enforcement would take; and whether you might hide or fraudulently transfer assets.
When you were going into liquidation, did you help your lender sell your business or collect from you in a way that got them more money than they might otherwise have gotten? Your lender can take that into consideration. If you made a good-faith offer to settle the debt, but the offer was not high enough, the lender should make its own counteroffer in good faith. But unacceptable offers or counteroffers should not be sent to the SBA.
The lender needs SBA approval to settle a deal with you, in writing and in advance. Without it the lender runs the risk of losing its guarantee on the 7(a) loan. Once it has the SBA approval, the lender has to apply the money you agreed to pay it right away to the principal balance of the loan. It then has to release the loan documents after making sure that it has actually received the full amount you have agreed to pay, and if there is no way to collect the remaining balance from another party who is responsible for the debt, send in a wrap-up report so the remaining balance can be written off.
In short, yes, you can settle an SBA loan. But only after the loan has gone into liquidation (which usually means that all of the collateral has been sold). You also have to offer an amount that is supported by complete, accurate and realistic financial information and that is reasonable in relation to what the lender could collect by coercion. You should also be careful how you prepare the offer, since the lender is going to review it, may make a counteroffer, and will not submit an offer it finds unacceptable to SBA.
