SBA Offer In Compromise.
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?
If you are closing your business, you should establish a plan. That plan usually means working with your bank. Presumably, 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 (the one exception could be 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, and if they have value, they will sell them and apply the funds to your loan balance.
Once the business is closed, and all the business assets have been liquidated, you will then be eligible to submit an Offer In Compromise (OIC) to the SBA. 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.
If your offer is strong enough and the SBA approves it, once you pay what you agreed to pay to settle the debt, the SBA will release your personal guaranty and any remaining liens on your home. 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.
In a word: sometimes. There are cases when an OIC is required, and times when an OIC is not needed. So what does it depend on? In most cases, it depends on whether or not you are personally liable to the SBA loan.
When An OIC Is Required
If you had a business that closed, and all the assets have been liquidated, you should in theory be eligible for an OIC (some other conditions must be present). If you signed a personal guarantee and want to be released from that guarantee, the SBA requires that you submit an OIC, which requires full financial disclosure. If you pledged your home as collateral for your SBA loan, then you would ask for the lien release as part of an Offer In Compromise. In this case, the OIC is required because are still personally liable for the loan, therefore how strong or weak you are financially does matter.
When An OIC Is Not Required
If you did not personally guarantee your SBA loan (highly unlikely), or if you filed for Chapter 7 personal bankruptcy (much more common) and were discharged, then you are not personally responsible for repayment of the SBA loan. That said, a bankruptcy discharge does NOT result in the release of liens on real estate. The only way for a lien release to happen is for the lender to agree to a lien release.
Most lenders will agree to consider a lien release, but in a case when you are not personally liable, your lender should not be requiring you to submit an OIC (and the associated paperwork). Why? Since you are not personally liable, your personal financial situation should not matter. All that should matter is how much equity is in the home. The lender should be making a business decision: is the offer you are making in exchange for the lien release going to result in the same amount of cash that they would expect in a foreclosure scenario?