The most asked question that I get, along with how much my services cost, is how much do I think a guarantor can settle for. To answer the question from the title, no, to my knowledge, there is not a formula that determines how much you will be able to settle your personal guarantee. With that said, I do tell my client’s that based on their personal financial situation (SBA Form 770), I will give them an approximate range of what I would expect them to settle for.
But why can’t simply write a formula that will spit out a single definitive number?
Mostly, because the amount you will ultimately settle for will depend on the bank and the workout officer and the bank you are negotiating with. Since different banks will be tougher to deal with than others, this is why I can’t give you a specific number when it comes to your settlement. What I will do, is go over your entire situation (Assets, liabilities, income, expenses, age, health, earning potential etc) and explain how bankers might view your overall situation. Determining the amount of the SBA Offer In Compromise can be considered part art, part science. And as with art, there is no set formula.
So what types of things will different banks look at differently?
1) Determining equity in your home. Banks will usually apply some sort of discount to your home value. Some banks will apply a 10% discount. Others apply 20%. This can swing the amount of your OIC offer pretty significantly. So can the appraisal (not up to the bank, but worth mentioning).
2) Your future earning potential. As soon as some banks see that a business owner is a doctor or a lawyer, they will often assume great earning potential. Other banks will take the time to understand that not every doctor or lawyer makes a million dollar per year. And to get a little touchy feely, some people realize that being a doctor or a lawyer doesn’t make them happy, and they want to try something else.
3) The stuff that doesn’t show up on your PFS. When I worked for a bank, we had a borrower who send us PFS after PFS that showed no income, no assets. Yet, the bank management refused to settle. And it had nothing to do with what was on SBA Form 1150. It had to do with the fact that the bank believed the borrower’s family had money, and they were determined to play hardball until some of that money appeared. Obviously this is part of the OIC review process that you’ll likely never be privy to, but for some guarantors, it’s as real as cash in the bank.
4) Your monthly excess income. The PFS has sections devoted to listing your income and your expenses. Many expenses can be sliced and diced depending on their definition of what a discretionary expense is. Some banks carve down expenses to the bare minimums, while others are more liberal.
So those, folks, are the reasons why I can’t give you a down-to-the-dollar estimate when you ask me how much you’ll be able to settle for!
