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Determining how much a borrower can settle for under the SBA Offer in Compromise program depends on multiple financial and behavioral factors. While most business owners want to repay their debts in full, financial distress and business closure can make that impossible. The SBA’s Offer in Compromise program provides a structured path to settle those debts in good faith and avoid bankruptcy.
The key principle: an OIC typically equals what the lender could recover through forced collection. Understanding how the SBA and participating lenders calculate that number is critical before entering negotiations.
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How the SBA Views a Defaulted Loan
When an SBA-backed loan defaults, the lender first liquidates business assets to recover as much of the outstanding balance as possible. Once the business entity is liquidated, attention turns to the guarantors—the individuals who signed the loan documents, often including spouses or business partners.
SBA guarantees are joint and several, meaning each guarantor is responsible for the entire debt, not just a portion. The SBA can pursue any guarantor for 100% of the balance, focusing on those with the greatest ability to pay.
The Four Key Factors That Drive an OIC Calculation
1. Value of Current Assets
Lenders begin with the borrower’s net equity in major assets—home equity, cash, vehicles, investment property and similar holdings—minus secured liabilities. Certain protections exist, such as homestead exemptions, retirement accounts and wage garnishment limits.
However, protected assets do not eliminate responsibility. The SBA views the OIC as a privilege, not a right. For example, a borrower living mortgage-free in a $500,000 protected home cannot expect to settle a $250,000 debt for pennies on the dollar. But if the debt is $800,000 and full repayment through refinancing isn’t possible, a reasonable settlement may be negotiated for less than the total owed.
2. Future Earning Potential
A borrower’s ability to generate income is another critical factor. Lenders review current and past earnings, age, health and employment outlook to assess potential recovery through wage garnishment.
Because garnishment is costly and time-consuming, a lump-sum settlement—even if lower—can be more attractive to creditors. It provides immediate recovery without prolonged enforcement.
3. Cooperation and Character
A borrower’s conduct throughout the process can significantly influence settlement outcomes. Demonstrating transparency, timely communication and willingness to assist with liquidation efforts signals good faith.
Providing financial reports, asset appraisals and requested documentation promptly builds trust and often results in more favorable terms. In contrast, avoiding communication or waiting until after legal action begins typically leads to higher settlement demands.
4. Cost of Collection
Creditors weigh the expense of pursuing legal recovery—court filings, enforcement actions and attorney fees—against the value of an immediate settlement. The longer the collection process takes, the higher the cost. This often motivates lenders to accept a smaller, prompt payment rather than pursuing the full balance over time.
Strengthening the Offer
While the SBA formally requires Form 770 (personal financial statement), Form 1150 (offer justification) and two years of tax returns, successful settlements rely on stronger documentation. Supporting materials—bank statements, mortgage records, appraisals and proof of income—lend credibility to the offer.
Equally important is a well-crafted hardship letter explaining the borrower’s situation, actions taken to mitigate loss and rationale for the proposed settlement.
Bottom Line
An SBA Offer in Compromise is both a financial and strategic negotiation. The final settlement reflects what the lender believes could be recovered through liquidation, wage garnishment, and legal action—balanced against the borrower’s demonstrated cooperation and credibility.
Because every case is unique and outcomes depend on precise documentation and negotiation, professional representation is strongly advised. Expert guidance ensures the offer is positioned realistically, supported thoroughly, and negotiated effectively.
