Debt Resolution: What Are SBA Offers in Compromise (OIC)?
It's been a tough year for many small business owners. Find helpful information in our guide to Offers In Compromise and how to find legal assistance.
If you want to settle SBA loan debt but don't know how, then the answer is simple. Click here for your ultimate guide today!
Book a Consultation CallIt's a sad reality that half of all small businesses fail in the first five years of existence. While it might be the big dream of many to own their own business, the truth is that it's a tough road to create a successful and thriving business.
You may have thought you had a good plan and even worked out some financing through an SBA loan. Now, as your business struggles, that loan debt might be getting to be too much for you and your business.
When you sought a Small Business Administration (SBA) loan for your business, you had a plan to manage the debt. But even the best debt plans can go awry.
Now, you might be in the position of trying to figure out how to settle this loan debt as your business is in trouble or already shuttered. Read on to learn more about your options.
Before discussing the repayment of SBA loans, let's take a look at how an SBA loan works.
When you seek an SBA loan, you don't go directly to the Small Business Administration. Instead when you apply for an SBA loan, you go directly to your own lender and seek a loan backed by the SBA.
Your lender then takes your application to the SBA to see if they will provide the backing. It requires more documentation and paperwork from you, the applicant, and more work for the lender too. Yet, it reduces their risk because the loan is being backed by federal funds through the SBA.
The money you get for the loan comes from the lender but is just insured in case of default by the SBA. Understanding this matters as you try to figure out what to do with your loan that needs to be settled.
Once you're granted an SBA loan through your lender, your payments go to the lender. You're in essence paying them back, not the SBA.
So, if you fall behind on payments, it's the lender who will seek repayment. They will go through the debt collection process. If you default on your loan, the lender will go back to the SBA and request the guarantee be paid.
It's possible the lender might forgive part of the loan, you'll want to make every effort to work with them before having to deal with the SBA. The lender knows the SBA only guarantees a portion on the loan anyway, so they may be willing to forgive part of it.
The SBA has something called an offer in compromise that might allow you to get forgiveness on part of your loan. However, an offer in compromise is only an option after the loan is in default.
You might be very worried about paying this money back and hoping that some of it will be forgiven by the SBA. Having said that, you need to make every effort to avoid your loan going into default.
The SBA is not generous when it comes to arrangements in an OIC. They will make every effort to get their money and use whatever assets might be available to do it.
So, before you latch onto the idea of an offer in compromise, let's discuss how you should approach the money you owe.
If you're behind on payments, it's important to take a breath and remember how an SBA loan works. Remember, the money for your loan came from your lender.
If you're having trouble making payments, you want to work with your lender first. Go to them and ask for help. Don't hide from the problem or pretend the problem doesn't exist. It will only make it worse to ignore it.
Go directly to your lender and ask for a payment arrangement. They might be willing to do lower payments for a period of time, for example. They might be able to adjust your interest rate or waive late fees if you need to pay a little late.
But you need to really work to communicate with the lender. You want to make every effort to avoid defaulting on your loan.
What happens if your loan goes into default or is about to default? In most scenarios, (loan terms vary from lender to lender) a loan is considered in default when it becomes 120 days behind in payments.
So, what are the consequences of a loan in default? Once the loan goes into default the balance on the loan is due in full. The lender can then go back to the SBA asking for repayment.
If the SBA pays off your loan to the lender, be prepared for them to come to you for repayment and with every intention of getting the money.
Even the most successful small businesses have faced financial struggles. There is a natural ebb and flow to running a business that you need to be prepared for.
If you're behind or facing a cash problem, you need to address it right away. One option might be to seek an SBA loan deferment. This would help your business get back upright and get caught up. As your lender and the SBA consider your requests for help, there are some things they will want to see.
While your intentions might be completely genuine, it's not likely to get help from a lender or from the SBA if you can't legitimately show you can hold up your end of the agreement.
It's one thing to agree to a repayment plan, you'll need to show you have the money coming in to actually make it work.
Many small businesses struggle and eventually fail because they don't have adequate cash flow. Your cash flow is how much money you have coming in to help you pay your debts.
You'll want to make sure your books are up to date and you can show you have money coming in from accounts receivable. If you have customers who are behind on paying you, you'll want to make every effort to get paid so you can show you have the money you need coming in to actually live up to the deferment or repayment plan.
The truth is that nobody likes to be behind on their bills and you might want to hide from the problems. But lenders are going to be more willing to help you out when you make every effort to be proactive and responsible.
Be prepared to show the lender your track record and your books. Show your profit margins and what's impacting them. The lender will want to believe if they help you that you can live up to your part of the deal. You can do that by making sure your books are ready for the lender.
It won't make sense for them to want to help you or believe you can get out of the trouble if you're unable to fix the situation.
Communication is the key to getting the help you need. So many borrowers avoid the calls and are afraid to talk to the lender. Your SBA deferment may depend on you showing you will do exactly what the lender is asking of you.
If they ask you for paperwork or documentation, it's necessary that you provide it in the timeframe they request. Anytime you do something and it's late it sends a message to the lender you aren't sincere in your efforts to fix the problem.
When you sought an SBA loan you were likely asked to offer your own down payment or collateral in exchange for the loan. You will want to carefully consider the role that collateral will play in getting behind.
If the collateral sold off is worth more than what you owe, the bank can sell it to get their money. If you go into default and have to work with the SBA to try to come to a resolution on your debt, the SBA will certainly want to know the value of all assets.
You want to be forthright about the equipment your business might need to continue working. It won't make sense for the bank to seize a piece of equipment you need to operate your business. But don't be surprised when you're asked for an accounting of assets, including equipment.
If your loan goes into default and you are then dealing with the SBA, one possible option is an offer in compromise agreement. There is no guarantee that the SBA will approve an offer in compromise and you should know upfront, they do require your business to be closed.
They expect to know about all of your assets and it's likely they will require them to be sold to get approval. You want to carefully consider this option especially if you have used your house as collateral. The SBA will want any equity from the house as part of the repayment plan.
When your business took on this loan debt, certainly you couldn't imagine being behind on your loan or trying to figure out a forgiveness plan.
Working this out with your lender and the SBA may require some professional assistance. These arrangements and even negotiations can be complex and it makes sense to have someone who's looking out for your interests.
Contact us today to discuss your debt and let's see if we can help you come up with a forgiveness agreement.
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.
Client personally guaranteed SBA 7(a) loan for $350,000. The small business failed but because of the personal guarantee liability, the client continued to pay the monthly principal & interest out-of-pocket draining his savings. The client hired a local attorney but quickly realized that he was not familiar with SBA-backed loans or their standard operating procedures. Our firm was subsequently hired after the client received the SBA's official 60-day notice. After back-and-forth negotiations, we were able to convince the SBA to reinstate the loan, retract the acceleration of the outstanding balance, modify the original terms, and approve a structured workout reducing the interest rate from 7.75% to 0% and extending the maturity date for a longer period to make the monthly payments affordable. In conclusion, not only we were able to help the client avoid litigation and bankruptcy, but our SBA lawyers also saved him approximately $227,945 over the term of the workout.
Client personally guaranteed an SBA 7(a) loan to help with a relative’s new business venture. After the business failed, Treasury was able to secure a recurring Treasury Offset Program (TOP) levy against his monthly Social Security Benefits based on the claim that he owed over $1.2 million dollars. We initially submitted a Cross-Servicing Dispute, but then, prepared and filed an Appeals Petition with the SBA Office of Hearings and Appeals (SBA OHA). As a result of our efforts, we were able to convince the SBA to not only terminate the claimed debt of $1.2 million dollars against our client (without him having to file bankruptcy) but also refund the past recurring amounts that were offset from his Social Security Benefits in connection with the TOP levy.
Client’s small business obtained an SBA 7(a) loan for $750,000. She and her husband signed personal guarantees exposing all of their non-exempt income and assets. With just 18 months left on the maturity date and payment on the remaining balance, the Great Recession of 2008 hit, which ultimately caused the business to fail and default on the loan terms. The 7(a) lender accelerated and sent a demand for full payment of the remaining loan balance. The SBA lender’s note allowed for a default interest rate of about 7% per year. In response to the lender's aggressive collection action, Client's husband filed for Chapter 7 bankruptcy in an attempt to protect against their personal assets. However, his bankruptcy discharge did not relieve the Client's personal guarantee liability for the SBA debt. The SBA lender opted to pursue the SBA 7(a) Guaranty and subsequently assigned the loan and the right to enforce collection against the Client to the SBA. The Client then received the SBA Official 60-Day Notice. After conducting a Case Evaluation with her, she then hired the Firm to respond and negotiate on her behalf with just 34 days left before the impending referral to Treasury. The Client wanted to dispute the SBA’s alleged debt balance as stated in the 60-Day Notice by claiming the 7(a) lender failed to liquidate business collateral in a commercially reasonable manner - which if done properly - proceeds would have paid back the entire debt balance. However, due to time constraints, waivers contained in the SBA loan instruments, including the fact the Client was not able to inspect the SBA's records for investigation purposes before the remaining deadline, Client agreed to submit a Structured Workout for the alleged balance in response to the Official 60-Day Notice as she was not eligible for an Offer in Compromise (OIC) because of equity in non-exempt income and assets. After back and forth negotiations, the SBA Loan Specialist approved the Workout proposal, reducing the Client's purported liability by nearly $142,142.27 in accrued interest, and statutory collection fees. Without the Firm's intervention and subsequent approval of the Workout proposal, the Client's debt amount (with accrued interest, Treasury's statutory collection fee and Treasury's interest based on the Current Value of Funds Rate (CVFR) would have been nearly $291,030.
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