The idea for today’s article came about when I was recently assisting a client with their Offer In Compromise package. As sometimes happens, I asked my client for a number of documents that I knew that bank would ask for, and over a couple of weeks the documents were emailed to me in drips and drabs. I never understand why clients don’t make assembling important documentation a priority, considering that there are tens or hundreds of thousands of dollars on the line. The problem, you see, is that the SBA wants all the information for a reason. The reason is that when you combine all of the information, it paints a fairly comprehensive picture of the borrowers financial situation, so if I don’t have all the info, there may be a crucial piece of the puzzle that I don’t find out about until the very end.
In my recent client’s case, the bank already had a judgment against them, so time was of the essence since many banks will attempt to execute on a judgment as quickly as the law allows. For that reason, I was anxious to get the settlement submitted. My clients were not able to get their proof of income quickly , so we decided to submit the settlement offer without tax returns or proof of income because it was unclear how long it would take to get those items. As expected, after I submitted the OIC, the bank came back and requested 2011 personal tax returns. They were on extension (not uncommon), and in such cases we provide W2s instead. So after the personal financial statement had already been submitted, my client sent me his W2 which showed a huge amount of income from the prior year. Since they had many debts and expenses associated with their defunct business, we were able to piece together a spreadsheet that demonstrated where all the money went (showing why they didn’t have much to offer right now). The problem was that much of the money was spend on “discretionary” items like vacations, toys, and eating out. When a lender sees that, their first thought is “wow, you owed us $500,000, and you decided to spend $15,000 on a vacation?”. This rubs banks the wrong way, and could be used against you since they can argue that your offer was not made in good faith.
As it turned out, a large part of the W2 was bonus, with the rest being in the form of salary. The problem was that the salary he earned didn’t match the salary my client had written on his personal financial statement. That, my friends, presents a problem too. Now we are in a position to go back an revise the PFS that’s already been submitted. This means we will potentially be revising the offer to account for higher income.
So what lessons can be learned here:
1) When you hire an advisor and time is of the essence, sending your documentation promptly will ensure that the settlement strategy will put in place without the worry of surprises (like a huge W2 from last year, or a sizable asset that you forgot to mention). The worst thing that can happen is to submit information on a personal financial statement that can’t be supported. If you indicate that you make $5,000 per month, but your paystub later shows that you make $10,000 per month, that presents a major problem.
2) When you owe a bank (or anyone, for that matter) money, keep in mind that the expectation is that you are going to make a settlement offer because you are experiencing financial hardship. Spending your cash on things that you could clearly have lived without indicates to the bank that you could have offered more money, but you made the conscious decision to spend it on non-essential purchases.