This article explains the relationship between SBA offer in compromise and asset protection. I’ll be covering the following:
- What is asset protection?
- How your bank and the SBA may view asset protection.
- How asset protection strategies may impact your SBA OIC.
- The difference between legit asset protection and concealment.
Note: Every state has it’s own laws around this stuff, so I’m going to talk about the concept in general.
Please allow me to set the stage here. I spend my days handling nothing but SBA loan default. This means I take several calls per day from SBA loan borrowers and guarantors who are experiencing some sort of issue. Mainly, people want to know how much they can settle their SBA loan for. They also want to understand what the potential consequences are for defaulting.
But several times per year, including yesterday, my potential client wants to discuss something else. They share with me that they have significant assets, and that they want to know the best way to protect them. Alternatively, they share with me that they already have engaged in asset protection, and want to know how to proceed with their OIC.
What is asset protection?
Is there a way keep my bank and the SBA from taking everything I have? If that’s your question, what you are really asking about is asset protection.
In general, the main intent behind asset protection is to protect one’s wealth, particularly from creditors. Both individuals (i.e. guarantors) and business entities can use various asset protection techniques. This is typically accomplished with the help of an attorney to use existing laws to legally safeguard assets.
It should be noted that certain assets like retirement plans (401k, IRA etc) are exempt from creditors, and don’t need to be protected. Other assets, however, are not so fortunate. Your home (in some states), investments, and bank accounts are all fair game.
When I say “fair game”, I mean that when you default on your SBA loan, the bank can attempt to enforce the personal guarantee you signed by taking you to court, and obtaining a judgement. Once the bank gets the judgement, this clears the way to for your lender to levy your personal assets. This, my friends, is everyone’s biggest concern. That one day they’ll wake up and their bank account balance will be $0 because the bank. And that is why people either look into, or go through with, asset protection.
How your bank and the SBA may view asset protection?
Whenever someone asks me about how best to protect their assets, I explain that while legal asset protection can be explored, it doesn’t mean your lender will be required to like it. In other words, if you put your personal assets in a trust and your lender can’t get to them, this doesn’t mean that the SBA will happily accept a nominal settlement.
An offer in compromise is about a good faith negotiation. If you can afford to repay them in full, but simply don’t want to, that may not sit well with decision makers. The whole idea of the Offer In Compromise is full disclosure, and good-faith negotiation. To that end, let’s pretend that you owe your buddy $10. Instead of giving him the $10, you went to McDonald’s. Now he claims he can’t pay you. Is that illegal? No. Does it mean that your friend will appreciate what you did? Probably not. And that’s the general feelings your banker may have when you open a blind trust, then claim those assets are protected.
How Will Asset Protection Impact My SBA Offer In Compromise?
In most cases, if you are going to move your assets immediately before the OIC, then stick to your “sorry, those assets are protected” shtick, it’s going to be tough to settle. To be clear, an asset that was already protected BEFORE you took the loan, such as a 401K or IRA is not what I’m talking about here. Let me give you an example of what a lender won’t like:
Let’s say your home has $100,000 in equity in it. You also have a home equity line of credit available a month before your business closes. You close your business, and sell all the assets. Then, before you submit the OIC, you transfer the house to your wife’s name, who is not a guarantor. When you submit your OIC, you state that you don’t own a home, and therefore can only afford a nominal sum. This is an example of a maneuver that your lender will be annoyed by. In this case, if I were a betting man, I’d say that any successful OIC would need to include the equity in your home.
What the difference between legal asset protection and concealment?
Investopedia actually explains it better than I can: “Asset protection helps insulate assets in a legal manner without engaging in the illegal practices of concealment (hiding of the assets), contempt, fraudulent transfer (as defined in the 1984 Uniform Fraudulent Transfer Act), tax evasion or bankruptcy fraud. Experts advise that effective asset protection begins before a claim or liability occurs, since it is usually too late to initiate any worthwhile protection after the fact. Some common methods for asset protection include asset protection trusts, accounts-receivable financing and family limited partnerships.”
Besides the above, I’ll also mention the good old asset dump buyback. Also, selling your business to a friend, business associate or family member is definitely shady, and no bank in the world will go for it if you full disclose the scheme.