Monday, July 25, 2022

EIDL LOANS and SBA OFFER IN COMPROMISE PROGRAM

In a recent blog post we discussed EIDL LOAN WORKOUTS AND BANKRUPTCY http://shenwick.blogspot.com/2022/07/eidl-loan-workouts-and-bankruptcy.html 

In this post we will discuss EIDL Loans and the SBA Offer in Compromise program (“OIC”).  

An offer in compromise is an offer by the borrower to pay less than the amount that is owed on the SBA loan, in consideration for the SBA considering the loan satisfied. The “compromise amount” must bear a reasonable relationship to the amount that could be recovered through “enforced collection proceedings”. 

Enforced collection proceedings are litigation or the lien and levying on collateralized assets by the SBA including bank account levies, wage garnishments, and liens on houses pledged as collateral.

Generally in an OIC, the business has closed and all business assets have been sold or abandoned. In rare cases, an OIC can  be filed while the business is open and operating.

The compromise amount should be paid in one lump-sum payment on a specified date, usually within 60 calendar days of the approval date. Rarely the OIC can be paid in installments.

Similar to an OIC for a tax obligation, the SBA Offer-In-Compromise is required when a borrower or guarantor is seeking to have their obligation released for less than the balance due after the business has closed.

What are the Requirements for an Offer in Compromise?

(1) The loan must be classified in liquidation status by the Lender or SBA;

(2) The borrower has not filed for bankruptcy;

(3) The full amount owed on the loan cannot be paid or recovered 

(4) Collection of the loan is not barred by a discharge in bankruptcy or the statute of limitations;

(5) The borrower has not engaged in fraud, misrepresentation, or other financial misconduct; and

(6) The compromise amount bears a reasonable relationship to the amount that could be recovered in a reasonable amount of time through enforced collection proceedings. 

After defaulting on the EIDL loan, when the loan is classified in liquidation status by the Lender or the SBA, the borrower will receive a  60 day demand notice from the SBA.

It is during this 60 day demand notice that a borrower typically files the OIC.

If a borrower takes no action the SBA can commence litigation, seize IRS tax refunds, take Social Security benefits or an individual's wages can be garnished. 

The OIC package is sent to the lender who will review it and  forward it to the SBA for further review and action.

What Documentation Must the Borrower Submit with the OIC?

(1) SBA Form 1150 (Offer in Compromise).

(2) SBA Form 770 (Financial Statement of Debtor) showing the borrower’s assets, liabilities, income, and expenses. 

(3) Statement of Personal History

(4) Borrower Consent to Verify Information

(5) IRS Form 4506-T (Request for Transcript of Tax Return);

(6) The borrower’s federal tax returns for the past two years

(7) If the loan involved personally guarantees, then 2 years of federal tax returns for the guarantor

(8) If a house was collateral for the loan, then a recent appraisal of the house and a mortgage statement showing the mortgage balance on the house, if applicable.

(9) A statement or explanation from the borrower stating why the loan cannot be repaid in full.


Timing:

The OIC process takes six months to one year.

Will the SBA accept a payment plan for an OIC?

The SBA prefers a lump sum payment, but they will also consider monthly payments from an individual. 

Note however, that the SBA will not issue a release, terminate a guaranty or release a lien on a house until all payments under the OIC are made. 

If your house is collateral for the loan, then the OIC offer must equal the equity in the house, which is determined by the fair market value of the house (based on a recent appraisal) less outstanding mortgages, less brokerage fees (if the house were sold), less your States homestead exemption and state and local transfer taxes.

Bankruptcy filing vs OIC

Clients will often ask us is it better to do an OIC or a bankruptcy filing? There is no correct answer and at Shenwick & Associates we do that analysis for clients.

At Shenwick & Associates we have done hundreds of workouts for clients and many bankruptcy filings for individuals and businesses.   

Clients having questions about the OIC process or bankruptcy should consult with Jim Shenwick, Esq.   jshenwick@gmail.com  212 541 6224  



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