Your business is behind on an SBA 7(a) loan and you are thinking about settling it. You wonder how low you can go when you offer a compromise amount to the lender. The lender cannot say yes to that amount. The lender needs approval from the U.S. Small Business Administration, SBA. The number you put on Form 1150 is not your guess. In short, the number has to be real.
An SBA Offer in Compromise is a request to waive part of a loan principal. The only way to get a settlement that reduces principal is with an Offer in Compromise. It is generally appropriate when a loan is in liquidation and there is no pending bankruptcy, fraud, misrepresentation or other financial misconduct, and the full amount of the loan cannot be recovered.
What the Lender Can Recover
Think about it from the lender’s side: the question is not how much you need but how much the lender can get from you if the compromise is not approved. Lenders do not accept arbitrary numbers. They will look at what the borrower and guarantors own and earn. Then the lender figures out what it could recover from the borrower in a reasonable amount of time through enforced collection, taking into account collection costs, litigation risks and available remedies. If they’d have to spend years chasing you, they’d accept a smaller offer upfront. If collection would be quick and painful, your settlement goes up. The amount you put on Form 1150 should correlate with what the lender can recover. When the lender can get less money from the borrower through enforced collection than it can from an Offer in Compromise, the lender would probably want to do an Offer in Compromise. If you offer $2,000 on a $100,000 loan and it is likely that the lender could collect far more, you are unlikely to get approval. SBA’s compromise program is not a lottery and it is not charitable giving.
For example, let’s assume the loan balance is $60,000. Your financial statement shows you made $85,000 last year. You could reasonably pay $60,000 within one year. So you don’t need a compromise, and SBA would likely reject it. In another scenario, let’s say the loan is for $120,000 and you can only pay $30,000. But, you can only pay it if you are allowed to make small payments over the next three years. If you can prove you can only make small monthly payments because you are living paycheck to paycheck, then SBA might accept a $30,000 compromise amount. So, there is no magic number in an SBA Offer in Compromise request. Your amount cannot be a guess. It must be defensible.
There is a floor, though. Generally speaking, the compromise amount should be more than $5,000. However, if there is a showing of hardship, $5,000 or less may be acceptable. You would need to tell the lender your story and explain why you would be so hard hit if you had to pay the minimum. But, if you own a nice home, a new car, and are not struggling to pay monthly bills, you should not be claiming a hardship. You should be realistic.
How you pay matters too. The guideline is cash. If you can come up with a lump sum within 60 days of SBA approval, that is the gold standard. If you cannot, then you do installments, and we try to keep the term as short as we can - preferably three years or less.
Full Financial Disclosure
Negotiations do not begin with the lender. They begin with your financial situation. The SBA requires SBA Form 1150, the full financial disclosure on SBA Form 770, a signed IRS Form 4506-T, and a signed SBA Form 2202. They go directly to the lender. Your own disclosure is necessary for the lender to assess your ability to pay and the SBA to approve your offer. The lender will have to get a current credit report and compare it to the financial information provided on SBA Form 1150 and SBA Form 770. If the lender pulls a recent credit report and it contradicts what you reported, the offer can be rejected for false information. So, give the lender some information to use in its calculation. You do not want to make it easy for the lender to reject your offer.
The lender must always get SBA’s written approval before finalizing the settlement. To do so, the lender uses SBA’s Offer in Compromise Tab System. SBA will notify the lender in writing of its acceptance or rejection. Once approved, the lender and obligor should execute a written agreement for a mutual release upon payment in full of the compromise amount.
How a Compromise Could Affect Your Future Finances
There is no right to a compromise. An approved offer is a loss to the federal government. If accepted, it may impact your ability to get another SBA 7(a) loan in the future. It can also have tax consequences. You should review the terms of the compromise offer with a tax advisor.
So, here is the answer to the original question: How much should I offer? It is not about how low you can go. It is about what the lender can recover from you through enforced collection in a reasonable time frame. For the lender, it means it can be collected quickly and has a reasonable chance of being collected. For you, it means it’s a number that is feasible to pay. You should do your research. Know what you could pay and estimate what the lender could recover. If you can pay a lump sum within 60 days, great. If you are doing installments, make sure you can meet the terms. And consider how a compromise could affect your future finances.
