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SBA Offer In Compromise (OIC) Settlement Amount: How Is It Determined?
How long should I wait to settle my OIC?
The answer to this is complicated. It is determined by several factors, which will be described below.
Background: When a borrower who has a bank loan, guaranteed by the SBA, goes into default, the borrower has the option to seek protection by filing a Chapter 7 bankruptcy (assuming the borrower is eligible … more on this in another post). However, the SBA (and the bank, which acts as the SBA’s servicing agent) has the option of allowing the defaulting borrower to make an Offer In Compromise (OIC) instead of bankruptcy Ch 7. The borrower must be aware that an OIC is a PRIVILEGE, not a RIGHT, and the SBA is not under the obligation to accept an OIC, and only do so if the SBA feels that it is a good offer, and there is no fraud, concealment. or distortion. How the SBA decides this is often confusing, and they feel that they use black magic to understand, and it is very dependent on the individual who reviews the file. However, there are guidelines, as set forth in the SBA SOP. According to the SBA SOP on the OIC,
“The amount of the compromise must bear a reasonable relationship to the amount that could be recovered within a reasonable time through enforced collection proceedings and must be sufficient to protect the integrity of the SBA loan program.”
So what does this mean? Basically, an acceptable OIC is determined by eight (8) general criteria:
1. Size of the deficiency:
The amount of the deficiency is an obvious factor in determining the “settlement”. However, while there is a belief that the SBA “seems” to obtain a recovery of 20%, there is no magic percentage that the SBA will accept. It is because the deficiency of the loan is $ 150,000 or $ 1,500,000 is significant only in the context of the other criteria – that is, who can really pay the loan? What are the loan alternatives?
2. The liquidated value of the borrower’s assets should the lender seek protection in Chapter 7 Fally (BK)
This is an obvious alternative to an OIC for the loan. This is a calculation that must be done, and it is very significant to present to the bank and / or SBA. If the borrower has limited exposure in a BK deposit, that will have an impact on how the SBA sees an OIC… but the borrower must keep in mind, that even if they have no liability in a BK deposit, and his personal guarantee. would be fully discharged, the SBA may STILL require a significant and substantial OIC liquidation amount, based on the borrower’s Net Worth and ability to pay.
3. Net value of the loan if they do not seek BK protection.
Many default lenders assume that “exempt” assets do not factor into the SBA’s thinking when dealing with an OIC. This is not correct. Although IRAs and 401Ks are “exempt” from consideration in a BK filing, the SBA will still consider these assets when reviewing an OIC. Why? Because the OIC is a PRIVILEGE … and so in many cases the SBA officer feels that the borrower should dive into his assets – even the exempt assets – to demonstrate good faith OIC.
4. The recovery should the SBA seek a wage garnishment more than five (5) years
The SBA also considers the guarantor’s earning power. We recently spoke with a high-powered attorney who was in default at ~$600,000. The SBA was seeking $300,000 from him, although he submitted BK, his exposure was less than $30,000. Why? Because he earned $250,000+ a year. They figured if they garnished his salary (which they could do if he didn’t file BK) they would collect $300,000 in five years. In this case, the SBA guessed wrong – the lender filed for BK.
5. The “desire” of the borrower to avoid bankruptcy
This is a fuzzy calculation, but I advise my clients that filing a BK has a “hidden” cost. The operation in the business world is complicated when the loan files for BK, and these complications can cost real money over the 10 years that a BK is reported on a credit report. We estimate the cost to be between $75,000 – $125,000. Stated another way, if the borrower can afford an OIC agreement for less, it is a good idea to settle. However, if the cost of the settlement is higher than this, as in the case of the lawyer I mentioned above, the borrower must seek protection for a BK.
6. Structure of the offer
Many borrowers ask us if they can structure a Payment Plan for their OIC. The simple answer is yes, but … be prepared that the amount that the SBA will require in terms of payment plans are typically higher than if the borrower can make a single lump sum offer. The reason is simple: many loans on default payment plans in those plans. The SBA understands this, and thus requires a higher settlement amount to reflect the increased “risk” that not all payments will be received.
7. Other factors – health, age, unusual circumstances
The SBA will take into consideration “other” factors such as age, health, etc. For example, if a borrower is 65 years old, the hidden cost of a BK is negligible since the value of a clean credit report is meaningless for most people. near the pension. Likewise, significant health issues affecting a borrower will influence the SBA’s consideration of an OIC. Other factors that could affect SBA would be a sick child, a divorce, or a sudden job loss.
8. Administrative costs
This sounds trite, but the SBA and the bank involved are both large, relatively inefficient bureaucratic entities. As such, they have operating expenses, and for them to turn the wheel of progress and actually process an OIC, the offer must be enough to interest them. For a loan with no exposure in a BK, NO other collateral, and NO liens on personal property, this figure is relatively modest… maybe as low as $10,000 – $15,000. If there are liens on personal property, now the bank must spend resources to have these liens removed (legal fees) which can increase the cost to another $ 10,000 or more.
In the end, trying to estimate what will be the cost of establishing the OIC of a defaulting lender is an exercise based on many factors and criteria. And there is no single answer – every situation is different and unique.
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