SBA Offer in Compromise

approvedThe Small Business Administration (SBA) is a federal organization whose mission is, “…to aid, counsel, assist and protect the interests of small business concerns, to preserve free competitive enterprise and to maintain and strengthen the overall economy of our nation,” (  The majority of their work is focused on providing loans and guarantees to small businesses in order to support their overall mission.  Most loans are issued through participating SBA lending banks where the bank loans the business money and the SBA guarantees a large portion of the note (ranging from 50-90%).  These guarantees vastly reduce the risk to the bank because even if the loan fails, the SBA guaranty will assure they do not experience large losses.  This shift of risk away from the banks opens credit to small businesses that they would otherwise not qualify for, creating opportunities for small businesses to grow, hire, expand and succeed.

However, what happens when one of these businesses fails?  Revenues are down since the beginning of the recession and have not fully recovered for many industries.  Many feel when they cannot pay their SBA loan that bankruptcy is their only option.  However, it is not.  The SBA has a program in place that allows defaulted guarantors to settle their obligations for far short of what is owed on their loans.  The process is called the Offer in Compromise program and is essentially a bankruptcy alternative. The SBA has a lot of information on their website and distributes the required forms for an Offer in Compromise (

However, after reading all information available and reviewing the required forms, many borrowers still don’t know how much to offer.  Essentially the question that goes unanswered is: How much is the right amount to offer in or for the SBA to accept an Offer in Compromise?

The answer to that is somewhat addressed in the SBA Standard Operating Procedures, “The compromise amount must bear a reasonable relationship to the amount that could be recovered in a reasonable amount of time through enforced collection proceedings and must be sufficient to protect the integrity of the SBA loan program,” ( Yet this answer leaves a lot open to interpretation and leave many still scratching their heads.

To answer the question, first a defaulted guarantor must understand the following things: an Offer in Compromise is a privilege, not a right, and, that any fraud or misrepresentation throughout any part of the loan process will result in disqualification from the Offer in Compromise program.  This means that communication and cooperation are essential in maintaining your ability to settle.  The bank must believe you are acting in good faith to put forth your best offer per the SBA guidelines for forced collection.  Once this type of relationship is established, you must present an offer with all required supporting documentation that addresses the following points:

1. The forced liquidated value of the assets of the guarantor

A guarantor must present an offer equal to or greater than the liquidated value of their personal assets.  To determine liquidated value, a guarantor must first examine their personal balance sheet and remove any assets that are protected from collection such as homesteaded properties or protected retirement assets (see post on State by State Protection for more information).  From there any remaining assets must be appraised or valued at their liquidated value less any debt owed against the assets.  For example if you own a rental property whose liquidated value is $300,000 and you owe a mortgage of $250,000 on that property, the forced liquidated value would be $50,000 for that asset ($300,000 liquidated value – $250,000 mortgage).  Finding liquidated valuations often requires the assistance of certified appraiser.

2. Future earning potential of guarantor – ability to garnish wages

Above and beyond a guarantor’s liquidated asset base, an acceptable offer must compensate for the earning potential of the guarantor. The SBA will likely want to examine the current earning statements of a guarantor along with at least two years worth of tax returns in order to be able to calculate the guarantors ability to earn. The SBA and bank will then compare this to the state laws regarding wage garnishment to calculate the borrowers future ability to repay the loan (see post on State by State Protection for more information).  Other factors are also included in this calculation, such as age and health conditions which may limit a person’s current or future ability to remain gainfully employed.

3. The size of the deficiency balance

While the validity of an offer is based more on the previous two points, the size of the deficiency does come in to play.  The offer must not jeopardize the integrity of the program as dictated by the standard operating procedures.  This means that certain offers may be considered too low simply because the balance is large.  For example, a $15,000 Offer in Compromise may be a perfectly acceptable offer for a distressed borrower on a $200,000 deficiency.  However, a similar borrower would likely not get a $15,000 offer accepted if the balance owed was $2,000,000.

4. Cost of collection and administrative costs

Assets held in trusts, other businesses, partnerships, or other asset protection vehicles often have higher cost of collection, meaning that the bank would have to spend more time and money litigating in order to have the legal right and access to liquidate those assets.  The costs are considered by the bank when reviewing any offer.  Likewise, any costs associated with accepting an offer are considered as well.  For example, if a defaulted guarantor owns multiple real estate properties, each with a lien on them that would need to be released if an Offer in Compromise is accepted could mean that the bank has to incur thousands of dollars in legal fees releasing those liens. Those fees would be considered before accepting any offer.

These four points touch on how the bank and SBA will review and validate an offer. Each must be addressed and support by the appropriate documentation.  If done correctly, the SBA will accept the offer and the guarantor can settle their obligation without having to file for bankruptcy protection.

In the end, determining the appropriate offer amount can be difficult. Dealing with the SBA can be a long process and proposing an inadequate offer can result is precious time wasted and your window of opportunity to settle closing.  SBA loans that are not settled in a timely fashion are sent to the US Treasury Offset Program, where settlement becomes much more timely and expensive (for more information see post on Treasury Offset Program). Therefore if you find yourself behind on your SBA payments, contact your bank, be open and honest, seek the help of professional to assist you in calculating an adequate value for an offer in compromise, and present to the bank and the SBA as soon as possible.



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