If the Small Business Administration (SBA) has accepted your offer in compromise, then congratulations are in order. But, be warned, you must follow the terms of your offer precisely and make all payments on time or risk default. In many cases we are approached by well intentioned people who established settlements with the SBA calling for payment of the settlement in equal consecutive monthly installments; however, for one reason or another they missed a payment or two. Missing a payment can have disastrous consequences and result in a referral to Treasury, the imposition of additional collection fees adding nearly 30% to your original debt, less a credit for your prior settlement payments and the resumption of interest on the uncollected balance (this assuming the SBA agreed to zero interest settlement for you).
I knew a default was bad news – what can I do?
If you have been advised that your SBA OIC is in default you must act quickly. It may not be possible to get the original settlement back by simply making up the missing payments and a new SBA Offer in Compromise may need to be submitted. There are simply too many variables in these cases and consulting a licensed attorney with experience in this area should seriously be considered.
Missing a payment and paying ahead are both equally dangerous
How can paying ahead be bad? When the SBA accepted your offer to pay in installments, it programmed its computers to look for payment in accordance with its terms; in most cases equal, consecutive, monthly payments of an exact amount are called for under the agreement. Many people concerned about defaulting think that paying ahead can protect them from default by establishing a cushion of sort. However, that is a very dangerous train of thought. In fact, all you will do is pay down the balance and in effect short the remaining duration of your agreement (much like paying a mortgage off earlier), but the next month’s payment will still be due. When the SBA’s computers fail to register payment, you are at risk of default and the account may be referred to Treasury (this process is highly automated).
If you have paid ahead on your offer, but nonetheless received a notice of default, you should contact the SBA at once and explain the situation or consult with a licensed attorney experienced in this area. Although it may seem unfair, the government may strictly enforce the terms of your settlement to the letter. Instead of appreciating the gesture on your part, they may refer the debt to Treasury! Remember, SBA computers do a lot of this work and once transferred to Treasury, the SBA staffers may be unwilling to even discuss the matter.
Can I pay off my settlement early?
If your payment will completely pay off your settlement, then you may be able to do so safely, but you should contact the SBA or advise your attorney before doing so. The terms of your offer control and making a mistake can cost you dearly.
When submitting an offer under the SBA Offer in Compromise program pursuant to SBA SOP 50 57, the SBA is trying to determine whether making you repay the loan in full will cause a hardship, at least that’s the idea. A complete and accurate picture of your finances is absolutely necessary for the SBA to consider your offer. Moreover, this statement is made under the penalty of perjury. In fact, in our experience if the SBA 770 is visibly incomplete or vague, SBA may not even take your offer seriously and refer you straight to Treasury. Below we address two of the most common questions we get from people contacting our office:
Why is my wife’s financial information necessary, she is not a guarantor?
The short answer is because the SBA requires it; the long answer is that the SBA is trying to determine what portion of your household expenses he/she may be paying. This allows the SBA to determine what sort of disposable income you, the guarantor, may have based on your income, to repay the loan. This calculus is just one of the reasons SBA is asking.
Will providing my wife’s financial data make her liable?
No, the personal liability for the repayment of your SBA loan was established under the original loan documents and the unconditional personal guarantee signed by you the borrower or guarantor. Providing answers to questions on the SBA 770 is not going to make him/her liable for your debt.
Can my spouse still be liable for my unpaid SBA debt in some other way?
Yes. While he/she may have no “personal” liability for your unpaid SBA debt, depending on the laws of your state, your spouse’s income and/or property may be liable for repayment — remember, we are saying “income” and/or “property” not him/her personally. There are nine community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. In these states, your spouse’s income and community property (property acquired during marriage) may be liable for your unpaid SBA loan balance.
Why does the SBA want to know if I have transferred property to someone else?
Transferring cash and other valuable assets to a third-party to make you look financially weaker or in an attempt to put those assets out of reach of creditors and the SBA is unwise. Not only are such transfers potentially voidable under various state statues, including those dealing with fraudulent conveyances, but if the SBA concludes you made those transfers with a bad motive, they consider that a red flag and may not be willing to settle with you on any terms at all.
How will the SBA know I transferred assets if I don’t tell them?
Remember, you are signing the SBA 770 under penalty of perjury and prison time is not just a threat, but a very real possibility. You must tell the truth — to your attorney and the SBA. Transfers made to relatives and others need not always scuttle a deal. There are many reasons for transfers and many ways to address them in the offer process. Let your attorney discuss the matter with you first, then you decide if you wish to proceed with filing your SBA offer.
I don’t want to disclosure all my financial information, I will just file bankruptcy instead.
Bankruptcy may be an option to discharge your unpaid SBA debt if you really don’t want to proceed with or cannot afford an offer. However, its important to note that filing bankruptcy will still require similar disclosures. In fact, bankruptcy disclosures are on the whole even more invasive.