If your business has fallen behind on an SBA loan, sooner or later you will ask the question in the title: should you hire an attorney who handles SBA offers in compromise, or a debt settlement firm? Their experience is critical. But before you can judge anyone’s experience, you need to understand who you actually owe.
The SBA Guaranteed Part of the Loan
You made a bank loan application. But the government is in the deal too. What happened is that the SBA guaranteed part of the loan to the bank, so the bank didn’t take all the risk. Because the SBA issued a guarantee, it essentially acted as a co-signer on the loan. Therefore, the SBA’s interests are at stake if a default occurs. If you settle with your bank, you will need the SBA to approve the settlement as well, and the SBA can reject your settlement and continue to press you for the balance of the debt. A settlement that works with the bank but not the SBA is useless.
Here is how it usually plays out. The bank will call you and write to you first. They will explain that you are in default and how you can “cure” that default. If payments are consistently missed and no catch-up agreement is reached, the lender retains the right to enforce the terms of the loan agreement. This includes seizing and selling collateral pledged against the loan. For most small business owners, their home and business assets have been pledged as collateral. When the lender decides to foreclose, your business may be forced out of existence - or you may lose your home.
When the lender runs out of things to do to try to get the money back, it will file a claim for the SBA guarantee. The SBA guarantees up to 85 percent of loans of $150,000 or less and up to 75 percent of larger loans. From that point on, the SBA becomes the primary party with which you have to deal. After that the SBA will send you a demand letter giving you 60 days to either pay the entire remaining debt balance or to submit a settlement proposal, known as an offer in compromise.
The OIC
The offer in compromise works a lot like the IRS version for back taxes, except that the SBA can take its time. You will have to provide several years of your business and personal tax returns and a listing of all assets and liabilities. The SBA will review the application and do its own assessment of the business and personal finances, and assets. The primary goal of this evaluation is to determine if the applicant is truly unable to pay the full amount of the debt based on their income, expenses, and assets.
Then comes the number itself. You propose a number that represents your ability to pay a compromise sum up-front or over time. The SBA wants a lump sum, but you can do an installment deal. Either way, the offer has to be fair, and the business must have adequate cash flow to support the business and the offer. If your monthly budget comes up negative, they will not accept an offer of payments, because they want to see that you can pay. Since you have admitted you cannot pay the loan in full, the best advice you can get is to do the math. Carefully, methodically. You are looking for a settlement that is both realistic and substantial. If you don’t have professional help, the OIC will be ad hoc - more an act of hope than of strategy.
If you work out the offer with your lender, the lender must approve it first before passing it on to the SBA. If the lender says yes and the SBA says no, the deal is off. When either one turns it down, they often do not explain why, leaving you unable to fine tune the offer.
After a rejection, the SBA may let you submit again, or it may send your file to the Treasury Department. That is when it gets serious. If this happens, your tax refunds can be seized, your wages and benefits garnished, and your bank accounts may be levied. It is a federal loan, so there is no statute of limitations. No law requires Treasury to sue or get a judgment. Either way, your debts to the federal government aren’t going anywhere. You can still try to settle once you are with Treasury, but it is very difficult to do and the settlement amount will most likely be higher than if you had gotten help when you first defaulted.
An Experienced Professional
So, do you need an SBA offer in compromise attorney or a settlement firm? The label matters less than what the person has actually done. Experience negotiating an offer with the SBA is not the same as negotiating with a bank, or settling accounts with the IRS. Because the SBA is a co-signer, a deal has to be acceptable to both. A settlement paid in installments, in particular, is something a debt lawyer who has worked on SBA claims before can get done. Whoever you are considering, ask questions. What has the attorney or firm done for other clients? And will they really have experience negotiating an offer in compromise for an SBA loan? Negotiating with the bank and SBA can take a lot of time, and a great deal of emotional energy. You may not have the time, or the will.
Timing matters just as much. The problem is, most business owners wait until it is too late. The best opportunity to get some help is when you know that you are going to default, and a professional can work directly with the lender before it gets sent to the SBA. I’ve seen too many entrepreneurs lose their opportunity to keep their business and livelihood by hoping the problem will go away.
The bottom line is you have to get the right offer to the right people at the right time and your law firm or debt settlement company is going to need to do that. It is harder than you think, and that is why you need an experienced professional to help.
