Pros and Cons of SBA Loan Modification
Discover the pros & cons of SBA loan modification with Protect Law Group. Expert SBA debt relief help for small businesses. Take control today!
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.
Clients obtained an SBA 7(a) loan for $324,000 to buy a small business and its facility. The business and real estate had an appraisal value of $318,000 at the time of purchase. The business ultimately failed but the participating lender abandoned the business equipment and real estate collateral even though it had valid security liens. As a result, the lender recouped nearly nothing from the pledged collateral, leaving the business owners liable for the deficiency balance. The SBA paid the lender the 7(a) guaranty money and was assigned ownership of the debt, including the right to collect. However, the clients never received the SBA Official 60-Day Notice and were denied the opportunity to negotiate an Offer in Compromise (OIC) or a Workout directly with the SBA before being transferred to Treasury's Bureau of Fiscal Service, which added an additional $80,000 in collection fees. Treasury garnished and offset the clients' wages, federal salary and social security benefits. When the clients tried to negotiate with Treasury by themselves, they were offered an unaffordable repayment plan which would have caused severe financial hardship. Clients subsequently hired the Firm to litigate an Appeals Petition before the SBA Office & Hearings Appeals (OHA) challenging the legal enforceability and amount of the debt. The Firm successfully negotiated a term OIC that was approved by the SBA Office of General Counsel, saving the clients approximately $205,000.
Client personally guaranteed an SBA 7(a) loan for $100,000 from the lender. The SBA loan went into early default in 2006 less than 12 months from disbursement. The SBA paid the 7(a) guaranty monies to the lender and subsequently acquired the deficiency balance of about $96,000, including the right to collect against the guarantor. However, the SBA sent the Official 60-Day Due Process Notice to the Client's defunct business address instead of his personal residence, which he never received. As a result, the debt was transferred to Treasury's Bureau of Fiscal Service where substantial collection fees were assessed, including accrued interest per the promissory note. Treasury eventually referred the debt to a Private Collection Agency (PCA) - Pioneer Credit Recovery, Inc. Pioneer sent a demand letter claiming a debt balance of almost $310,000 - a shocking 223% increase from the original loan amount assigned to the SBA. Client's social security disability benefits were seized through the Treasury Offset Program (TOP). Client hired the Firm to represent him as the debt continued to snowball despite seizure of his social security benefits and federal tax refunds as the involuntary payments were first applied to Treasury's collection fees, then to accrued interest with minimal allocation to the SBA principal balance.
We initially submitted a Cross-Servicing Dispute (CSD) challenging the referral of the debt to Treasury based on the defective notice sent to the defunct business address. Despite overwhelming evidence proving a violation of the Client's Due Process rights, the SBA still rejected the CSD. As a result, an Appeals Petition was filed with the SBA Office of Hearings & Appeals (OHA) Court challenging the SBA decision and its certification the debt was legally enforceable in the amount claimed. After several months of litigation before the SBA OHA Court, our Firm Attorney successfully negotiated an Offer in Compromise (OIC) Term Workout with the SBA Supervising Trial Attorney for $82,000 spread over a term of 74 months at a significantly reduced interest rate saving the Client an estimated $241,000 in Treasury collection fees, accrued interest (contract interest rate and Current Value of Funds Rate (CVFR)), and the PCA contingency fee.
Our firm successfully negotiated an SBA offer in compromise (SBA OIC), settling a $974,535.93 SBA loan balance for just $18,000. The offerors, personal guarantors on an SBA 7(a) loan, originally obtained financing to purchase a commercial building in Lancaster, California.
The borrower filed for bankruptcy, and the third-party lender (TPL) foreclosed on the property. Despite the loan default, the SBA pursued the offerors for repayment. Given their limited income, lack of significant assets, and approaching retirement, we presented a strong case demonstrating their financial hardship.
Through strategic negotiations, we secured a favorable SBA settlement, reducing the nearly $1 million debt to a fraction of the amount owed. This outcome allowed the offerors to resolve their liability without prolonged financial strain.
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