SBA SOP 50 57 4 (click here to view SOP 50 57 4) reinforces that an Offer in Compromise (OIC) is a recovery tool of last resort and should be used only when the facts support that the full outstanding debt cannot be collected within a reasonable period of time. For lenders managing SBA 7(a) loans in liquidation, understanding the OIC process is critical to maximizing recovery while maintaining compliance with SBA requirements.
An Offer in Compromise is an offer by a borrower, guarantor, or other obligor to pay less than the full amount owed in satisfaction of their SBA loan obligation. It is important for SBA lenders to understand that the SBA has the sole authority to approve an OIC, and it is helpful for lenders to advise any obligor who wishes to submit an OIC that:
- Submission of an OIC does not guarantee acceptance by the SBA.
- SBA evaluates whether the offer reflects the obligor’s true ability to pay.
- SBA generally will reject compromises when the obligor has the ability to repay in full, either through a lump-sum payment or an installment arrangement.
- A compromise approved by SBA is generally final unless it was obtained through fraud, misrepresentation, or mutual mistake of fact.
- An accepted OIC may affect future eligibility for federal financing programs and may have tax consequences.
The most common opportunity to pursue an OIC arises after a business has ceased operations. SOP 50 57 4 provides that compromise is generally appropriate when:
- The business has closed;
- The loan has been classified in liquidation status; and
- All available collateral has been liquidated.
SOP 50 57 4 does recognize a few circumstances where compromise may be considered before all liquidation efforts are complete, including:
- Negotiated releases of liens on an obligor’s residence;
- Certain going-concern situations where compromise is necessary to avoid business closure (more to come in next week’s newsletter); and
- Deeds in lieu of foreclosure or non-judicial foreclosure actions that legally extinguish the remaining deficiency balance.
Before submitting an obligor’s OIC request to the SBA, lenders should confirm that:
- The Loan is in Liquidation Status
- The lender’s analysis reflects that full collection is not likely and that one or more of the following apply:
- The obligor cannot repay the debt within a reasonable period of time;
- Collection through litigation is unlikely to result in full recovery;
- Collection costs would exceed expected recoveries;
- Significant litigation risk exists; or
- Special circumstances, such as illness or financial hardship, support compromise consideration.
- Collection is not already barred by legal defenses such as:
- Bankruptcy discharge; or
- Expiration of the statute of limitations.
- The obligor has not engaged in:
- Fraud;
- Misrepresentation; or
- Other financial misconduct.
- The proposed OIC must bear a reasonable relationship to the amount that could otherwise be recovered through appropriate collection efforts.
SOP 50 57 4 continues to emphasize that an Offer in Compromise is a recovery strategy, not a convenience tool. For closed businesses, lenders should view OICs as a structured process designed to maximize recovery when full collection is no longer practical. A well-documented financial analysis and clear demonstration of collection limitations remain the foundation of every successful Offer in Compromise request. It is also important for SBA lenders to keep in mind that an Offer in Compromise with one obligor does not release remaining obligors. Each obligor remains jointly and severally liable unless separately released through an approved OIC, and lenders must evaluate each obligor independently.
If your lending institution has questions about SBA Offer in Compromise, or any other SBA lending matters, please contact us at SBAQuestions@JellumLaw.com.