Determining A Reasonable Offer In Compromise
What is a reasonable amount to offer in an Offer in Compromise for a defaulted SBA loan? I am asked this question constantly and have a very simple answer: the combination of income stream and your liquidated value.
The liquidated value of the business assets does not apply to your personal guaranty. It does reduce the debt owed but it is direct collateral for the loan thus is not applicable to the personal guaranty obligation.
Computing what that actually means is a bit more tricky, as the liquidated value of your net worth is frequently not easy to compute, but once done, the number yields a relevant value which is used as an important benchmark to determine the right amount to offer. What you earn can support debt, what can be realized by liquidation helps determine the amount the SBA expects to collect from you. The combined value is the real number. The skill is in arranging your financial affairs to present your offer in the best light most beneficial for you. This, of course, does not include fraudulent transfers.
While it takes a long time for the SBA to get back to us regarding an acceptance or rejection of the offer, they will ask for current information when they send out their rejection of your first offer. Thus financial recovery and/or further decay will require adjustment to your counter-offer after the first offer is rejected (which it will be, most assuredly). The SBA will reluctantly accept payments over 30 months, and while preferring a total payoff, this is a definite possibility.
The largest area of error in computing your net worth and liquidated value is in over-estimating the value of your home. We all tend to believe our homes are worth more than they are. Take this into consideration – if you live in a homestead state where the home equity is protected, such as Texas and Florida. Also take into consideration whether your spouse has signed the guaranty thus allowing the bank to reach all the equity. If not, then only half the equity is available. Be careful of adding value for minority ownership positions of land or other businesses as it can be argued that despite the inherent value of the underlying asset, there is little value in a minority position as it really cannot be liquidated.
Of course, protected assets like 401ks or IRAs are exempt from your calculations.
There are many other traps and pitfalls that must either be eliminated or explained adequately and it may require a professional view to assist you in developing your best possible presentation. It requires both experience and specific knowledge to best design an effective financial statement. The idea of down-valuing your position is contrary to everything you have done in the past and creates a challenge to successfully deliver the right answers.
Call us if you need help and or guidance.
I just stopped by your blog and thought I would say hello. I like your site design. Looking forward to reading more down the road.
Very interesting! But what if a person do not have any personal assets and earns enough to put the meal on the table. What would SBA likely to do in that situation?
What are the way to resolve it? Can we talk?
Not that I’m impressed a lot, but this is a lot more than I expected when I stumpled upon a link on SU telling that the info is awesome. Thanks.
Good information,
After business asset has been liquidated for the SBA loan then do you talk to a Bank or SBA to offer a compromise on the deficiency? Also, if nothing paid to SBA then can SBA send you 1099 for the forgiven debt?
Do SBA send out 1099 for any forgiven debt? Does the 1099 needs to be filed with the IRS for the business with no assets?(in case of S-Corporation).
Great website – you’ve answered many questions for me. Our family has a business with an SBA loan around $700k and we are struggling with the monthly payment. However, our business could break even if we could reduce the monthly payment by 60%. Moreover, we have some promising opportunities we are close to securing but may take a 6-9 months to materialize. Thus, could we submit an Offer in Compromise to work out a lower monthly payment yet keep the business running? Do we have to close down the business and liqudiate all assets to have an Offer in Compromise accepted?
Second question: My wife is a personal guarantor and she is employed at a large insurance company with a decent salary. How much of her income would be used in determining a reasonable offer in compromise? Our living expenses are quite high, especially credit cards, mortgage, taxes, kids tuition, taxes, etc. What does the SBA consider as her “income stream” – gross income? adjusted gross? taxable income?
Your guidance would be much appreciated.
Thank you and keep up the execellent work!
I posted briefly before, but have another question. Closed a business 6 months ago with a 275K SBA loan. Loan secured with 2 pieces of property (lots) that we paid $210,000 cash for in 2005 but which are obviously worth far less now. Hired and then fired a lawyer who did nothing more for us than act as a messenger (and a poor one at that) and who failed to respond to the bank enough times that the bank got their big gun attorneys to file a complaint for foreclosure on the properties and a deficiency judgment, even though we had offered, through our attorney, from day one, to transfer all collateral to them, to which they agreed (verbally) and work out a repayment plan. Bank says the legal actions were just to motivate our atty and that they really don’t want to litigate. They recently sent us the SBA offer in compromise form (which up until that point we were unfamilair with and our attorney had never mentioned). In the “offer” portion of the form, the lender wrote “see attached forebearance agreement.” The forebearance agreement (another document our atty had never forwarded to us). We read the full agreement this weekend and it basically says that we will pay back all remaining principal (269K), all accrued interests, all late fees and all of their attorney’s fees – all of which amount to several thousand dollars. They also offered a 60 month repayment plan at a 6.75 fixed interest.
When we returned the Offer in Compromise and financial statement, we deleted the reference to the forebearance agreement and summaraized our offer as a pay back of the entire remaining principal, and immediate transfer of the business equipment (which was done yesterday) and the properties. We also offered to pay $250 a month until the net proceeds were applied against the principal, and then do an 84 month payback at a fixed rate of 5.75%. (They had indicated that they could stretch the payback to 84 months.) We did not offer to pay accrued interest, atty’s fees or late fees. My husband has a new job and steady income, but we have exhausted all of our savings and credit for the business and are barely staying afloat due to having 4 other investment properties that we are trying to sell and on which we have large monthly payments. 3 are currently reneted, but one rental is due to leave this month. If we don;t sell those properties, we will be near bankruptcy if we have too large of a payback on this SBA loan.
The first response from the bank was whether we had read the forebearance agreement and why wasn’t it part of our Offer in Compromise. Are we even in the right ballpark with our offer and what happens next when they reject our offer? Was it a reasonable offer or is our only option to sign the forebearance agreement??
How much time can the bank take in responding to an offer in compromise? We submitted an offer 6 months ago and still have not heard back. Is this the norm? Please advise. Thanks for all of your insight.
Not unusual if its in the hands of the SBA Offer in Compfomise department, it can take them a year, but if it is the bank, its long…call and ask where it is, who has it, then act accordingly.
Yes your offer can and should be evaluated and accepted independently from your partners. Presumably you submitted three separate Offers, and yes the other two can default and you can be released after payment. Carry on.
Your site is great. Very helpful. What happens if your spouse has not signed the personal guaranty ….but you live in a community property state like Texas? My spouse keep absolutely everything financial separate. Our names are not joint on anything except our home. I have an SBA loan that I am about to start a workout compromise on. He originally, because of it being a community property state, was told he had to sign the actual application but he did not sign a personal guaranty. Can they come after his assets?
No Suzanne,…safe and sound. although I wonder how secure you are in doing your own workout?
Then you live with a judgement lien on your shoulder for then on……not fun. Better to resolve to get the problem behind you.
Of course. Call my office at 413-549-2966, Norm will arrange a no obligation teleconference.
Yes the bank will.It must be filed. There are ways around this issue.
You submit the offer in compromise to the SBA but through the bank. They can and will 1099 you, but there are ways around the tax issue.Read about it in my blog.
Read on I answer these questions in my blog, however the bottom line is the Bank will clean you out as they are required to exhaust their legal remedies in converting the collateral to cash to pay down the loan, and between you and your wife it sound as they will have much to look at. In consideration of your upside down state now, you should be considering a pre-emptive workout, which will keep the business intact and allow us to strip of the debt leaving the business with future opportunity and little debt, short of this, you are in for a rough ride.
Call me at 413-584-2581 and I can explore some options with you, Norm will attange a no obligation tele-conference for us to talk.
Well after almost 7 months of waiting,the bank finally responded to our offer in compromise. Their counter wasn’t too bad. The only problem now is that in the 7 months since our offer, my 2 partners situation has drastically deteriorated. Do you think that the bank would be willing to just accept my share (40%) of the offer and relieve me of my liability; thus removing the lien from my home? Obviously I’m not assuming or asking the bank to forgive the remaining 60% owed, just for them to do a workout with the 2 remaining partners. Any advice would be greatly appreciated. Your website and feedback has been a great help in this time of need. Thanks!