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Can I Use an SBA Loan to Pay Off Personal Debt?
Can I use an SBA loan to pay off personal debt? Read further to discover how you can and can't use your SBA loan funds.
SBA loan settlements require specific knowledge of current policies and changes. Here are the elements of a successful SBA offer in compromise.
Book a Consultation CallMany people rely on loans to start or grow their small businesses. Financing remains a critical part of turning a dream into reality. Small businesses use loans for everything from working capital to purchasing equipment to marketing initiatives.
When businesses fall into hardship, it can become difficult to make payments on loans. While banks will often try to create work-out plans with struggling borrowers, this becomes trickier if the loan is guaranteed by the Small Business Administration.
If your loan falls into default, you can request an SBA offer in compromise (OIC). Getting approval for your OIC can mean the difference between being crushed by your SBA debt and being able to pay back a much smaller amount.
SBA Offer in Compromise
If you begin to fall behind on your loan payments, your lender will attempt to collect. This can include everything from repossessing the assets used as collateral on the loan to making a demand on the guarantors.
Any guarantors will have signed a guarantee document. The guarantee comprises a legal promise that you will personally pay back the loan if your business cannot. The SBA requires personal guarantees from any borrowers owning 20% or more of the business or those that have key management positions.
The SBA also holds a guarantee on the loan, but in a different way. The SBA's guarantee says that in the event of default if the bank fails in its collection efforts, the SBA will repay the bank. This can be up to 85% of the loan amount.
As the lender begins its efforts to collect from the business, it will turn to the guarantors and make demands as well. The bank will request that the SBA honor their guarantee once the lender exhausts all efforts to collect. If the federal government takes a loss, it may take additional steps, such as freezing the borrower's bank account or garnishing wages.
The offer in compromise represents your one chance to settle the debt. You would pay a smaller portion of the full amount due. In exchange, the SBA considers the debt to be completely paid off.
On an SBA Form 1150, you would make an offer and state your case for the SBA to accept your offer. You must meet certain requirements to submit an SBA loan offer in compromise, which the SBA has outlined:
Based on the eligibility criteria, you must wait to begin the process for an offer in compromise (OIC) until the business completes its closure and the assets liquidated. You submit your OIC proposal to the SBA through your lender, so you will want to confirm that your lender is open to an OIC.
If the SBA approves your offer, your personal guaranty on the loan will be released. You will pay the amount agreed to in the offer, and this payment could be structured over time.
As you prepare your offer, you will also need to get your financial disclosures ready. Since the SBA needs to understand your "full financial capacity," you'll need to have ready prior years' tax returns, a personal financial statement with a list of your assets, as well as other forms that the SBA will require.
The most critical part of your OIC consists of your grounds for acceptance of the offer. This represents your argument to the SBA that they should settle with you rather than pursue the full amount of the debt. There are a few strategies that can result in the SBA accepting your OIC.
Demonstrate to the SBA that it cannot recover the debt in a reasonable amount of time. You must convince the SBA that your offer is a better option for recovering part of the loan. For example, a factor could be the amount of disposable monthly income you have compared to the loan amount.
This approach looks at the underlying SBA loan itself and raises questions about the SBA's ability to prevail in court because of legal issues or factual disputes. An attorney would review the loan documentation and determine if there were issues with documentation, misrepresentation, or due process.
The SBA will not settle if further collection efforts will recover more. You need to convince the SBA that your offer is better than what the federal government could otherwise obtain through home equity, wage garnishment, litigation, or other tactics.
This involves "crunching the numbers" and understanding the collection process so that you can make an offer that the SBA will find reasonable.
If your loan is facing default, the best option is to open discussions about options as soon as possible. Your willingness to work with the SBA and your lender will go a long way. The SBA offer in compromise is a way to make a good faith settlement on your business debt.
How much you will end up owing will ultimately depend on the amount of the debt and the package that you present to the SBA based on the strategy used.
Rather than attempt to prepare an offer yourself, you can use an experienced attorney. You will be more likely to have the SBA accept your offer in compromise as reasonable and have your rights protected. Contact us at Protect Law Group today to speak with an SBA work-out attorney.
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.
Our firm successfully assisted a client in closing an SBA Disaster Loan tied to a COVID-19 Economic Injury Disaster Loan (EIDL). The borrower obtained an EIDL loan of $153,800, but due to the prolonged economic impact of the COVID-19 pandemic, the business was unable to recover and ultimately closed.
As part of the business closure review and audit, we worked closely with the SBA to negotiate a resolution. The borrower was required to pay only $1,625 to release the remaining collateral, effectively closing the matter without further financial liability for the owner/officer.
This case highlights the importance of strategic negotiations when dealing with SBA settlements, particularly for businesses that have shut down due to unforeseen economic challenges. If you or your business are struggling with SBA loan debt, we focus on SBA Offer in Compromise (SBA OIC) solutions to help settle outstanding obligations efficiently.
Our firm successfully facilitated the SBA settlement of a COVID-19 Economic Injury Disaster Loan (EIDL) where borrower received an SBA disaster loan of $150,000, but due to the severe economic impact of the COVID-19 pandemic, the business was unable to recover.
Despite the borrower’s efforts to maintain operations, shutdowns and restrictions significantly reduced the customer base and revenue, making continued operations unsustainable. After a thorough business closure review, we negotiated with the SBA, securing a resolution where the borrower paid only $6,015 to release the collateral, with no further financial liability for the owner/officer.
This case demonstrates how businesses affected by the pandemic can navigate SBA loan settlements effectively. If your business is struggling with an SBA EIDL loan, we specialize in SBA Offer in Compromise (SBA OIC) solutions to help close outstanding debts while minimizing financial burden.
Client's small business obtained an SBA COVID EIDL for $301,000 pledging collateral by executing the Note, Unconditional Guarantee and Security Agreement. The business defaulted on the loan and the SBA CESC called the Note and Guarantee, accelerated the principal balance due, accrued interest and retracted the 30-year term schedule.
The loan was transferred to the Treasury's Bureau of Fiscal Service which resulted in the statutory addition of $90,000+ in administrative fees, costs, penalties and interest with the total debt now at $391.000+. Treasury also initiated a Treasury Offset Program (TOP) levy against the client's federal contractor payments for the full amount each month - intercepting all of its revenue and pushing the business to the brink of bankruptcy.
The Firm was hired to investigate and find an alternate solution to the bankruptcy option. After submitting formal production requests for all government records, it was discovered that the SBA failed to send the required Official 60-Day Pre-Referral Notice to the borrower and guarantor prior to referring the debt to Treasury. This procedural due process violation served as the basis to submit a Cross-Servicing Dispute to recall the debt from Treasury back to the SBA and to negotiate a reinstatement of the original 30-year maturity date, a modified workout, cessation of the TOP levy against the federal contractor payments and removal of the $90,000+ Treasury-based collection fees, interest and penalties.
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