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I got a call from a woman the other day. It started out like most other calls I get. Her business is closed, and she can’t afford the SBA loan payment. Not surprising. Who has an extra $5K per month to put towards a business loan for the defunct business?
She owes about $500K, and was smart enough to pull the plug on the business before she spent all her cash trying to keep her sinking ship afloat. With $100K in the bank, I told her, much of that cash would need to go to the lender.
“But what if I give it to my sister?” she asked.
“You could, but the bank and the SBA are going to notice that when they review your bank statement”, I replied.
“Oh I’m good with photo shop, so I can make it say whatever I want”, she bragged.
Are you kidding me, lady?
Sadly, she wasn’t kidding. She really wanted my help in committing fraud.
“I know it’s kind of a gray area…”
Before she could go any further, I cut her off. “No, that’s not a gray area. That’s fraud. There’s no classifying it any other way”, I told her.
I ended the conversation there. I simply don’t want to be entwined with someone who is that casual about committing blatant fraud.
So let’s be clear (it’s amazing that I even need to say this): You should NEVER defraud or blatantly mislead a lender. While you’re at it, you should not attempt to “hide” assets. My job here is to give your lender and the SBA a clear and honest look at your personal situation, not engage in a smoke and mirrors campaign on your behalf.
So what’s considered to be shady or fraudulent?
Selling Your Business To A Friend/Family Member/Business Associate
I’ve written about this before here, but it bears repeating. The SBA is not interested in you selling your business to a “straw man” (basically a fake buyer) so that you can settle your SBA loan. If your intention is to make the sale, submit an Offer In Compromise, then take your business back later, that’s not something your lender and the SBA would like. And that’s why whoever advises you to do this will also advise you not to share the details of this scam.
Intentionally Omitting Info
Some borrowers are tempted to conveniently leave off their investment account, or the rental home they own. Clients have asked me how the lender or SBA would know about the missing assets. The easiest way to find omitted assets is to refer back to old personal financial statements. You filled one out when you took the loan, and generally are required to submit an updated PFS annually as part of your loan agreement.
But what if you didn’t own the house or have that bank account when you took your loan? Still not that hard to find. The rental would likely show up on your tax returns (which are always required for an OIC). If you move funds around from your primary bank account to your “secret” bank account, it will be easy to identify this other account. If your “secret” account earned interest, that would also show up on your tax returns.
Personal finances are often a complicated web, and all it takes it once connection that you didn’t consider for your lender to find the account you are trying to keep under wraps.
The easiest way to avoid this type of problem? Be honest and tell the truth. Full disclosure is the right thing to do.
Giving Away Assets Just Before You Submit Your OIC
For those of you who don’t know, there is a different version of the PFS for the SBA offer in compromise than there is for when you apply for an SBA loan. SBA 770 (the PFS for the OIC) has a section that asks about transfers of property over the past 3 years:
So what’s section #30 of SBA form 770 all about?
It’s not their first rodeo. The SBA knows that there are lots of people try to get “creative” when it comes to disclosing their personal assets. They know that on more than one occasion, someone has realized “oh crap, I have a bunch of money in the bank, and my lender is going to want it as part of my settlement!”
In an attempt to circumvent the system, the borrower devises a brilliant scheme: transfer the money to their mother/sister/best friend for “safe keeping”. That way, they can truthfully state (with a somewhat straight face) that they have minimal liquid assets.
So the SBA, knowing people are trying to pull this stunt, added section 30 to the PFS. Unless you transferred that cash to your mother/sister/best friend over 3 years ago, you’re obligated to note that on SBA Form 770. If you don’t you just knowingly lied, which could be a problem given the language on the signature line of the 770:
In case it’s too small to read, I’ve copied and pasted the language below:
“By signing below, I certify that all statements made in this form, and all information provided with this form, are true and correct, I understand that SBA and my lender are relying on this information, and that false statements can lead to criminal prosecution under 18 U.S.C. 1001 and other laws, with fines of up to $500,000 and imprisonment up to 10 years, and civil fraud damages of three times the government’s loss.”
While I’m sure it’s uncommon for borrower’s caught lying to be dealt those very severe penalties, if it were me, I’d steer clear of any shenanigans that could be construed as a false statement. And lying about transferring a chunk of cash to a friend is a pretty clear example of a false statement.
But the Bank would screw me if they had the chance. I’m just beating them to it!
Look, I get that you don’t get the warm and fuzzies when you think about your lender. And I don’t disagree that if a bank has a point of leverage – whether it be a foreclosure, bank levy, or wage garnishment – they’ll do it without blinking.
But I would note that the things I mentioned above are not the same as committing fraud. When you signed up for your SBA loan and signed all those documents, somewhere in there you agreed that both your business and you personally are liable for the debt. So if you bothered to to a little digging, you would have learned that adverse actions like foreclosure, bank levy, or wage garnishment were all possibilities in the event of default. In other words, those are the rules of the game.
Contrast the above with flat out fraud (hint: they are not the same). It’s not like the bank never explained the terms of the deal. If you never bothered to read them, unfortunately that’s on you. What your bank also wouldn’t do (in most cases, anyway) is commit blatant fraud. They wouldn’t lie about how much you owe, or about what collateral is pledged.
My point here is that talking yourself into lying to the bank is not the same as the bank taking collection action that you agreed to. Yes, it would absolutely suck to get sued and have them go after your personal assets. But committed fraud puts you at risk of making a bad situation even worse.
I get it, Jason. Lying is bad. You’ve explained what not to do, but you haven’t told me what I should be doing.
Fair point. Let’s talk about some things you can do to ensure you are doing it the right way.
Seems like common sense but after I got the call from the lady I initially described, I got a similar call yesterday.
“How are they going to know I have the money in my account”, the shady prospective customer asked me. “I have more than one account”, he continued “I’ll just give them the account that has almost no money in it”.
I explained that they could check on personal financial statements, see the reported in interest on a tax return, or see a transfer between his accounts. The problem with everything being interconnected is that, well, everything is interconnected. It’s really hard to scrub data from existence when it’s so easy to access and move it.
Even if you don’t like my boy scout argument of doing the right thing because it’s the right thing to do, then at least consider the fact that a smart bank will sniff out assets.
I routinely find excluded accounts with my own clients. It’s really not that difficult.
Hey Bob, you have a mortgage payment of $1200 listed on your PFS, but I don’t see the payment coming out of your account. Is there another bank account somewhere?
Hey Sally, you didn’t list a rental property on your PFS, yet I see it on your tax returns. What’s up with that?
Hey Roger, your bank statement shows that you transferred $5,000 last month into an account ending in 3744. Can I see a statement from that account?
If you want to avoid a situation that results in you being caught with your hand in the cookie jar, just be honest and full disclose all your assets. As Mark Twain said, if you tell the truth, you don’t have to remember anything.
Proactive and Frequent Communication
I 100% understand the temptation to let sleeping dogs lay. The ball is in their court, you reason. It’s on them to let me know when they want me to submit an OIC. While that might be true, it’s not going to help you when the file ends up sitting at the Treasury with a punitive 28% penalty and ridiculous settlement options.
If you want to ensure your bank doesn’t close your file on the assumption that you aren’t interested in an SBA offer in compromise, I have a simply yet effective solution: check in often. It’s a big part of what I do for clients. Followup, followup, and more followup. It’s not hard.
If you think that maybe they just forgot about you and that maybe, just maybe, you are going to be off the hook for the $300,000 you owe, think again. I’ve gotten calls from borrowers who got a letter from Treasury 5 years after they defaulted. “I thought this was over” is the typical refrain.
Honor Your Word
If you tell your banker that you’ll have the paperwork to them next week….get it to them next week! Don’t be nonchalant about tardiness. I get it, stuff happens sometimes that makes delays unavoidable. Maybe your accountant is on vacation or your waiting on HR to send you a pay stub. All reasonable excuses. But at the very least, communicate that to your lender.
Personally, I always try to under-promise and over-deliver. If I commit to getting you something in a week, it’s because I believe I can have it to you in 4 days. If all goes according to plan, I’ll delight by delivering early. If something goes wrong, I’ve already built in a buffer that will still allow me to meet the deadline.
It might sound like a little thing, but following through on your commitments says something about you. When I have clients promise to send me paperwork but don’t, it makes me feel like they are not truly interested in a settlement.
If that’s what I think, what do you think your workout officer thinks? Probably the same, or worse. After you blow a deadline by a week, it’s completely reasonable that they’ll assume that you’re never going to send the information, and therefore it makes sense to start litigation.
Poof. Just like that, your degree of difficulty on your OIC just went up. All because you treated the OIC process like 2nd semester high school kid treats their art history 101 homework.
Treat Your OIC Like A Term Paper
Do you remember in high school or college when you had a term paper that represented like 25% of your overall grade? You didn’t take 10 minutes to jot down the first thoughts that came to your mind, did you? Of course not.
You did some research, wrote multiple drafts, and re-read it several times. Why? Because it was really important. You knew that accuracy mattered, and this was not the time to “wing it”.
Your OIC should be prepared with at least the same level of thoughtfulness and effort that you spent on that term paper. Don’t “ballpark” bank account balances on the PFS. Use the actual balance. Take the time to look at your mortgage statement to get the exact monthly payment. And for the love of all that is holy, type it on a computer.
Nothing says “I don’t care about this” like a sloppily handwritten PFS that is mostly left blank, and what numbers you did write are all rounded to the nearest $100.
That term paper was for a class you likely will never think about again. So if you could muster the energy to do a bang up job on that, you should be even more motivated to produce a complete OIC package. You had to pay to be in the college class that your wrote the term paper for. Successfully negotiating an OIC could actually save you 10’s or 100’s of thousands of dollars.
Sounds simply and obvious, but seriously, be nice. When I was a workout officer, I had my fair share of nice borrowers, and just as many jerks. While being nice and courteous won’t turn a clear “no” into a “yes, it could possible be the difference between a “yes” and and a “no” when the workout officer is on the fence.
In my experience, there are A LOT of OICs could qualify as borderline, meaning that there are some aspects that make me say “yep, these are factors that make me think this person should have their OIC accepted”, and others that make me say “I could see them arguing that you can afford to pay your debt in full”.
So when a case is borderline, and the workout officer is on the fence, it’s not hard to believe that treating them with respect could end up being the ever-so-slight nudge that pushes them onto the approval side of the proverbial fence.
If you come into the process expecting an SBA settlement to be the financial equivalent of a swatting a away a pesky gnat, you’re going to be disappointed.
A more appropriate analogy? Successfully navigating the SBA Offer In Compromise process is more like trying to score a touchdown against an NFL defense. It’s almost never easy, you’ll likely come out battered and bruised, and there are usually one or more setbacks.
Potential clients frequently call with ideas of their own about how they want to proceed with their settlement offer, and want to bounce those ideas off me. Sometimes, they’re flat out unrealistic.
If you have $100,000 in the bank, and owe $50,000 on your loan, it’s not going to settle.
If you make $250,000 per year, and your loan payment is $1000 per month, it’s not going to settle.
Settlements are reserved for situations when it’s clear that you, as a personal guarantor, lack the personal financial resources to repay the debt in full. If you can’t prove that you lack the resources to pay, a settlement will be tough.
Of course, the SBA is supposed to compare your offer to the amount recoverable through enforced collection. That should mean that retirement accounts are off the table. If you like in a state (like Texas) where wage garnishment is prohibited, your wages should be off the table.
Keep in mind that even if they can’t levy your 401K or garnish your paycheck, you still need to prove hardship. So even if they can’t take it from you, it still needs to be proven to the bank and SBA’s satisfaction that you cannot afford it.
So, if you have $10,000,000 in an IRA retirement account, it’s going to be tough to settle. Are those funds protected? Sure. Does that mean they’ll settle for a few pennies? Probably not.
I understand where the woman who wanted to create a fake bank statement was coming from. She already lost money on her failed business, and to be forced to hand over what’s left absolutely sucks.
There are moments in life that feel like crossroads, or defining moments of sorts. Deciding to commit financial fraud seem to like one of those moments. Are you going keep your ethics intact, or are you going to abandon them and try to justify it later?
I once heard someone says that adversity doesn’t test character, it reveals it. What route will you take when the you-know-what hits the fan?