Barry A. Furman, Esquire, Kaplin Stewart: Compromising an SBA loan
Businesses and individuals who are unable to pay a Small Business Administration (“SBA”) loan may be able to pay less than the full amount of the indebtedness in settlement of the Borrower’s obligation. This is referred to as an offer in compromise (“OIC”). An OIC that is approved by the SBA is final and conclusive on the Borrower, the SBA and the bank that made the loan (“Lender”). The circumstances under which the SBA will approve an OIC, however, are narrow and the rules for submitting an OIC are strict.
The SBA will generally not consider an OIC if the business is a going concern. Whether the loan is secured by business assets or real estate, the SBA will generally require that the collateral be liquidated before the SBA will consider an OIC. In the case of a loan made to purchase real estate for a real estate business, the going concern rule may be more easily satisfied than a business that has not yet closed its doors. Compromise of a going concern, however, may be approved if the viability of the business is at stake or liquidation of collateral commenced.
An OIC must first be submitted to the Lender since SBA loans are made by banks, not the SBA. Rather, the SBA is the guarantor of payment to the Lender. The OIC must be submitted on SBA Form 1150 together with a completed financial statement, generally Financial Statement of Debtor, SBA Form 770, and fully substantiated with documentation. The Lender must approve the OIC before sending it to the SBA for approval.
Factors that will be considered for acceptance of an OIC include the following: the Borrower’s ability to pay; applicable state and federal exemptions; and cost and time that would be required to collect through enforcement mechanisms. Hardship may also be considered. In the case of an individual Borrower or guarantor, personal health, age and economic situation will likely be considered for hardship.
Generally, an OIC will not be accepted unless it reflects the Borrower’s ability to pay and should be in an amount that the Lender/SBA could recover in a reasonable amount of time through enforcement mechanisms. An OIC will not be accepted if the Borrower can pay its obligation in full through an installment agreement or if acceptance would harm the integrity of the SBA loan programs. These factors are similar those considered by the IRS when reviewing an offer in compromise.
In the case of loans made under Section 7(a) of the Small Business Act, the Lender has the sole responsibility for conducting all liquidation activities. Generally, the Lender has unilateral authority to take all necessary action to liquidate the loan. All substantive Lender liquidation activities and decisions must be justified and documented to obtain the SBA’s written approval of the OIC.
Submitting an OIC does not ensure that it will be accepted. Rather, it begins a process of evaluation and verification. Generally, an OIC that reflects the Borrower’s ability to pay will be accepted if the information required is submitted and substantiated and includes an explanation of financial hardship.