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.
The SBA Offer-in-Compromise process requires a guarantor to prepare a detailed financial statement and provide very detailed supporting documentation. In fact, the whole process feels a lot like applying for your loan all over again, but is quite the opposite. Instead, the company for whom you pledged your assets and your good name as security has already received the loan proceeds and failed! Worse, as a guarantor, the SBA is now looking at you to make good on the defaulted SBA loan.
With great care and after reviewing your financial situation in detail, your professional advisor has crated an offer for you. The offer is intended to catch the eye of the government and persuade them that a bird in the hand is still worth two in the bush.
A good offer will take into account your earning potential, age, employment history, health, and the health of your dependents, your assets, and those of your spouse in some cases. All of this information rolls up into an analysis that provides the SBA with the ability to compare what they think they may be able to recover through enforced collections to what you are offering. In short, you are making the case that your voluntary offer of settlement is the better deal between the two possibilities.
After submitting your offer, which agains feels like a mortgage application and is about as thick, several weeks pass. After a long wait, the SBA has responded — they have rejected your offer! Is it this end? As you look more carefully at their response, they have made a counteroffer!
In some cases, the SBA believes that a guarantor’s offer is, shall we say, in the ballpark, but they may disagree on some points supporting your offer and feel that you could do a little better. In such cases, the SBA believes the guarantor’s offer warrants something more than just a rejection. A counteroffer represents a deal that the SBA will do. These deals are often great opportunities because a referral to Treasury Department will cost you a 28% collection surcharge on top of what you already owe. Should you take it? That all depends; it may well represent your last chance to settle this matter and avoid bankruptcy or a referral to Treasury and possible wage garnishment.
Before you accept the counteroffer, take a day or two to calmly and cooly look it over. If you believe you can make it work, accepting the counteroffer will immediately stop the referral to Treasury — all that remains is to complete the payments required. On the other hand, if you believe the counteroffer calls for too much, but is almost manageable, then by all means let the SBA know. If a deal is close, you may still be able to gain some small concessions and perhaps enough to close a deal.
Do deals really get done?
The SBA Offer-in-Compromise process is there because the government knows that not all businesses make it and that repaying these debts is not always possible without causing extreme financial hardship. The default position of the SBA will always be — pay us, but don’t afraid to tell your story and ask for relief. You have very little to lose and much to possibly gain. Not all offers are accepted, even some really good ones get rejected, but the SBA Offer-in-Compromise is an option that should not be overlooked.
There is really no way to know. Period. There are so many variables:
1. Who handles your file;
2. What SBA office is handling your file;
3. Your level of cooperation with the lender, both real and perceived;
4. Whether you have liquid assets vulnerable to traditional collection methods.
In general, the following factors will impact the likelihood of settling with the SBA:
1. The amount of the Deficiency Balance;
2. Whether a Bankruptcy would shield some or all of the Guarantor’s assets;
3. The Guarantor’s net worth, including exempt retirement assets.
4. What would a wage garnishment yield over 5 years?
5. Is the Guarantor really likely to file bankruptcy or is it a bluff;
6. The Guarantor’s health or special circumstances (e.g., hardship);
7. The costs of collection, and in particular, the likely ROI on collection activities.
In short, the SBA, like the IRS, already sees the exposed assets you have pledged as the baseline of any offer. What they want is more. The SBA is looking for an Offer, usually a lump-sum offer, that is better than any alternative that can be obtained through enforced collection activities that consume time and money and may carry an uncertain outcome.
The hard truth is that thousands of businesses fail every year and not everyone will settle with the SBA. But, the SBA Offer in Compromise represents a powerful alternative to bankruptcy in many cases.