If you are facing the prospect of a call on your SBA loan, you may be overwhelmed by how much debt you owe your lender, let alone how you might possibly pay it all back. At its core, an SBA offer in compromise (OIC) is just a request that the loan be settled for less than the total amount owed. Usually this is after the borrower has sold all the collateral for the loan. The compromise amount must bear a reasonable relationship to the amount which the SBA could reasonably recover in a reasonable amount of time by enforcing the collection, and the amount must be sufficient to protect the integrity of the program. In general, the amount should be above $5,000, unless a higher amount would create a financial hardship. It should be paid in a lump sum, usually within 60 calendar days after approval, but it can sometimes be paid over time if that is necessary to collect as much as possible.
The offer is not made to the SBA directly. You must send your own offer to the lender or CDC (a Certified Development Company) that made the loan. If the lender agrees, it has to send your offer to the SBA for a decision. If the SBA accepts the offer, your loan is marked Compromise/Closed and you don’t owe the lender or CDC anything, unless the SBA accepts the offer based on your fraud, misrepresentation or a mutual mistake. Because the SBA must do a full review of the request, the process can be lengthy.
General Requirements
Generally, when your business has closed and all the collateral has been liquidated, then an offer in compromise would be the appropriate course of action. You may also submit an offer if you are still operating your business, but it is at risk of failure. BUT… you cannot submit an offer in compromise if you are just going through a temporary cash crunch. If you are able to afford your original debt payments, and have enough cash to continue operations until a time that you can resume making regular payments on your debts, it is in your best interest to do so.
Beyond timing, there is a list of general requirements. Seen from the lender’s side of the table, they read like this:
- first, the loan must be in liquidation status;
- second, you cannot be in bankruptcy unless the bankruptcy court has authorized us to make the compromise;
- third, we are not able to collect the full amount from you because you cannot pay it in a reasonable time, or we cannot collect it through collection efforts in a reasonable time, or collecting it through collection efforts is not worth the cost, or there is significant litigative risk (there is a real risk that we would lose in court because of the legal issues or the factual disputes), or because of special circumstances (such as you have an illness, so paying the loan would cause financial hardship);
- fourth, collection must not be barred by a valid legal defense (such as the loan was discharged in bankruptcy or the statute of limitations has passed);
- fifth, you have not committed any fraud, misrepresentation or other financial misconduct;
- sixth, the amount must bear a reasonable relationship to what we could collect in a reasonable time from collection efforts.
If your business is still open, there are more things that have to be met:
- that reduction is necessary to keep your business open;
- that your business passes the test for a successful workout in the SBA’s Standard Operating Procedure;
- that the reduction is part of an overall restructuring of the debt with all of your creditors;
- that the terms of the reduction of secured and unsecured debt with each creditor are set out in a written agreement with all of them;
- and that the way the SBA is treated is fair and equitable compared to the way the other creditors are treated.
In other words, an open business can only compromise its SBA debt as part of a wider workout with everyone it owes.
You also have to back the offer up with paperwork:
- (1) SBA Form 1150 (Offer in Compromise) or a signed written offer that describes the source of the money for the offer and special circumstances, if any (for example, an illness) and signed under the penalties of 18 U.S.C. 1001 for false statements;
- (2) SBA Form 770 (Financial Statement of Debtor) or other current financial statement, signed under the penalties of perjury, detailing the assets, liabilities, income and expenses; if a going concern include its most recent year-end financial statements, and if you have one or more affiliates, include a consolidated statement;
- (3) a complete copy of your personal federal income tax returns for the last two years, or an explanation of why you cannot produce a copy, and a signed IRS Form 4506-T;
- (4) a complete copy of your business federal income tax returns for the last two years for each going concern and affiliate, or an explanation.
These forms are signed under penalty, so what you put in them has to be accurate.
The Minimum Due Diligence of the Lender
The lender then has to make a good faith effort to check what you have told it. The minimum due diligence of the lender is to obtain a current credit report. Then the lender has to analyze your past financial representations, current representations, and the credit report. The lender will investigate any inconsistencies. After doing so, the lender must determine what it could collect on the loan in a reasonable period of time. That includes any collateral that has not yet been liquidated. It also takes into account state and federal exemptions from attachment, and any other assets that are not exempt from attachment and are not pledged as collateral. The lender will need to assess your current and potential income, and the litigative risk that the lender will face. Finally, the lender must consider administrative and litigative costs, the length of time for enforcement of collection, and the risk that the borrower has or will conceal, or fraudulently transfer the assets.
The lender may also consider how much your cooperation during the liquidation has helped the lender recover more money. If your offer was made in good faith but is insufficient, the lender should attempt in good faith to arrive at an acceptable sum by submitting a counteroffer. Offers and counteroffers that are unsatisfactory are not submitted to the SBA. If the lender accepts your offer, it must receive SBA’s prior written approval before it executes a compromise agreement with you. After approval, the lender should apply the compromise payment to the principal balance, release the loan documents once the lender confirms receipt of the full compromise amount, and, if there is no recourse against another borrower on the loan, prepare a wrap-up report to charge off the remaining balance.
There are a significant number of hoops to jump through before even the offer can be considered. The rules described here are the ones lenders and the SBA work from, so knowing them before you make an offer puts you in a far better position. Whether a SBA OIC is the right choice for you or not, you need to consult a professional to figure that out.
