I’ll cut to the chase. The best advice I could possibly give to a client is this: BE HONEST AND TELL THE TRUTH.
When you trying to settle your debt following a business failure, your lender and the SBA are seeking full disclosure. So what does this mean to you?
Don’t “Fudge” Your Personal Financial Statement
Intentionally omitting major assets is the fastest way to convince your lender/SBA that you are trying to avoid repaying your fair share of what you owe. Lenders will run your credit report and perform asset searches to confirm that your PFS is accurate. Mortgages show up on credit reports, so if you are thinking of “accidentally” forgetting to list your home which has equity in it, don’t.
Don’t forget about all the past Personal Financial Statements you submitted along the way. You completed one when you applied for the loan, and most banks require an annual update. If you mentioned a major asset (bank accounts, investments, real estate, etc) in even one of them, and that asset gets left off SBA Form 1150, a sharp workout officer will notice and ask about it. At that point, you’ll be in a position to outright lie, or to confess that you “accidentally” left a major asset off your PFS.
I know it can be excruciating to part with what little cash you have left. But please believe me when I tell you that misdirection is not the right move. Whatever goodwill you have will evaporate instantly if your lender discovers you have been less than forthright. As far as I was concerned when I was a workout officer, leaving that other bank account off your PFS is the same as lying about the balance.
If a “strategy” seems too good to be true, it probably is.
If someone has convinced you that the SBA rules have loopholes, and they will show how to jump though them, turn and run. The idea that you should sell your business to a friend, or to a new corporation (that was set up just so you could claim the business ceased operations) are actions that the SBA would not approve of.
Remember, you are the one signing your name on the Offer In Compromise Form, not your workout advisor. That means if the bank/SBA discovers you are trying to defraud them, it’s YOU who they’ll be coming after.
I’ve gotten plenty of calls from borrowers over the years who’ve had this scam pitched to them. They hear it, and it doesn’t pass the sniff test. So they do some more looking around. They seek to validate the claim that it’s perfectly OK to deceive the bank and the SBA. Not surprisingly, you won’t find anyone proclaiming publicly that this is an acceptable method of settling your personal guarantee. Because it’s not.
Play It Straight
The whole point of the Offer In Compromise is to provide guarantors the opportunity to settle their debt because they truly can’t afford to pay it back. The SBA won’t settle simply because it would be a nuisance for you to make payments. Not because you have the money, but want to buy a new jet ski. There is nothing wrong with putting forth an argument about why you can’t afford to repay your lender/SBA in full. However, it must be a fair offer that you honestly believe is the most you can afford.
The failure of a business is a life changing event (in a bad way), and I understand that. The goal of this article is to point out that by trying to avoid paying what you owe by misrepresenting your situation, you risk making a bad situation even worse. Nobody has ever been put in jail for borrowing money, making an honest effort, and not being able to pay it back. Plenty of people have gone to jail for committing fraud. Keep that in mind when making submitting your Offer In Compromise.