When an SBA loan goes bad, most owners take a few weeks to decide what to do. They usually call back a few times before they make their final choice, and that’s absolutely normal. Closing a business is not a nice experience. You already lost your entire investment. Now the bank has its hand out. You don’t even know how much to offer. At the end of the day, the choice is personal bankruptcy or an SBA Offer in Compromise on SBA Form 1150.
I just finished up a phone call with a really nice guy. It wasn’t our first conversation, we’d already gone over his situation in detail. He said he had more questions. In fact he didn’t have questions about the SBA default process, what he was unsure about was whether he should file personal bankruptcy, or file an Offer in Compromise. He said he had talked to a bankruptcy attorney and was still confused. I explained that I couldn’t give advice about how bankruptcy works, but I did have some questions that would help him decide.
The questions I asked him are the same questions any owner in this position should be asking. At this firm, we don’t give any legal advice or counsel on how bankruptcy works; for those things, a bankruptcy attorney can walk you through your options and go over all of the ins and outs. Ultimately, the right decision really depends on your own financial situation and what’s important to you.
The Cheapest Possible Way to Get Out of Debt
The first question to ask is whether you’re only looking for the cheapest possible way to get out of debt. If the answer is “yes,” then you need to get as much information as you can about all your costs. You should talk to a bankruptcy attorney and an SBA loan default expert. First you have to know whether you even qualify for bankruptcy. If you do, which type of bankruptcy should you file? What assets do you get to keep and what do you have to give up, and what are they worth? And how much will the bankruptcy attorney charge you to do all this? If you still have to negotiate repayment plans with some creditors, what will those payments be — how much per month, and for how many months?
On the settlement side, this leaves three big questions: do you qualify for an Offer in Compromise through the SBA, how much will the settlement itself cost, and how much will an SBA loan default expert charge to help you? The costs of an Offer in Compromise are usually not 100% predictable. There are a few things that can change the amount you get to settle with:
- whether you pledged your house as collateral for a business loan and whether that house has equity in it,
- whether you have cash savings,
- whether you’ll have an income after the business closes,
- how old you are,
- what profession you have and your earnings history,
- whether you have any major assets that are easy to liquidate,
- and whether you’ve cooperated fully with the liquidation and not done anything shady or fraudulent.
For many of our clients, cost isn’t the primary concern. They aren’t simply trying to get rid of as much debt for as little money as possible. They genuinely want to work as hard as they can within their budgets to repay the debts. If you are willing to make a reasonable offer that honestly reflects your capacity to pay, you can often settle a default on an SBA loan without going through bankruptcy.
Weigh the Pros and Cons
With all that said, let’s weigh the pros and cons. There are four key things to compare: how it will affect your credit, whether you’ll be able to take out another SBA loan in the future, the cost, and how much borrowing power you will have in general.
There is good news: you might be able to settle without impacting your credit. I know of banks that report SBA loan defaults to credit agencies, and I know that the SBA now reports defaults to credit agencies. But other banks do not report defaults. Personal bankruptcy, on the other hand, will absolutely show up on your credit report. And what about getting another SBA loan? If you are looking for another SBA loan, I’m sorry, but you won’t get one either way. If you did not repay the first one in full they will not give you another SBA loan.
Cost is harder to pin down. It will depend on your particular situation. You should do your homework and figure out all the costs specific to your situation. The cost of each option is highly dependent on your personal financial circumstances. When borrowing money in general, your credit will be affected if you file for bankruptcy and it will affect your ability to get credit cards, mortgages, car loans, etc. A successful Offer in Compromise may not impact your credit at all since a settlement often does not show up.
How Do You Decide What to Do?
How do you decide what to do? First, do your homework. This is a big decision, and you’ll want to walk in with your eyes wide open. Now is not the time to make a rash decision in order to get it over with. You need to understand the options available to you and the pros and cons of each. Second, if you do qualify for bankruptcy, decide how much you would be willing to pay to settle the debt and then try the Offer in Compromise first. Keep bankruptcy in your back pocket just in case. If the bank will not agree to settle on terms that are reasonable, bankruptcy is plan B.
The rest is up to you. Take your time with the decision, and don’t worry about giving us more than one call. You should probably consult with a bankruptcy attorney and an SBA loan default expert to make sure you understand your options before you decide. Even if you try to settle first, you can still file for bankruptcy later.
