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My name is Jason Milleisen, the founder of Distress Loan Advisors. Today, I’m going to tell you about 10 different things that I’ve seen over the years that may indicate that a bank was not well versed in the SBA default in offering compromise process.
1) They think you have to sell your home in order to submit an offer and compromise.
This is not true. The SBA is very clear about the fact that they want lenders to work with borrowers and guarantors in order to avoid having to foreclose on people’s personal residences. So what this means is that the SBA is really willing to negotiate. They want you to figure out a way to come up with cash without foreclosing on your home. And where banks get tripped up is that the SBA does require that a business close (cease operations,) and also all the business assets have to be sold. And so I once had a bank who thought, in error, that liquidating all the assets also included the home of the guarantor. And so when we made an offer to them, they said, “No, no, no, the house has to be sold first and then we can consider a settlement.”
I’ve done a lot of these over the years and I can tell you emphatically that such a statement is incorrect. And so if your bank tells you that they’re wrong and either the person who is telling you it is new, uninformed, um, or the bank in general just doesn’t have any experience.
2) Your bank doesn’t understand the difference between an offering compromise and a lien release.
They are not the same thing. An SBA Offer In Compromise is seeking the release of a guarantor or a borrower in exchange for less than the full balance…so you’re seeking for them to settle the debt. That process requires the SBA to sign off on any settlement, so if you want to do an offer in compromise, if you want to be released from your guarantee and change for less than what you owe, the SBA needs to sign off on that.
In contrast, if your home has pledged as collateral and let’s say you filed for personal bankruptcy (so there’s no longer a personal guarantee) if your home is still pledged, you need to go back to the lender and submit a request for cash in exchange for the release of the lien.
This circumstance does not require an offering compromise. If your loan is an SBA 7a loan and your lender is a preferred lender (most of them are), then your lender actually has the authority to release that piece of collateral, not only without SBA approval but the SBA doesn’t even require any notification from the lender. So the lender has complete control over that decision. And it’s a very big difference because going to the SBA, it takes longer. It’s obviously one more hurdle to jump over because there is always the chance that they say no.
Whereas with a release of the lien in exchange for cash, that’s purely a collateral transaction. There’s no debt forgiveness associated with it.
3) Your bank thinks the SBA needs to approve a lien release.
This is related to what I just covered and have covered elsewhere. In #2 above, what I was saying was that they’re not the same thing and some banks don’t understand that. Some banks, even though they understand that a lien release is not the same as offer and compromise, they still don’t understand that the SBA unilateral servicing matrix clearly states that any preferred lender has the right to release collateral and make that decision on their own without any SBA involvement.
So when I have a lender who is a preferred lender and the loan was a seven a loan, when they tell me, “the SBA has to sign off on this,” I have to always challenge them. I send them a copy of their servicing matrix. One would think that’s something that they have access to as the lender. But you’d be surprised that there are some lenders who really are not aware of it.
4) If your bank tells you that the SBA won’t settle because it’s government backed, then it’s very clear that they have no idea what they’re talking about.
This has only happened maybe once in the 10 years that I’ve been doing it. And I was sort of flabbergasted when my potential client called me and said their lender said, “Oh no, this can’t be settled because it’s an SBA loan.”
Um, couldn’t be further from the truth. My whole business is built around the concept of the SBA offering compromise. So obviously, all you have to do is a quick Google search to know that that is completely false.
5) Your bank tells you that bankruptcy really is your best option.
There’s a couple points I want to make about this one. Really nobody should be giving you bankruptcy advice except for a bankruptcy attorney who’s licensed in your state. And that includes somebody like me because I, I don’t know the ins and outs of bankruptcy. There is nuance to it and there’s a lot of things you need to know.
Your banker shouldn’t be telling you should file for bankruptcy because they’re not privy to every detail of your finances, or bankruptcy attorney’s, and it’s really not their place to be giving you that sort of advice. Their role, if you choose to submit a settlement, is to review the settlement. To encourage you to do, a bankruptcy doesn’t make a whole lot of sense to me. That’s not their role. That’s the bankruptcy attorney’s role.
And so again, you know, going back to an earlier point, the SBA definitely will settle and it does not require you to file bankruptcy in order to do that.
6) If your bank tells you that you will, there are two settlements that are required, one with them and then one with the SBA, then they probably don’t have a lot of experience.
The way an offer in compromise is supposed to work is you submit one settlement offer, and if that’s accepted, those proceeds are split between your bank and your SBA. Everybody knows that the SBA guarantees a portion of the debt, which means if you default on your loan, the SBA will reimburse the bank for a portion of it. With a 7a loan, it’s typically 75%. Once that 75% is remitted to the bank, anything collected going forward means it gets split between the bank and the SBA on a pro rata basis.
So basically 75 cents out of every dollar gets sent back to the SBA. And so for that reason there are not two settlements that are required. It’s just one, you make one offer and then that money is split behind the scenes after the fact between the bank and the lender.
So if your lender says we’ll pay us our portion and then you can negotiate with the SBA, they’re doing it wrong. And I can tell you the SBA would not appreciate the fact that the bank is trying to be made whole and they want the SBA to take a discount.
7) They think they need to send your IRS Form 4506T directly to the IRS.
This just happened to me. So it’s fresh in my mind. We have a settlement that we’ve been working on for a long time because the bank is really not knowledgeable about anything to do with the SBA offer in compromise.
I’m recording this on February 7th, and sometime in December, the bank asked us for the IRS 4506T, which is a request to verify, the IRS transcript. Essentially what they’re doing is they’re making sure that the tax returns you gave them match what the IRS has.
And so a couple months later I finally followed with the Bank’s attorney and the attorney said, “Oh, we’re still waiting to hear back from the IRS.” I immediately explained to him the SBA does that. There is a package of, it’s, I forget how many tabs that is. I think it’s eight now, where the bank sends all this information to the SBA and then the SBA runs with it. Within that package is the IRS 4506T that’s required by them. So it doesn’t require to go to the IRS and then wait for the IRS to return that form.
8) They take forever to liquidate very basic business assets.
I have a client with a bank down in Florida and he’d been trying to liquidate maybe $10,000 worth of assets over the last year. This is a clear sign that this bank doesn’t know what they’re doing when it comes to these liquidations, because it should be very simple.
There’s a couple of ways to do it. The bank can engage a local appraiser or auctioneer, they’ll come pull the stuff, put it in a general auction and they’ll get what they get for it.
Alternatively, if the borrower or guarantor wants to sell it, put it on Craigslist, put it on eBay, they can sell it that way. There’s easy ways to liquidate things and so if your bank is taking forever to do it, that’s a sign that they don’t have a lot of experience with it and they’re slowing the process down unnecessarily.
9) If your bank tells you that your settlement should go directly to the SBA, it means either A) they don’t know what they’re doing, or B) they’re being extremely lazy.
The SBA actually pays a servicing fee to lenders. And what that means is they’re supposed to be servicing your loan and that goes from billing to collecting payments to offer in compromise. And so what’s supposed to happen is you’re supposed to submit an offer in compromise to your lender. They review it if they think it’s acceptable, they make a recommendation to the SBA for a final decision.
If your bank is telling you “we don’t process them, you have to do it directly with the SBA.” Again, that means they’re either just not interested, they’re being lazy or they really don’t understand the process.
10) If your bank tells you that settling with the treasury is a decent option, so you shouldn’t worry about settling right now, they clearly don’t understand the entire process.
As I’ve written about before on my website numerous times, settling with the treasury is pretty atrocious. It’s so atrocious that I actually don’t help people with settlements that have gone to the treasury because I found it to be such a fruitless exercise.
For anyone that doesn’t know anything that gets referred to the treasury, a 28% penalty is going to be added to your loan. And then they’re generally not going to settle for anything less than say 70 to 80% of the loan balance, including that new fee, which means they’re essentially looking for you to pay the entire balance of the loan in cash.
To me, that is not a reasonable option. And so anyone that says to you, “Oh, you can just deal with the treasury”, doesn’t understand that part of the process.
Jason Milleisen is the founder and owner of Distressed Loan Advisors, and can be reached at 631-428-1978 or at firstname.lastname@example.org.