Offer in Compromise is a way for a small business to close when it is clear that they won't be able to pay their debts, but here are 5 factors to consider
Book a Consultation CallAround 20,000 to 25,000 businesses file for bankruptcy annually. But bankruptcy can take a toll on your business and your finances.
If you have an SBA loan that you can't pay, you can apply for an Offer in Compromise to get the financial relief you need.
Keep reading to learn what to consider before you file with the SBA.
Offer in Compromise
When applying for an Offer in Compromise, you can't be in the process of filing for bankruptcy. If you have problems paying for more than your SBA loan payments, bankruptcy can be a good option.
However, an Offer in Compromise is an alternative to filing for bankruptcy. Applying for both isn't necessary, so you should determine which is better for you.
With an Offer of Compromise, you can settle your debt out of court, which can make everything less stressful.
Now, some businesses will benefit from declaring bankruptcy. But it can do a lot of damage to your credit and your ability to get future loans.
Bankruptcy can also have up to $150,000 worth of hidden costs. Unless you need to declare bankruptcy, you should explore alternatives first.
If you want to maintain your financial status, you should consider an Offer in Compromise. Then, you can pay off your debts without sacrificing your entire financial situation.
Even if you don't need to file for bankruptcy, you should consider if you're a defendant in a legal case. If so, that can help you prove your inability to pay your SBA loan.
While keeping cases out of court can lower the cost, you don't always have that control. If the opposing party doesn't want to negotiate a case, you'll have to pay for legal counsel for the trial.
You may face a trial for problems with your product. And if you're a sole proprietor, personal trials can affect your business.
On the one hand, having a trial means you have to spend more money to prove your case. However, you can use that as leverage when applying for an Offer in Compromise.
Whether your case has a factual dispute or another issue, your legal fees may burden your business finances. As long as you can show your small business finances, any major expense can help you get an Offer in Compromise.
You'll still need to pay back some money on your loan. But depending on how much of a burden you have, you can reduce your loan bill.
You also need to put your SBA loan in liquidation status. That can help you qualify for an Offer in Compromise
The SBA has a set of procedures they follow for liquidation loans. You may need to prove that your business has a lot of expenses that you can't afford to pay.
Then, you can get your SBA loan to have liquidation status. You can consult the SBA to determine your loan status and if you can switch it to be in liquidation.
After you obtain that status, you can move forward with your application for an Offer in Compromise.
If you can't pay for your loan, you can use that to liquidate it. That can then help you move further through the process.
You can also work with a lawyer to help make your case. If you can prove you have too much financial liability, you may be able to get the offer without having a loan in liquidation.
You don't have to currently have financial issues to qualify for an Offer in Compromise. But you should be able to prove some financial hardship
If you can show that paying the loan in full will be difficult, you can get an adjustment on your loan. One way to show this is if you're disabled or ill.
You may be able to use other methods to prove the debt would cause hardship. It can depend on your situation, so you should consult with an attorney for specifics.
To determine if paying your small business loan will give you financial problems, you should calculate a few things.
Figure out the cost of your loan, including the principal amount and any interest you owe. You should also think about any major expenses you have to pay.
You'll be able to use that information to prove your case to SBA. It can be hard to determine risk of financial hardship, and sometimes that may be subjective.
But the more information you can provide, the easier it will be for you and your lawyer to prove your case.
Another thing to consider when applying for an Offer in Compromise is how long it will take to pay off your debt. If you can't pay your loan in a reasonable amount of time you may qualify for refinancing.
This applies to both paying your loan regularly or if SBA goes through loan collections. When it takes over a certain amount of time to pay back your loan, it may be worth it to SBA to compromise.
Unfortunately, it can be hard to determine what is reasonable and what's not. If you aren't profiting much, that may be one tool you can use.
Your basic small business expenses might also help you prove you can't pay the debt soon.
You can contact the SBA to determine what they or the third-party lender considers reasonable. Then, you can get a sense of the numbers.
If you don't know what the other party considers to be reasonable, then you can have a harder time.
As the debtor, you may need to provide extensive financial records to prove this. However, it can still be worth it if you want to avoid the hassle of bankruptcy.
If you have significant small business debt, you don't have to pay it off. You can apply for an Offer in Compromise, especially if your loan is with the SBA.
The process can take time, and you should consider a few things before you start. But it can be a great alternative to other liquidation methods.
Are you ready to apply for an SBA Offer in Compromise? Contact us for a case evaluation.
Millions of Dollars in SBA Debts Resolved via Offer in Compromise and Negotiated Repayment Agreements without our Clients filing for Bankruptcy or Facing Home Foreclosure
Millions of Dollars in Treasury Debts Defended Against via AWG Hearings, Treasury Offset Program Resolution, Cross-servicing Disputes, Private Collection Agency Representation, Compromise Offers and Negotiated Repayment Agreements
Our Attorneys are Authorized by the Agency Practice Act to Represent Federal Debtors Nationwide before the SBA, The SBA Office of Hearings and Appeals, the Treasury Department, and the Bureau of Fiscal Service.
Small business sole proprietor obtained an SBA COVID-EIDL loan for $500,000. Client defaulted causing SBA to charge-off the loan, accelerate the balance and refer the debt to Treasury's Bureau of Fiscal Service for aggressive collection. Treasury added $180,000 in collection fees totaling $680,000+. Client tried to negotiate with Treasury but was only offered a 3-year or 10-year repayment plan. Client hired the Firm to represent before the SBA, Treasury and a Private Collection Agency. After securing government records through discovery and reviewing them, we filed an Appeals Petition with the SBA Office of Hearings & Appeals (OHA) court challenging the SBA's referral of the debt to Treasury citing a host of purported violations. The Firm was able to negotiate a reinstatement and recall of the loan back to the SBA, participation in the Hardship Accommodation Plan, termination of Treasury's enforced collection and removal of the statutory collection fees.
Client’s small business obtained an SBA 7(a) loan for $150,000. He and his wife signed personal guarantees and pledged their home as collateral. The SBA loan went into default, the term or maturity date was accelerated and demand for payment of the entire amount claimed was made. The SBA lender’s note gave it the right to adjust the default interest rate from 7.25% to 18% per annum. The business filed for Chapter 11 bankruptcy but was dismissed after 3 years due to its inability to continue with payments under the plan. Clients wanted to file for Chapter 7 bankruptcy, which would have been a mistake as their home had significant equity to repay the SBA loan balance in full as the Trustee would likely seize and sell the home to repay the secured and unsecured creditors. However, the SBA lender opted to pursue the SBA 7(a) Guaranty and subsequently assigned the loan and the right to enforce collection to the SBA. Clients then received the SBA Official 60-Day Notice and hired the Firm to respond to it and negotiate on their behalf. Clients disputed the SBA’s alleged balance of $148,000, as several payments made to the SBA lender during the Chapter 11 reorganization were not accounted for. To challenge the SBA’s claimed debt balance, the Firm Attorneys initiated expedited discovery to obtain government records. SBA records disclosed the true amount owed was about $97,000. Moreover, because the Clients’ home had significant equity, they were not eligible for an Offer in Compromise or an immediate Release of Lien for Consideration, despite being incorrectly advised by non-attorney consulting companies that they were. Instead, our Firm Attorneys recommended a Workout of $97,000 spread over a lengthy term and a waiver of the applicable interest rate making the monthly payment affordable. After back and forth negotiations, SBA approved the Workout proposal, thereby saving the home from imminent foreclosure and reducing the Clients' liability by nearly $81,000 in incorrect principal balance, accrued interest, and statutory collection fees.
Clients' 7(a) loan was referred to Treasury's Bureau of Fiscal Service for enforced collection in 2015. They not only personally guaranteed the loan, but also pledged their primary residence as additional collateral. One of the clients filed for Chapter 7 bankruptcy thinking that it would discharge the SBA 7(a) lien encumbering their home. They later discovered that they were mistakenly advised. The Firm was subsequently hired to review their case and defend against a series of collection actions. Eventually, we were able to negotiate a structured workout for $180,000 directly with the SBA, saving them approximately $250,000 (by reducing the default interest rate and removing Treasury's substantial collection fees) and from possible foreclosure.
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