When a business defaults on an SBA-guaranteed loan, the people who signed personal guarantees are usually left holding the balance. Clients are typically interested in knowing if they can settle the debt for less than the total amount owed, and the way to do that is through an offer in compromise. The first misconception clients have when they come to us is that the offer is sent straight to the SBA. I don’t blame them. I’d be lost, too, if I wasn’t in the business.
Send the Offer Package to the Lender First
More so now than in the past, the SBA will tell a guarantor to send the offer package to the lender first, who will review it and make an initial assessment and recommendation. Only then will the offer package be forwarded to the SBA for review. The SBA has the say-so on whether to accept the offer, but the lender has the say-so on whether to recommend it. In some offices, the lender gets just ten days. That’s it. Ten days to look at the offer package and decide whether to recommend that the SBA accept it or reject it. Not a long time to make that determination. The SBA is not trying to be unkind; rather, if the lender is committed to the deal, time is of the essence. If the lender is not available or willing to cooperate, the SBA will generally step in and take over the entire review process. The SBA will then work out the details with the lender pursuant to its own internal process.
Good Offer Package
Most of the calls we get, though, sound more like this: “I sent in an offer package to my lender but it never got approved. They keep saying ‘no’, and I’m sick and tired of the back and forth. What do I do?” The first answer is the package. It has to be a good offer package. An offer in compromise won’t hold up if it isn’t complete and accurate. It’s not enough to submit a reasonable offer. You have to prove it. If you’re working with a professional, they will know how to prepare it and what the lender and the SBA expect to see.
Where we see the most mistakes is the blind appeal for sympathy. The SBA analysts are human, and we deal with them every day. The human factor is always a consideration, but the guidelines under which they operate call for a rigorous analysis of your financial condition. It’s not about what you need, it’s about what the government needs. Your story can be part of the package. But it has to be a good case first. You have to have the numbers laid out and the logical argument presented before a proposal like that can succeed. The offer must look like a better deal than what the government can reasonably expect to recover by forced collection. In many instances, an administrative wage garnishment (AWG) will make it likely a substantial portion of the debt could be collected over your working lifetime. So at a minimum the offer must factor in that possibility. Know your numbers before you make a proposal for an offer in compromise.
Then put your best foot forward. If you clearly have assets and you do not borrow or at least partially liquidate those assets in order to support your offer, SBA may think your offer is insincere. So, don’t waste your time low-balling the SBA unless your rationale for making a low offer would be financially acceptable to the analyst. Remember, they aren’t looking at what you have, they are looking at what they would have available if collection efforts succeeded. If the lender tells you your offer is just not enough, look for a way to enhance it. Otherwise you may end up in Treasury.
Getting the Lender to Cooperate
Do you really need the lender’s approval? In the vast majority of cases, yes. Perhaps the greatest challenge is getting the lender to cooperate. Having the lender’s support doesn’t assure that the SBA will accept your offer, but failing to get its recommendation all but assures a rejection.
Just remember, never yell at your banker. It does you no good, and can actually be detrimental. If you wouldn’t talk to your lawyer or accountant like that, why talk to the banker like that? Even if the bank decides they want to recommend your offer, it’s still a great deal of work on their end. There may be a staff shortage. Don’t give them a reason to put your file in the ‘get to it later’ pile. You’re asking for the lender to help you. You need it.
Lenders rarely turn down a good offer. It’s in their interest to recover more on a bad loan. Unfortunately there are some lenders that have basically a “no settlement policy.” Sometimes they have unrealistic expectations that the guarantors can’t fulfill. Or bad feelings may have developed over the course of the loan or from dealings with the borrower and guarantors. Sometimes it feels personal. And it may be. Lenders are not evil, per se, but some lenders just aren’t helpful.
Can the bank just refuse to settle? Yes. In my experience, the SBA will not question the bank’s refusal. The only exception is if a bank does not review an offer in the timeframe given by the SBA. In that case, some SBA offices will take over the review. I am told that the SBA may request the bank to essentially waive its right to any portion of the recovery. That being the case, the bank’s consent is no longer a factor for SBA approval. Those cases are rare. The SBA will not make your lender accept your offer in compromise just because you want it.
So build the offer around the numbers, make it as strong as you can, and be nice to the bank. It can’t hurt and it may help. When an offer in compromise is accepted, the SBA is getting another opportunity to recover its money. And you’re getting a second chance to overcome a business failure that could’ve destroyed your financial life. Don’t get discouraged, and don’t give up.
