Many people don’t know this, but SBA 7(a) loans can be settled by submitting an Offer in Compromise. Some banks may claim that the SBA won’t settle government loans, but that’s not true. However, you need to follow the correct order: close or sell your business, liquidate your business assets, and then submit your offer. As of September 2024, EIDL loans are not eligible for an Offer in Compromise. What follows applies to the 7(a) loan, which is where most settlements happen.
You can sell your assets yourself using your industry contacts or platforms like Craigslist. However, always ask your lender for explicit permission first, since these assets are their collateral. Selling them without permission may be considered fraud. You can’t use the proceeds from the sale of your business equipment to fund your settlement. If you sell your business assets, the first step should be to use the proceeds to pay down the balance of the loan. This is because those assets were used as collateral.
However, only business assets need to be sold, not personal assets. Some lenders will incorrectly claim you must sell your house before you can make an offer. That’s not true. The SBA requires all business assets to be sold and applied to the debt balance so they know how much is left outstanding. You don’t need to file a business bankruptcy. Proof that the business is no longer operating is normally enough.
While all of that is happening, a few habits make a real difference. Don’t ghost your bank. Make sure you return their phone calls and emails. Also, save up some cash in the meantime. You can’t offer nothing. Any settlement requires a real cash payment. One common error is for people to sink every dollar of personal cash into the failing business, so they have no personal money to offer. Talk to your landlord; the lease is likely your biggest commitment after the SBA loan. See if you personally guaranteed the lease or not. If you are selling, the new business owner needs the landlord to grant the lease agreement.
Before you prepare your offer, you should ask the bank whether they will even entertain it. If the loan is fully secured, such as owing $500,000 and pledging a $1 million property, they won’t consider it. Banks and lenders settle because it makes sense for them to do so. They also won’t settle if they can see clearly that your income or the guarantors’ combined finances can repay the loan. If you’re being disingenuous and committing fraud, for instance, if you’ve sold assets without permission or sold your business to a friend to buy back later, they won’t settle. Be honest and transparent about the situation.
Submit Your Application
What documentation do you need to submit? Ask the bank for its list. Typically, the SBA will want IRS Form 4506-C, SBA Form 912, two years of personal tax returns, SBA Form 770, SBA Form 1150, two months of statements for liquid assets, and two months of pay stubs. Some banks ask for more, such as business tax returns, so get their list before you start.
You’ll eventually submit your application, but then you need to be patient and respond to questions within a day or two. Be honest about your income, averaging it for bonuses and such. Saying ‘I could get fired’ isn’t going to work because most employment is at will. Always follow up every couple of weeks, but not daily.
It’s likely going to be four to eight months before you get to the other side. The bank gets to look at it first, and they may want to ask questions. Then they’ll move it over to the SBA, and the SBA will take two to four months depending on how much stuff they’ve got to get through. Many banks have a committee or several people who need to sign off on your offer. If the settlement involves real estate, they may require an appraisal, which takes more time. You won’t have control over the timing.
If it’s approved, of course, you want to get everything in writing. Usually, the SBA will send you a generic approval email. Some lenders, however, will draft a formal settlement agreement. You’ll want your attorney to review the settlement agreement and make sure the bank concurs in writing that they agree with the SBA. It’s important to align the payment timing carefully. If they’re looking for a payment in 30 days and you need 45 days to secure a home equity loan, don’t wait until day 29 to request an extension. Instead, ask for 60 days from the beginning.
If the offer itself is declined, ask the lender what is missing, then you can fix those weak areas and re-submit. Guessing and simply raising the number is not a plan.
You Still Owe 100% of the Debt
A few misconceptions come up again and again. Remember, the SBA’s 75% guarantee only protects the lender. You still owe 100% of the debt. If there are multiple partners, and they own the business equally (50/50), each person is 100% liable under the unlimited personal guarantee. Just forming an LLC or corporation won’t protect you because of the personal guarantee. If you signed a personal guarantee for a loan made to someone else, like a family member or friend, but you’re not involved in the business, you’re still on the hook. That’s exactly why guarantees exist. You may have been told that your home would be released as collateral after a year of payments, but that almost never happens. Lenders only release homes as collateral in exchange for cash or if you move and provide a lien on a new home.
If you overpaid for your business, the SBA won’t reduce the principal just so you can continue operating. Only in a bankruptcy reorganization could the loan be crammed down to the value of the assets; outside of that, they would only forgive principal after the business closes and assets are liquidated. If you file personal bankruptcy, the personal guarantee may be discharged, but the lien on your home remains. After filing bankruptcy, you’ll negotiate with the bank to make a cash payment to release the lien. This process is separate from the Offer in Compromise.
Doing nothing is the worst option. If you default on your loan and don’t settle, the bank can sue you for a judgment, garnish your wages, levy your bank accounts, and foreclose on any home pledged even if it’s in a second lien position, depending on state law. Even if you hear nothing from the lender, don’t assume you’re off the hook – the file may have gone to Treasury, and your options become very limited. If you want to settle, you have to be the one who reaches out.
Settling has a cost, too. It will likely show up on your credit report as a charge-off. Also, you won’t be eligible for another SBA loan. However, even though the loan is marked as a charge-off, the savings might be worth it. The bottom line is that you need to approach this in good faith and be upfront with your approach. You need to ‘show your cards,’ so to speak. The more you demonstrate that you are trying to pay as much of the debt as possible, the better your chances are.
