Written by Lindsay Cremona, Partner at Jellum Law
To assist small business owners who have defaulted on an SBA 7(a) loan and are unable to pay the full amount owed an Offer in Compromise may be a solution. When exploring this option, SBA lenders must understand the appropriate protocols set forth in SOP 50 57 3 7(a) Loan Servicing and Liquidation which became effective on August 1, 2023.
Pursuant to SOP 50 57 3, a lender does not have unilateral authority to accept any settlement or payment proposal that would waive a portion of the principal debt obligation unless it is approved by SBA through the Offer in Compromise process.
The Offer in Compromise process is commenced by the obligor submitting a written proposal payment/settlement offer, along with financial documents, directly to the lender. Upon receipt of the completed Offer in Compromise, the lender must determine whether it is acceptable. To that end, the lender must review the submission and make a good faith effort to verify the accuracy of the financial disclosures made by the obligor. At a minimum, a current credit report should be obtained by the lender. Further, the lender must compare the current credit report and financial information submitted by the obligor in the past with the financial information submitted in conjunction with the Offer in Compromise.
Obligors do not have a right to compromise the amount due under an SBA 7(a) loan. Further, an Offer in Compromise is appropriate when the business is closed and all collateral has been liquidated or the business is open but continued viability is at stake and all non-essential business assets have been liquidated.
In situations where the business has closed and collateral has been liquidated, prior to commencing litigation, it is prudent to discuss the Offer in Compromise process with obligors to determine whether a potential Offer in Compromise may be feasible.
Submitting an offer does not guarantee that a lender or the SBA will accept the terms. Lenders must obtain SBA’s prior written approval before entering into a compromise agreement that will result in less than full payment of the outstanding principal balance of the SBA 7(a) loan. Failure to obtain SBA’s prior written approval could result in a repair or denial of the guaranty.