(Note: this article is based on the transcript of a Youtube video I made. You can watch the video here.)
Hey there, my name is Jason, and I’m the founder of Distressed Loan Advisors. Since 2009, I’ve been consulting with SBA borrowers, primarily regarding the SBA Offer in Compromise. If you have questions, I offer case evaluations, and you can schedule time here.
If you’re a regular on my Youtube channel, you’ll know I typically discuss EIDL loan developments, but today is different. If you’re looking for EIDL answers, you can stop reading. EIDL info can be found here. My EIDL-centric Youtube channel can be found here.
This article will provide a 2024 update regarding the SBA 7(a) Offer in Compromise and, to a lesser extent, the 504 loan. The 7(a) program is by far the largest SBA loan program, and most of the settlements I handle involve this loan. The purpose of this article is to explain the entire process from start to finish and to share some insights I’ve gained over the past 15 years of experience.
In those years, I’ve seen and done a lot, and I hope to pass on some useful tidbits. By the end of this article, you’ll have a clear understanding of the Offer in Compromise process.
Now, let’s say your business is struggling, and you’ve decided to close it. People often ask me what steps they need to follow. So before we even get to discussing an Offer in Compromise, there are a few things that must happen. First, the business needs to be sold or closed. If you sell it as a going concern, that’s fine. If there’s no buyer, the alternative is to close the business and liquidate all of its assets.
Notice that I said business assets. Occasionally, I encounter SBA lenders who don’t fully understand the process and wrongly tell borrowers they need to sell their personal residence before the SBA will consider a settlement. That’s simply not true. You don’t need to sell personal assets in order for the SBA and the lender to review your SBA Offer in Compromise for a 7(a) loan.
The general order of things is this: Step one, close the business; step two, liquidate the assets; step three, submit the offer. I’ll dive into the details of each step, but I wanted to start by laying out the basic process. People often want to submit an offer right away, but the business still has assets. Essentially, the SBA requires that everything the business owns is sold off and applied to the loan balance. This way, when they evaluate your Offer in Compromise, they have a clear idea of how much is still owed, without any pending sales of business assets.
“Before we dive in, I want to provide some general tips. If any of this sounds familiar, it’s because I have a cornerstone article on my website that covers everything I’ll discuss here. So, if you recognize any points, it’s likely from reading that.
First and foremost, when your business starts to struggle and you’re considering a settlement, do not ghost your bank. In other words, if they call, return the call. If they email, reply promptly. If you become the type of person who doesn’t respond and they’re constantly chasing you, it’s going to hurt your chances when you ask them for a favor in settling. They’ll feel like you’re not committed to the process. So, don’t disappear.
Next, you need to save some money for a rainy day. Any settlement is going to require a material cash payment. You can’t approach an Offer in Compromise with nothing and expect them to simply let you walk away. I’ve had people come to me after trying to settle on their own, showing me their offers. Their explanation for not being able to pay is that they have no assets left and are seeking a full release. That won’t work—you have to offer something. So, once it becomes clear that a settlement is on the horizon, start conserving cash. The difference between settling and not settling often comes down to having something to offer.
A common mistake I see is that people hold onto their business for too long. They pour all their personal assets and cash into it, and by the time they decide to settle, there’s nothing left. Unfortunately, this often means they won’t be able to settle.
Another important point is to make sure you’re in communication with your landlord. Aside from the SBA loan, your lease is likely the biggest commitment your business has. First, verify whether you have a personal guarantee on the lease, as some don’t. Then, keep your landlord informed. If selling your business is part of the plan, you’ll need your landlord to agree to grant a lease to the buyer of your business.
If you don’t maintain a good relationship with your landlord, they may not be as willing to work with you when the time comes. Yes, it’s business, but the point remains: do the right thing and be responsive. This applies to both the landlord and the lender. You owe a significant amount of money, so it’s essential to play ball. Those are just some basic general tips to start.
Now, let’s get into the specifics of how this process will unfold for you. First, as we discussed earlier, you’ll either close the business and liquidate its assets or sell it as a going concern. Either option is acceptable. No one will fault you if you can’t find a buyer for the business as a whole. In that case, you can sell the assets yourself. If you have connections in the industry or want to sell items on platforms like Craigslist, that’s an option. However, always remember that you need the lender’s permission to sell business assets. Don’t sell anything unless you have their explicit approval. This is a critical point. I’ve seen situations where people sold assets without the bank’s permission, and the bank considered it fraudulent. You’re selling their collateral, and if they haven’t approved the sale price, it can create serious problems. So, be sure to get permission.
If you can’t sell the assets, the bank may have resources to handle it. Typically, they’ll hire a third-party auctioneer, and as long as the assets have sufficient value, they’ll auction them off. The bank may also have relationships with others who can unload the assets. If the items have little or no value, often the assets will just be abandoned. For example, if you’re a CPA with just a few desks and lamps, it’s not worth anyone’s time to come collect those items. In those cases, they’ll be abandoned, and that’s perfectly fine. Once the asset situation is resolved, you can move on to the next step.
The next phase is assembling your Offer in Compromise. Before you begin, reach out to the bank to confirm that they are willing to consider your offer. In most cases, they’ll be open to it, but there are situations where they won’t. For instance, if the loan is fully secured—say you owe $500,000 and you’ve pledged a property worth $1 million with no mortgage—there’s no reason for them to settle. They’re fully secured and will get their money back, so they won’t negotiate. This brings us to a general point: they negotiate settlements when it makes sense for them, not for the sake of negotiating. If they believe they’ll be paid in full, they won’t accept any offer. Keep that in mind—they aren’t required to negotiate with you if they don’t see it as necessary.
Another reason they may not consider a settlement is if your personal income is clearly sufficient to repay the loan. For example, if I make $1 million a year and the loan payment is only $1,000, the bank will likely say, ‘You can afford this, we’re not interested in a settlement.’ They’ll expect you to pay the full amount. Similarly, if all the guarantors together have enough financial strength to repay the loan, the bank will likely believe they can get the money from you over time, and thus won’t feel the need to settle with any of you.
“And finally, the last situation that could disqualify you is if you engaged in fraudulent activity. For example, if you sold assets without the bank’s permission, that could disqualify you. Selling the business without their permission could also disqualify you. Lying about the nature of the sale of your business or assets could lead to disqualification as well. By this, I mean situations where someone advises you to sell the business to a friend or family member, with the intent of later buying it back, and then misleading the SBA about the sale.
As I’ve mentioned in one of my articles, the best advice I can give you is to be honest and transparent. If you think an Offer in Compromise is about misdirection or using ‘smoke and mirrors’ to deceive the SBA, you won’t get far. You need to approach this in good faith, showing them your cards and allowing them to make a decision based on the truth. The more open and honest you are, and the more you can demonstrate that you’re making a genuine attempt to pay as much as you can, the better your chances will be.
If they believe you’re not taking the process seriously or if your arguments are weak, such as ‘I can’t borrow against my house because my spouse doesn’t want to,’ or ‘I need to pay for my four kids to go to college,’ they won’t be sympathetic. For example, the SBA considers college expenses discretionary, so you can’t avoid repaying your debt because your kids need to go to college. Lenders might argue that plenty of people take out student loans to cover education costs. These are some of the reasons why a lender might tell you upfront that they won’t consider a settlement, but in most other cases, they’ll review your offer. They have nothing to lose by doing so.
The first thing you need to do is gather your loan documents. The easiest approach is to ask your bank what they need since banks sometimes request more than what the SBA requires. But here’s a basic list of what the SBA will ask for:
- IRS Form 4506-C (formerly 4506-T): This is used to verify your tax returns to ensure the information you provide matches what was filed.
- SBA Form 912: A background form.
- Two years of personal tax returns.
- SBA Form 770.
- SBA Form 1150.
- Copies of two months’ worth of statements for all liquid assets.
- Two months of pay stubs.
That’s the standard package of information, although they might request more based on your specific situation or any questions they have. Some lenders might also ask for business tax returns, although the SBA generally doesn’t care about those if the business is closed. In my opinion, once the business is closed, the tax returns aren’t very relevant, but some banks will still request them. That’s why it’s a good idea to ask your bank for their specific list to ensure you cover everything.
Once you’ve assembled all the documents, you’ll submit them to the bank and then wait. You won’t have control over how quickly the process moves, so you’ll need to be patient. It’s okay to follow up, but don’t become a pest. After submitting your documents, it’s crucial to stay responsive. If they reach out with questions, make sure you answer them promptly. If they email you today, don’t wait a week to respond. While it doesn’t need to be immediate, aim to get back to them within a day or two.
Also, be thorough and direct in your responses. Lenders can smell dishonesty from a mile away. Be honest and provide real answers. Lenders can tell when you’re trying to mislead them. For instance, some people try to argue, ‘I could get fired at any time, so I don’t know if I can afford the payments.’ But almost all jobs are ‘at will,’ so that’s not the type of argument the SBA will accept. Be reasonable when discussing your income. Show them your take-home pay, and if you receive bonuses, include those as well by averaging them out. The key is to be accurate and thorough. If they sense you’re being evasive or incomplete, they may lose patience and view your case negatively.
While you wait for a decision, understand that the timing is beyond your control. Most banks have a committee or several signers who need to review the offer, which takes time. If real estate is involved, they may also need to get an appraisal, which can extend the process. You can certainly follow up, but don’t become a pest. It’s perfectly fine to check in every couple of weeks, asking if there’s any news or if you can assist with anything. However, don’t pester them every day for updates—these people are busy and probably handling many files. Stay engaged, but be respectful of their time.
If your offer is approved, congratulations! We’re almost at the finish line, but there are still a few steps left. First, get the approval in writing. The SBA typically sends a boilerplate email approving the settlement. From there, what the bank does is up to them. Some lenders will have their attorney draft a formal settlement agreement. If that happens, I recommend having your own attorney review the settlement agreement to ensure it reflects what you believe it does.
However, some lenders won’t issue a formal settlement agreement. They might just forward you the SBA email and say, ‘That’s all we’re providing.’ If this happens, you could ask if they’d be willing to draft one at your expense. Having a formal settlement agreement is ideal, as it’s more specific and legally binding compared to the general approval letter from the SBA.
If the offer is approved, I always confirm with the lender that both they and the SBA are in agreement. When the offer is forwarded to the SBA, the bank is only recommending approval at that stage. So if the SBA approves it, I ask the bank to confirm in writing that they concur with the offer. This ensures everyone is on the same page.
Another important point is timing. If the lender tells you they want payment within 30 days and you know that timeframe isn’t realistic, address it early. Don’t wait until day 29 to tell them you need more time—that will frustrate them and create unnecessary drama. For example, if they say 30 days but you know a home equity loan will take 45 days, ask for 60 days upfront. Let them know the situation, and keep them posted. Being proactive is always a reasonable approach.
So, those are the basic steps if your settlement offer is approved. But what happens if it’s declined? First, ask the lender for feedback on what went wrong. What’s missing from the offer that they need to see? This is common sense: rather than guessing what the issue is and arbitrarily raising your offer, understanding their specific concerns helps you make a better offer next time. Asking for details is always a good idea.
If the offer is declined and you want to improve it, you go back to the drawing board. Typically, if I’m involved, I’ll review the situation and identify the weak points in the deal. And how can we address those weak points? That’s part of the process I handle. If your offer is declined, you can resubmit with a new offer and hope for approval. That’s the general process.
Now, I want to address some frequently asked questions I often receive about the SBA Offer in Compromise, specifically for 7(a) loans.
First question: Can EIDL loans be settled?
As I mentioned earlier, this article is not about EIDL loans. As of September 2024, EIDL loans are not eligible for an Offer in Compromise. I do offer case evaluations for EIDL loans and explain to people what their options are, but at this point, settlement is not one of them.
Next question: How long does the SBA Offer in Compromise process take?
I tell people to plan for anywhere between four and eight months. First, the offer has to go through the lender’s review process. Sometimes the lender will ask for additional documentation or come back with questions, so there can be back-and-forth before they make a decision. Once the lender approves, the offer is sent to the SBA. Depending on their workload, it can take another two to four months to get an answer from them. Overall, I tell people four to eight months, but each case is unique. Both the bank and the SBA can be unpredictable, so it’s hard to pin down an exact timeframe.
Next question: What happens if you default on your SBA loan?
If you don’t pay or work out a settlement, they can sue you to try and obtain a judgment. If your home is pledged as collateral, they could foreclose on it, depending on the laws in your state. If they get a judgment, they can garnish your wages, levy your bank accounts, and go after other personal assets. This is why it’s so important to try and settle to avoid this entire process. The key is to make a reasonable offer that reflects your true ability to pay.
Next: Can the SBA foreclose if they’re in second position?
One common misconception is that if your home is pledged as collateral and the SBA is in second position, they can’t foreclose. That’s wrong. If the SBA is in second lien position, it means they would have to pay off the first mortgage holder before they could collect any money from a foreclosure, but it’s my understanding that they can foreclose.
Next question: I never heard from my lender—does that mean I’m off the hook?
Absolutely not. Some lenders don’t follow up after a borrower closes their business. In some cases, they’re content to close the file and send it to the SBA without pursuing an Offer in Compromise. However, their silence doesn’t mean you’re free and clear. If you want to settle, you must be proactive. Stay in touch with your lender and let them know you’re interested in submitting a settlement offer. If you don’t take the initiative, they might close the file and pass it along to the Treasury, at which point your options become very limited.
Next question: My bank told me the SBA doesn’t settle government loans—is that true?
No, that’s false. I’ve been doing this since 2008, and I wouldn’t still be in business if the SBA didn’t settle loans. When I worked for CIT, the biggest SBA lender in the country, we handled plenty of settlements. The SBA absolutely does settle loans.
Next question: I overpaid for my business—will the SBA reduce the loan balance to make the payments more affordable?
In general, no. I’ve never seen the SBA reduce the principal balance on a loan simply because someone overpaid for their business. The only scenario where this could happen would be in a bankruptcy reorganization, where the loan could be ‘crammed down’ to the value of the assets.
In some cases, like if you owe a million dollars and the building is only worth half of that, they might reduce the loan in bankruptcy to match the value of the building. But outside of bankruptcy, I can’t think of a scenario where the SBA has been willing to write down a portion of a loan and allow the business to continue operating. The only way the SBA forgives a portion of the principal is if the business is closed and all assets have been liquidated.
Next question: If the SBA guarantees 75% of the loan, does that mean I’m only responsible for 25%?
Unfortunately, no. The 75% guarantee is for the lender. It reimburses the lender for 75% of the loan balance if the borrower defaults. It does not reduce your responsibility. You still owe 100% of the loan balance. The 75/25 split is the way the SBA encourages lenders to participate in the program. They essentially tell the lender, ‘If this borrower defaults and you underwrote the loan correctly, we’ll reimburse you for 75% of the balance.’ But that guarantee applies only to the lender, not the borrower.
Next misconception: I owe half a million dollars, and I can sell my equipment for $250,000. Will the SBA settle for that?
Unfortunately, no. You cannot use the proceeds from the sale of your business assets to fund your settlement. As I mentioned earlier, the process works like this: the business has to close, and the assets have to be liquidated. The funds from the liquidation are applied to your loan balance. Once that happens, then you can discuss an Offer in Compromise. The sale of business assets is just the liquidation of collateral that the SBA already has a claim to, so it can’t be used as a bargaining chip for settlement purposes.
Next question: I have a partner, and we each own 50% of the business. Can I just pay my half and have my partner pay his half?
The short answer is no. When you sign an SBA loan, the guarantees are typically unlimited and unconditional. This means that each partner is 100% liable for the loan. If one partner has the financial means to pay, the SBA will expect that partner to pay the full loan amount if necessary. Your ownership percentage doesn’t limit your liability unless the personal guarantee specifically states otherwise. The SBA is not obligated to split the debt between two partners based on ownership percentage.
Next question: I signed a personal guarantee for a friend or family member but wasn’t involved in the business. Can I avoid paying?
Unfortunately, no. Personal guarantees exist precisely for situations like this. If you’re surprised that the SBA is holding you accountable, it means you didn’t fully understand the implications of the personal guarantee when you signed it. Whether you’re a family member, friend, or just a financial backer, by signing the personal guarantee, you agreed to be responsible if the primary borrower couldn’t pay. The SBA specifically requires this guarantee to ensure they can collect the loan, regardless of your involvement in the business.
Next misconception: I was told that after making payments for a year, my home could be released as collateral. Is this true?
Generally, no. Lenders are rarely willing to release a home from collateral unless they’re receiving cash in exchange. Sometimes, origination officers might hint that if you make payments for a certain period, you can request to have your home released, but this is almost never the case.
Here’s the edited version of the last part:
“The only exception to releasing your home as collateral would be if you’re moving. They’ll allow you to sell your home and purchase another one, but they’ll want a lien on the new home. So, they’re not going to give up the collateral they took at the beginning without receiving something in return.
Next question: Doesn’t my corporate entity, like my LLC, S Corp, or C Corp, protect me? How am I personally liable?
The answer lies in the personal guarantee. If the SBA didn’t require personal guarantees from business owners, you’d be correct—your business entity would be the borrower, not you, and they couldn’t come after you personally. However, lenders know this, and that’s why almost every SBA loan, except for certain cases like EIDL loans, requires a personal guarantee. Lenders understand that if a business closes, there’s often more value to be recovered from the guarantor than from the defunct business itself. So, having an LLC, S Corp, or C Corp won’t protect you in this situation because of the personal guarantee.
Next question: If I want to settle, do I need to file for bankruptcy for my business?
No. The SBA does not require the business to declare bankruptcy. They typically just want proof that the business is no longer operating, and that’s sufficient. In most cases, people don’t bother bankrupting the business, especially if all the assets are sold and the business is dissolved anyway. If the SBA loan is the only major creditor, bankruptcy is often unnecessary.
Next question: Do I need to sell my personal assets?
As I mentioned earlier, no—you are not required to sell your personal assets. Only business assets need to be sold before submitting a settlement offer. Now, if you choose to sell personal assets to raise money for the settlement, that’s your decision, but the SBA does not require it as part of the liquidation process. This includes your home, which is not required to be sold.
Next question: If I file for bankruptcy, will that protect my home?
Some people think that filing for bankruptcy will wipe out all their debts, including a lien on their home, but that’s not the case. If there’s a lien on your home, it will remain there even if you file for personal bankruptcy. Bankruptcy might discharge your personal guarantee, but the lien on your home will still exist. After bankruptcy, you’ll likely have to go back and negotiate a release of the lien. I’ve done this for clients in the past. It’s no longer an Offer in Compromise but instead a cash offer to release the lien. It’s a bit less complicated, but it still requires a separate action.
Next question: Will this affect my credit?
Yes, it could show up on your credit report as a charge-off. Additionally, if you settle your loan, you won’t be able to get another SBA loan in the future—they will blacklist you. However, depending on how much you’re able to save in the settlement, it may still be worth it.
And that’s about it. That’s the gist of the SBA Offer in Compromise as of 2024. If you have questions, I offer case evaluations. Schedule one here.
