Seeking Answers To Your SBA Default Questions? Start Here
Do you have questions about how to handle an SBA default? This post covers it all: what the entire SBA Offer In Compromise process entails (step by step), while also answering the most common questions that people have asked me over the course of the past 9 years as an SBA default guru. I’ve settled hundreds of SBA loans, which has resulted in over $50,000,000 saved for my clients. You can see a small sample of the results I’ve achieved for my clients here. So yeah, it’s safe to say I’ve seen some stuff.
Who Wrote This Article?
Before we nerd out on SBA default, please allow me tell you who I am. You came to my site, so I’ll explain why I am an expert on this particular topic. My name is Jason Milleisen, and I am the founder and Distressed Loan Advisors. I personally handle every single client because, honestly, your Offer In Compromise is that important and I don’t trust anyone else to handle it.
I started DLA in 2009, when it was a side gig that I was running while I was a workout officer for the largest SBA lender in the US. My job was work handle a portfolio of hundreds of defaulted and delinquent SBA loans, representing several hundred millions of dollars.
In early 2011, I was so busy helping my own clients, that I quit my cushy job as a Bank VP to run DLA full time. And since then, I’ve done nothing but work on SBA loans. So that’s pitch on why I’m a big deal when it comes to the SBA Offer In Compromise. Simply put, when it comes to SBA Offer In Compromise, I don’t think anyone does it better than me . Now, let’s get to the good stuff you came here to read.
SBA Offer In Compromise 101 – An Overview
Making the decision to close your business is not easy, but often times, it is absolutely the correct thing to do. Once you make the decision to close your business, the next inevitable question is: Now what?
Close The Business or Sell The Business Assets
If you are closing your business, you are likely aware that there will be some loose ends to tie up. You need a plan to deal with those loose ends. That plan includes working with your bank to get the business closing and liquidation done. Only then can we resolve the issue of your personal guarantee.
In almost all cases, the SBA loan you have is secured with the assets of your business. That can include tables, chairs, ovens, sinks, etc. Before they will entertain talk of settling your debt, your bank will first want to liquidate all the collateral. Not that the one exception is your primary residence. You need to contact your bank. Explain to them that you have closed, and you are willing to cooperate however you can. This will usually entail the bank valuing the assets. If they have value, they will sell them and apply the funds to your loan balance.
Assemble and Submit the SBA Offer In Compromise Package
Once the business closes, and all the business assets are liquidated, you will then be eligible to have your SBA Offer In Compromise considered. This is typically accomplished by submitting the OIC through your lender. Your lender will review the OIC, then forward it on to the SBA (Note: the SBA will want to know if you’ve been cooperative, so play nice with your bank).
It’s important to keep in mind that if your home is being held as collateral, your OIC offer will need to at least cover the amount of equity in your home. If you don’t offer at least that, the SBA is likely to reject your offer. This is because are seeking the highest and best recovery possible. If they have better alternatives to your settlement offer, they won’t hesitate to pursue them.
Once you submit your OIC package, if your offer is strong enough and the SBA approves it, the SBA will release your personal guaranty and any remaining liens on your home once you pay what you agreed to pay to settle the debt. Keep in mind that if you are paying over time, these releases will only come once you’ve paid the entire amount of the OIC.
Before we begin, let’s discuss a few “best practices”. You’ll want to keep these in mind as you work your way through the OIC process.
Don’t Be A Ghost
When business is going poorly, the tendency is to want to run and hide, especially from your lender. Don’t do it. Ignoring your banker is the surest way to tick off her off, and simply invites litigation. Having a banker who likes you is a valuable asset because they are the bank and SBA’s “ears on the ground”. They will know more about your file than anyone. Having a banker who dislikes you can make settlement discussions difficult or impossible. Return calls, letters, and emails that come from the bank. It could mean the difference between settling successfully and having a legal judgment filed against you.
Save Your Pennies For That Upcoming Rainy Day
Once the business is closed and the business assets have been liquidated, this is when the bank will consider your settlement offer. You can only make a settlement offer if you have something to offer (cash and real estate are the two most popular assets), so once you know for sure that you’ll be closing and seeking a settlement, begin preserving cash and looking for ways to raise cash to make an offer. Friends, family, home equity loans, and credit cards are typical sources of cash. Yes, these are not ideal options, but in most cases, there are no “good” options. You are only choosing the best option out of all the crappy options.
Get Your Ducks In A Row
The time to decide what your settlement strategy will be should be well in advance of making an actual offer. If you are working with a professional like me, together, we can devise a strategy together. I don’t use misdirection or shady “strategies”. My goal is to make offers that are fair, reasonable, likely to be approved.
Ask Permission Before Having A Closing Sale
While the idea of selling everything in site to raise cash may sound good in theory, make sure your lender is ok with it. If they think you gave away the store (and their collateral), it could potentially kill your OIC before you even submit it. The last thing you want is to have your banker ask you to kick in more cash because he thinks you gave your inventory away.
Play Nice With Your Landlord
Next to your SBA lender, your landlord may be taking the biggest hit by you going under, as they stand to lose years and years of rent that they were expecting. In order to minimize the damage, try to find a qualified tenant for the space. Whether a landlord will settle depends on a bunch of different factors, such as how easily they can replace you as a tenant, how long the lease was, and if you offered up your personal guarantee on the lease (hint: try not to).
Ok, now that we have those pleasantries out of the way, let’s break the entire SBA Offer In Compromise process down, step by step.
Step 1: Close Your Business and Liquidate The Business Assets
Just like opening a business, closing a business requires a plan of action. This is not, I repeat NOT, the time to curl up in a ball and avoid the giant mess that lays before you. The difference between closing with a plan and closing without a plan is similar to the difference between jumping out of an airplane with or without a parachute: you are going down either way, but careful planning can be the difference between crashing in a fiery heap versus gliding to a smooth landing.
Liquidation of the business assets can happen in a few different ways:
A) Find a buyer for the business as a going concern.
This is not always feasible, especially if the business is going to run out of cash, and therefore you may have no choice but to close the doors. In most cases, you’ll get a higher price for the business as a whole than if you sell it in pieces.
Many people want to know if they can sell the business their friend, then just buy it back later. Essentially, this allows them to settle AND keep their business. This is what some consultants preach as “the way it’s done”. I’ll give you my opinion. It’s not. I consider it to be fraudulent. As a former banker who witnessed these tactics, I can assure you we were not amused.
If the bank and the SBA were agreeable to you selling the business to a friend, then buy it back after you settle, they would simply write down the loan. But guess what? They aren’t willing to do that. These ethically challenged consultants came up with this scheme (or as they call it, a “sophisticated strategy’) because in some cases, clients want to have their cake and eat it to. In other cases, the borrower is desperate and forgets what they say about things that are too good to be true. I’ve written in greater detail about this particular topic here and here.
B) Find a buyer for the individual equipment.
Very often, businesses have competitors or industry contacts that they can reach out to for a quick sale. Banks like it because it saves them the trouble of doing it themselves. Be sure that the bank approves any sale of business assets in writing. The last thing you want is your bank accusing you of stealing their collateral without permission.
C) The Bank will find a buyer.
If you can’t sell the business, and you can’t find a buyer for the equipment, the bank will send an auctioneer to value the equipment. The bank will then either sell it directly to a buyer, or put the equipment in a general auction like this.
D) Abandon the equipment.
If the equipment isn’t worth much (think desks and chairs), the bank will likely just decide to abandon it. If the bank decides to abandon the equipment, that counts as liquidation. In such a case, you can move on to the Offer In Compromise.
(Note: liquidation also includes pledged commercial real estate, so don’t expect to settle unless the building has been sold. A personal residence is an exception to this rule. Your home does not need to be sold in order move forward with the process.)
Step 2: Assemble a Fair, Accurate, and Comprehensive Offer In Compromise Package
Once the business is closed, and the assets have been liquidated, the bank will then ask the “million dollar” question. How do you plan to repay the remaining balance on your SBA loan? When the honest answer is “I can’t”, it’s time to explore the Offer In Compromise.
A) Check In With Your Bank.
Before you start furiously assembling documentation and filling out the forms, it’s a good idea to confirm that your bank is willing to consider an OIC. There are a variety of reasons why a bank might not be interested in entertaining a settlement. This may include:
i. The loan is fully secured with a combination of cash and/or real estate;
ii. You have sufficient income to repay the debt;
iii. On a combined basis the guarantors have the ability to repay the debt in full, or;
iiii. You’ve done something wrong such as selling the assets without their permission.
Think of it this way: The SBA does not settle for the sake of settling. They only settle when they believe a full recovery will not be possible, and settling will result in the highest and best possible recovery from the guarantor.
B) Assemble The Required Financial Documents.
Here is the actual list that I send to my clients once they engage me.
– Form 4506T (get it here)
– SBA Form 912 (get it here)
– SBA Consent to Verify (get it here)
– Last 2 years personal tax returns. As of the date of this post, this means 2016 and 2017 personal income tax returns (federal only, all pages) or if 2017 not ready yet, 2015 and 2016 tax returns.
– If 2017 tax return not ready yet, 2017 proof of income (last 2 pay stubs, or P&L and balance sheet if self employed)
– YTD 2018 proof of income (last 2 pay stubs, or P&L and balance sheet if self employed)
– SBA Form 770 (get it here).
They key to a good 770 is accurate information and full disclosure. The SBA has access to your old PFS from when you first applied for the loan, and subsequent ones as well, so leaving assets off of your 770 is not a great idea. The point of the 770 is to give the bank and SBA a clear view of your personal financial situation. This includes showing them exactly how much you take home every month, and exactly how much you spend. They ask about transfers within the past 3 years because they know people will try to “give” their assets away in order to claim poverty. I could go on, but you get the point here…full and accurate disclosure.
– SBA Form 1150 (get it here)
The 1150 is your opportunity to present your argument. Before I tell you what it should include, let me tell you what it should NOT include. It should not include long narratives about your sad story, and it should not be a low ball offer. If you throw a silly offer against the wall, hoping it will stick, know that by doing so it puts you at risk for litigation or Treasury referral. If they don’t think you are taking it seriously, they won’t waste their time.
The 1150 should convey to the SBA why you can’t pay (be sure to cite documents like pay stubs and bank statements), and why your offer truly does represent the best recovery they can hope for. To do that, you need to examine your situation and look at it through their eyes. Do you have cash or investment accounts (they can usually levy those if they have a judgement)? Do you have a full time job (many states allow for wage garnishment)? Is your home pledged, and does it have equity? If you understand what they believe they can get through what they call “enforced collection” you will have a better understanding of how much you should offer. If you want to know a bit more about why there simply isn’t a definitive formula for calculating the OIC, I’ve written about that here.
– Proof of current liquid assets (bank, brokerage, and IRA statements)
Keep in mind that this list is not comprehensive. It’s the opening salvo. Once the bank or SBA reviews the package, they often will ask for additional information if questions arise about particular elements of your package.
Step 3: Submit The OIC Package, Then Wait
If you’ve read this post, then you know that the process is not a quick one. You can count on the process, from the time you submit the OIC, to the time when your OIC is (hopefully) approved, to take 4 to 8 months. If you get a decision from both the bank and SBA in 4 months, that requires everything to go right, without a hiccup. And to be honest, roadblocks almost always come up at some point. Like a home improvement project, it almost ALWAYS take longer than you’d hope or expect. Between emails, requests for more paperwork, gathering that paperwork, bank committees, time adds up.
So while there are certain things we can’t control, there are a few things you can do to ensure that the process goes as quickly as possible:
- Be Responsive – Be responsive to everyone involved. That includes me, the bank, and the SBA. I understand the temptation to respond to an email tomorrow, or return a call on Monday, but if you exchange 10 emails with the bank with a 2 day lag each time, that adds up to an additional 3 weeks of time.
- Be Accurate and Complete – One major reason that an SBA Offer In Compromise gets held up is that borrowers send me inaccurate or incomplete information. Even when I beg, I sometimes find myself submitting an OIC package that I wish could be better, but when you are up against a firm deadline, sometimes you have to compromise. A less-than-perfect OIC package vs. being referred to Treasury is a no-brainer, but it still irks me because I know it’s completely avoidable.
With all that said, there are some things you can’t control:
- The speed at which the bank works. Understandably, borrowers are often very anxious to get a decision, and are often disappointed to learn that the process is not a quick one. My client often ask me to go over the bank’s head to deal directly with the SBA. That won’t work. The SBA pays the bank to service the loan, so as long as the bank is continuing to service the loan, the SBA will either ignore you or tell you to talk to the bank.
- Appraisals – A borrower’s home is typically the most valuable remaining asset they have. If that home is pledged as collateral, the bank will need to do an appraisal because the SBA requires it. I’ve had OICs either fall apart or go up significantly because the appraisal come back at a higher value than my client listed it on the PFS. Despite client protests, once an appraisal says there is more equity in a property than previously thought, it’s hard to convince the bank to come down off that value.
- The speed at which the SBA works. When you think SBA, think of a black hole. Once your SBA Offer-In-Compromise goes it, it doesn’t come out, and no information is available. You get an answer when you get an answer.
Following Up and Staying Engaged
While it’s fine to follow up occasionally, you don’t want to become a nuisance. Once I submit an OIC package, I usually give it 2 weeks. If I haven’t heard anything by then, I’ll email the workout officer to see if they have had a chance to review it, and offer to get them any additional information that might make their job easier. This process is a marathon, not a sprint. So following up every day is not helpful. Your settlement is not the only file the workout officer is working on, so be respectful of his or her time.
If Your SBA Offer In Compromise Is Accepted
So after many months of blinding paperwork and hard fought negotiations, you get the email with my two favorite words: SETTLEMENT APPROVAL! Great, now what?
1) Make sure that your settlement is documented in writing.
Verbal promises are not acceptable, not with this amount of money on the loan. The last thing you need is to have a collection company come calling and not have any proof that you settled the debt.
2) Involve your attorney.
My job is to negotiate the settlement, but as I tell all me clients I am not an attorney, and therefore I always strongly suggest having an attorney review all legal documents. With so much on the line, paying a few hundred dollars to ensure all the i’s are dotted and t’s are crossed is well worth it.
3) Ensure that all parties, including both the SBA and the bank, have approved the settlement terms.
Many banks will defer to the SBA, and go along with whatever the SBA approves, but that doesn’t mean you should make any assumptions. Get it in writing that the bank is on board. Nothing would be worse than finding out that bank still wants money above and beyond the settlement.
4) Make sure you can honor the settlement terms.
Banks and the SBA will usually give you and extra few weeks to pay if you have a good reason. Just be proactive about it. It’s much easier to get extra time by asking at the time of approval, than it is to ask for more time at the last minute (then bite your nails awaiting an answer).
What About Documentation?
Settlement documentation will vary from bank to bank. Some will have their attorney draft a comprehensive settlement agreement. Other will send you a one-page letter. The SBA doesn’t even do that….they send an email. While a settlement agreement that lays out all the details in a proper legal document is preferable, borrowers frequently face the reality that they can either move ahead with the OIC with what they have (warts and all), or don’t move forward at all. But don’t fret, I’m yet to hear of SBA welshing on a settlement approval regardless of how poorly documented it may be.
Your SBA OIC is Declined: What To Do?
It sucks, but OICs are often declined. But I have good news. Having your initial settlement offer declined is not necessarily the end of the road. However, it does require some self-reflection and triage. The bank or the SBA gave you a big “thumbs down”. Not the end of the process, but now is the time to get inside your banks or the SBA’s mind.
The easiest way to find out what their thinking? Just ask! I usually phrase it is as something along the lines of “Thanks for your email. I thought the offer was a representative of my client’s ability to pay, but obviously the bank/SBA doesn’t agree. Would you be able to give me any insight as to where our views differ?” Then you can go on to explain exactly how you arrived at your offer figure, and give them a chance to explain what part(s) they see differently.
Common Questions About SBA Default
I’ve laid out the process for the SBA Offer In Compromise above, but I know you probably still have questions. Below are the most common questions I get, in a “Q&A” type format.
Is it possible to settle an SBA Disaster Loan?
It’s not impossible, but it’s very difficult. For that reason, I don’t handle them.
How long will it take to settle my loan?
See step 3 above. But just to reiterate, you can plan on 4 to 8 months from the time you submit your OIC. There are many factors that determine the overall length of the process. Factors such as the need to liquidate equipment or real estate, and whether or not you are dealing directly with the SBA.
What can an SBA workout specialist do for me that I can’t do for myself?
Ah, the question you are too polite to ask. A knowledgeable SBA workout expert will not only have knowledge of the SBA settlement process, but experience too. Just because someone reads the SBA SOPs doesn’t mean that they’ll know how these things go in the real world. Fair or unfair, the SBA doesn’t always follow the letter of their own rule book. And to further complicate matters, different office interpret the SOPs differently. No amount of reading will fill you in on that kind on inside knowledge. An experienced SBA workout pro knows the SBA rules knows when to challenge the lender, and when to accept realities that won’t change. As a business owner who is going through the settlement process for the first time, it’s virtually impossible know all the SBA rules and practices.
What’s the worst that can happen to me if I default on an SBA loan?
I’m not trying to scare you, but there are some very severe consequences to that you should be aware of. Banks can foreclose on a home that has equity in it. They can force your business to close, and sell all the business equipment. They can obtain a personal judgment against you in court, then subpoena you for information. If you don’t respond to the subpoena, some states allow you to be arrested (to my knowledge, it doesn’t happen very often). Even if you didn’t specifically pledge your home as collateral, some states allow a judgment lien to be placed on your property which will remain there until you sell the property. These are all reasons why you should be proactive about settling.
When I make a settlement offer, does it go through my lender or directly to the SBA?
It depends. In most situations, the lender will service the loan until they feel that all avenues have been exhausted. Once the lender reaches that point, the file is “wrapped up” and referred to the SBA for further collection efforts. Once the matter is referred to the SBA, the borrower and guarantors will typically get a letter from the SBA.
If you receive such a letter directly from SBA (sometimes referred to as a “60 day letter” letter), your lender may no longer be involved in the negotiation, and you are free to deal directly with the SBA. Interestingly, sometime the SBA will send you back to your lender even after you get a 60 day letter. Confusing, I know.
BTW – If you try to deal with the SBA directly while your bank is still servicing the loan, chances are that they will refer you back to your lender.
I never heard from my SBA lender. Am I off the hook?
Probably not. Just because your bank isn’t breathing down your neck, it doesn’t mean you won’t have to deal with issue. I often hear from people who stopped paying years ago, assumed the matter was dead and buried, only to get a letter from the US Treasury (or a collection company on their behalf). Once it gets to Treasury, it’s unlikely to settle.
My bank is telling me that SBA loans cannot be settled. Is that true?
No, but that’s a good indication that your bank(er) has no clue what they are doing, or they are simply lying.
I paid too much for my business. Will my lender/SBA reduce the principal amount I owe so I can afford the payments?
Unfortunately not. The only way that the SBA will consider a settlement is after the businesses ceases operations and all business assets have been liquidated (Note: some exceptions do apply). Some people get awful advice and will sell the business assets to a related party (friend, relative, business partner etc), then buy them back later (see my article on Ethics and Legality of an Asset Dump Buy Back). Unless you fully explain the true nature of your transaction to decision makers at the bank and SBA, it’s fraudulent.
The SBA guaranteed 75% of the loan to my lender. That means as a guarantor, I only owe 25% of the balance, right?
Unfortunately, that’s not how it works. Regardless of how much the SBA reimburses the bank for, you are still responsible for the entire balance. The SBA guarantee has no impact on how much you, the borrower, legally owe.
Do I need a lawyer to settle my SBA debt?
No, and here’s why. Settling SBA debt is largely a financial matter. While I’d recommend having an attorney review legal documents such as settlement agreements, in many cases SBA settlements often involve no signing of any agreements at all because all they give you is an approval letter. When engaging someone to represent you, you need someone with a through knowledge of the SBA process (most lawyer’s don’t), and an understanding of the philosophy behind SBA settlement policies.
If I want to settle my debt, I sell my business assets, turn over the cash to my lender, and then I’m all done, right?
Sorry, selling the business assets is just the first step (see above). Offer In Compromise negotiations begin after that. The OIC is about one thing: releasing your personal guarantee. The OIC is a separate event from business asset liquidation.
I have a business partner, and we both personally guaranteed the debt. Am I only liable for 50% of the debt?
In most cases, personal guarantors sign unlimited personal guarantees. This means that you are both responsible for 100% of the debt. Therefore, they will pursue both of you for the full amount. In many cases, one guarantor is has a stronger financial profile than the other. Guess who they’ll go after first.
I personally guaranteed the loan as a favor to a friend/family member. I had nothing to do with the business. Shouldn’t that count for something when they are considering my Offer In Compromise?
Not as far as your lender and the SBA are concerned. The whole reason they initially asked for your personal guarantee was because the business and business owners did couldn’t qualify on their own. Any lender in the world will expect you to honor a personal guarantee regardless of why you agreed to it at loan origination.
When I first took this loan, I pledged my home as collateral. My lender said the bank would release the lien after 12 months of on-time payments, but now they won’t. What gives?
It’s important to recognize who made that promise to you: a sales person whose job is to bring in loans. Unfortunately, they will tell you things with a wink and a nod. In reality, they have no business committing to such things. Unless you have it in writing, it will be almost impossible to get the bank to honor such a thing.
If I file for personal bankruptcy, can the bank still legally come after my business and shut me down?
They can absolutely shut your business even if you file for personal bankruptcy, assuming the business assets are owned by your S-Corp, C-Corp, LLC etc. Having your personal guarantee discharged only relieves you of personal liability. In other words, they can’t go after your personal assets (unless you pledged them as collateral). Your business is still fair game.
When I took this SBA loan, I formed a corporation. Doesn’t this shield me from any personal liability?
The part you are forgetting is that you personally guarantee the loan. Unfortunately, the bankers know this fact too. That’s why in almost every case they require a personal guarantee from the business owner. By doing this, you are essentially saying “I agree to use my personal resources that I owned outside the business to repay this loan”. And you can bet they’ll want to hold you to that.
Does my business need to file for bankruptcy in order to qualify for a settlement?
No, in most cases, just ceasing operations is sufficient for the SBA. There may be strategic reasons for filing a corporate BK. Doing it to qualify for an OIC is not one of them.
Will the bank be able to foreclose on my home if I file for personal chapter 7 bankruptcy?
First, you should run any BK questions past a BK attorney, but I’ll tell what I learned as a lender. If there was a lien on your home prior to the bankruptcy, then the lien will not be extinguished if there is equity in the home. If there was not a lien prior to the bankruptcy, then I believe that having your personal guarantee discharged will protect your home from a judgement lien.
I met with a bankruptcy attorney, who recommended that I file for bankruptcy. Why should I try to try to settle the debt instead?
I believe that there is a place for both bankruptcy and Offer In Compromise. Do some homework, gather all the facts, then make an informed decision. Whichever approach you take will have it’s own unique pros and cons. The key is to fully understand your options so you don’t rush into something that you’ll later regret.
Will settling an SBA loan impact my personal credit?
For years I have been telling people settlements had no negative credit impact. If your bank never reported to the credit bureaus to begin with, then it would be all good. Then I got a note from a client that their SBA loan settlement had resulted in a credit report entry. Then, I heard it again from a different client a few weeks later. In both cases, I negotiated DIRECTLY with SBA (not sure if that is coincidental or not). I’m happy to report that both clients successfully challenged the information, and the bureau remove the information from both reports.
If I settle, will be able to get another SBA Loan?
Highly unlikely. If you borrow from the SBA, and don’t pay it back, they are going to put you on the CAIVRS list. Any federally subsidized programs like FHA and government guaranteed student loans will be hard to obtain as well.