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.
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.
As a general rule, more so now than in the past, the Small Business Administration (SBA) will direct a Guarantor to submit their SBA offer-in-compromise package to the lender for preliminary review and approval. In fact, not in every office, but in some, lenders will be given just 10-days to get the job done. It is not that the SBA is trying to be unkind, but if lenders what to support the deal time of the essence. Now, if for some reason the lender can’t or simply won’t cooperate in the process, SBA will usually take on the responsibility of doing the entire review and work out the particulars with the lender following their own internal process. But, what if the lender just won’t play ball?
My lender has refused every offer I have made?
First, make sure your packages are complete and your offer is serious. If you are working with a professional, they will know how to prepare your offer package and what is expected by the lender and the SBA. Where we see the most mistakes involves a blind appeal for sympathy. Folks, its not that the SBA analysts aren’t human; we work with them every day and the human factor comes into play all the time. But, the guidelines under which they operate require a stringent review of your financial condition. In short, your offer has to present itself as a better alternative to anything else the government is likely to collect from you through enforced collections. In many cases, administrative wage garnishment (AWG) makes it likely that a substantial percentage of the debt might be collected over your working lifetime. Therefore, if your offer has any chance of success it must, at a bare minimum, take that calculation into account.
Second, make sure you are really putting your best foot forward. If you clearly have assets and are unwilling to borrow or at least consider partially liquidating them to support your offer, the SBA may consider the offer insincere — at least, that is my take. So, don’t bother low balling the SBA, unless the rationale for the low offer would make financial sense to the analyst.
Finally, if the lender tells you the offer is just not enough, then look for a way to improve it, or you may end up in Treasury.
Do I really need the lender’s approval?
Yes, in the vast majority of cases, if your lender will not support your offer, the battle is lost. Gaining the support of your lender does not assure acceptance of your offer by the SBA, but failing to secure their recommendation in support of your offer all but assures its rejection. You may be under a lot of stress, but never never yell at your banker; it won’t help and can make things worse. The SBA Offer-in-Compromise package still requires a lot of work on your bank’s part, if they choose to recommend it for approval. Do not give your banker, who may be short-staffed, another reason to put your file on the corner of his her desk in the “I will get to it later pile”. Remember, you are asking the lender to help you and whatever other feelings you may have at the time, you need that help.
The lender’s just doesn’t like anything I suggest. I think they are being unreasonable.
In my experience, lenders rarely turn down a good offer. After all what’s not to like about recovering more money on a bad loan? Sadly, in some cases, lenders may have all but adopted a no settlement policy. A loan committee may have unrealistic expectations that the Guarantors simply cannot meet or may simply have a sour taste in their mouth based on the loan history or their interactions with the Borrower and Guarantors. Sometimes, it just feels personal and it may be.
Can the bank just refuse to settle?
Yes, the SBA, in my experience, will not question a bank’s refusal to settle. Only in certain situations where a bank refuses to review an offer within the time provided by the SBA will some SBA offices take over the offer review process. I am led to believe that, in those few cases, the bank may be asked by the SBA to essentially waive its right to any part of the recovery. Hence, at that point the bank’s consent no longer has any real bearing on the approval by the SBA.
We have had quite a few clients ask us how a defaulted SBA loan might affect their business dealings with the government. In this post we are going to look at this question from the perspective of a client who has one or more contracts with the federal government under which they receive payments for services rendered.
For example, a medical practice or surgical center might receive Medicare payments or a janitorial service might have a contract to clean the offices of certain federal buildings. Will defaulting on an SBA loan really affect any of those agreements? Yes.
Will I be barred from receiving government contracts?
Surprisingly, no, unless otherwise provided by law. Contracting officers shall not use the presence of the CCR debt flag indicator (see below) to exclude a contractor from receipt of the contract award or issuance or placement of an order. However, the government will take steps to ensure that delinquent funds are collected. And, they will be aggressive once they become aware of the delinquency.
Centralized Offset of Federal Payments
As we have just learned, you probably won’t lose your contract award because of defaulted SBA debt, but federal payments made to you are all but certain to be offset. When it is contemplated that the Government-wide commercial purchase card will be used as the method of payment, and the contract or order is above the micro-purchase threshold, contracting officers are required to verify whether the contractor has any delinquent debt subject to collection under the Treasury Offset Program (TOP). This check must be performed at the time of contract award or order placement.
Federal contracting officers are required to check the General Services Administration Central Contractor Registry (CCR) to determine whether a contractor owes a delinquent debt. When the Government contracts for goods or services and pays with a credit card, those payments are made to the card-issuing bank and cannot legally be intercepted for delinquent debts owed by the contractor.
The contracting officer, by law, may not authorize the Government-wide commercial purchase card as a method of payment during any period the CCR indicates that the contractor has delinquent debt subject to collection under the TOP. In such cases, payments under the contract shall be made in accordance with the clause at 52.232-33, Payment by Electronic Funds Transfer—Central Contractor Registration, or 52.232-34, Payment by Electronic Funds Transfer—Other Than Central Contractor Registration, as appropriate in order to assure that delinquent contractors are paid through a mechanism that can be offset or levied to collect the contractor’s debts.
The original law references CCR. What is SAM?
The CCR was the primary supplier database for the U.S. Federal government until July 30, 2012. On July 30, 2012, the CCR transitioned to the System for Award Management (SAM). SAM is now the Official U.S. Government system that consolidated the capabilities of CCR/FedReg, ORCA, and EPLS. For purposes of this post, all references to the original CCR process should now reflect SAM. If you had an entry in the CCR database, you now have an entry in SAM.
Owing unpaid federal debts can cause serious problems. If you would like more information on how the Treasury Offset Program (TOP) works, please contact the Perliski Law Group for a free initial consultation at (214) 446-3934 or use the Contact Us link at the top right of this page.
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.