How long should I wait to reach an agreement with my OIC?
The answer to this is complicated. It is determined by multiple factors, which I will describe below.
Background: When a borrower who has a bank loan, guaranteed by the SBA, becomes delinquent, the borrower has the option of seeking protection by filing a Chapter 7 bankruptcy (assuming the borrower is eligible … more on that in another post). However, the SBA (and the bank, acting as the SBA’s servicing agent) has the option of allowing the defaulted borrower to make an Offer in Compromise (OIC) instead of filing for Chapter 7 bankruptcy. The borrower You should be aware that an ICO is a PRIVILEGE, not a RIGHT, and that the SBA is not required to accept an ICO, and will only do so if the SBA considers it a good offer and there is no fraud, concealment or misrepresentation. How the SBA decides this is often confusing and feels like it uses black magic to find out, and is largely dependent on the person reviewing the file. However, there are guidelines, as stated in the SOP SOP. According to the SOP SOP on OIC,
“The amount committed must be reasonably related to the amount that could be recovered in a reasonable period of time through mandatory collection procedures and must be sufficient to protect the integrity of the SBA loan program.”
So what does this mean? Simply put, an acceptable OIC is determined by eight (8) general criteria:
1. Size of deficiency:
The amount of the deficiency is an obvious factor in determining the “settlement.” However, while there is a belief that the SBA is “looking” for a 20% recovery, there is actually no magic percentage that the SBA will accept. This is because whether the borrower’s deficiency is $ 150,000 or $ 1,500,000 is only significant in the context of the other criteria, i.e. what can the borrower actually pay? What are the borrower’s alternatives?
2. Liquidated value of borrowers’ assets in case the borrower seeks protection in Chapter 7 Bankruptcy (BK)
This is an obvious alternative to an OIC for the borrower. 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 presentation, that will have an impact on how the SBA views an ICO … but the borrower should be aware that even if they have NO liability in a BK presentation, and their personal collateral would remain. fully discharged, the SBA MAY STILL require a significant and substantial OIC settlement amount, based on the borrower’s Net Worth and ability to pay.
3. Borrower’s net worth if NOT seeking BK protection.
Many defaulted borrowers assume that “exempt” assets are not a factor in the SBA’s thinking when it comes to an ICO. This is not correct. Although IRA and 401K accounts are “exempt” from consideration in a BK filing, the SBA will still consider these assets when examining an OIC. Why? Because the ICO is a PRIVILEGE … and that is why, in many cases, the SBA official feels that the borrower should use his or her assets, including exempt assets, to demonstrate a bona fide ICO.
4. Recovery in the event that the SBA seeks wage garnishment for five (5) years
The SBA will also consider the purchasing power of the guarantors. We recently spoke with a high-powered attorney who was in arrears with ~ $ 600,000. The SBA was seeking $ 300,000 from him, although if he submitted BK his exposure was less than $ 30,000. Why? Because he was making more than $ 250,000 a year. They figured if their wages were garnished (which they could do if they didn’t file BK) they would collect $ 300,000 over five years. In this case, the SBA guessed wrong: the borrower applied for BK.
5. The borrower’s “desire” to avoid bankruptcy
This is a fuzzy calculation, but I caution my clients that filing a BK has a “hidden” cost. Operating in the corporate world is complicated when the borrower applies for BK, and these complications can cost real money during the 10 years that a BK is reported on a credit report. I estimate the cost to be between $ 75,000 and $ 125,000. In other words, if the borrower can afford an OIC agreement for less, it is a good idea to settle. However, if the settlement cost is higher than that, as in the case of the attorney I mentioned earlier, then the borrower should seek protection through a BK.
6. Structure of the Offer
Many borrowers ask us whether or not they can structure a payment plan for their OIC. The simple answer is yes, but … be prepared that the amount the SBA will require under the terms of a repayment plan is usually higher than if the borrower could make a single lump sum offer. The reason is simple: many borrowers with repayment plans do not comply with those plans. The SBA understands this and therefore requires a higher settlement amount to reflect the increased “risk” that they will not receive all payments.
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, the hidden cost of a BK is negligible, since the value of a clean credit report doesn’t make sense to most people approaching retirement. Similarly, major health issues affecting a borrower will influence the SBA’s consideration of an OIC. Other factors that could influence the SBA include a sick child, divorce, or sudden job loss.
8. Administrative expenses
This sounds trite, but the SBA and the bank involved are large and 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 borrower with no exposure to a BK, NO other collateral, and NO personal property bonds, this figure is relatively modest … perhaps as low as $ 10,000 – $ 15,000. If there are links in personal property, now the bank must spend resources to remove these links (legal expenses), which can increase the cost by another $ 10,000 or more.
In the end, trying to estimate what the cost of liquidating a defaulting borrower will be an exercise based on multiple factors and criteria. And there is no single answer: every situation is different and unique.