How to Make an SBA Loan Default Offer in Compromise

Allison Blackham
Expert Contributor
Last Updated:
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  • If you are in danger of defaulting on an SBA loan, an offer in compromise is an option to pay a portion of the outstanding back taxes in exchange for the amount to be fully resolved.
  • An offer in compromise is not an option if you are in bankruptcy proceedings or if you committed fraud or other financial misrepresentation.
  • Submitting an offer in compromise may help you avoid the enforced collection process, which is handled by the Department of Treasury.


Struggling with small business back taxes is a challenge that many business owners face at some point. If your debt is through the Small Business Administration (SBA), you may qualify for assistance to repay the loans. An SBA loan offer in compromise allows you to make an offer to pay a smaller portion of the debt amount in exchange for the SBA considering the debt to be completely paid off. Understanding this option can help you determine if your business debt qualifies for an offer in compromise and, if so, how to pursue one.

Using an Offer in Compromise Strategy

An offer in compromise is a strategy to pay off SBA debt without having to pay the full amount owed. If you’re facing default on your loan with the SBA, the best option is to seek help. React quickly and effectively in order to find a solution that works and show you’re actively trying to resolve the problem rather than burying your head in the sand. Not only will ignoring a problem like defaulting on a small business loan lead to significant fees and costs, but it will also cause more problems for your company and your financial future.

Requirements for an Offer in Compromise

In order to qualify for an offer in compromise, a debt must meet certain criteria:

  • The loan must be in liquidation status.
  • The individual or business listed on the loan cannot be involved in a bankruptcy proceeding.

If the loan meets both of these requirements, the debtor must be able to prove that they are unable to pay the full amount. This inability to pay may be for any of several reasons:

How to Make an SBA Loan Default Offer in Compromise
  • The debtor can’t pay in a reasonable amount of time.
  • The collection cost isn’t justified in enforcing its collection.
  • Paying the debt would cause financial hardship to the debtor due to special circumstances, such as illness.
  • The debt can’t be collected through legal collection proceedings in a reasonable amount of time.
  • Significant litigation risk exists around the ability of the debtor to pay due to factual disputes of legal issues.

An offer in compromise is only available if the debtor has not engaged in any financial misconduct, including misrepresentation or fraud, and the debtor is not involved in any valid legal defense, such as bankruptcy. If the offer being made is reasonable or closely represents the amount that could be recovered through collection proceedings in a reasonable amount of time, the SBA program may accept it. An offer in compromise must also be sufficient to protect the SBA loan program’s integrity.

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Emphasizing a Reasonable Amount of Time for Recovery

When making an offer in compromise on SBA debt, it’s important to emphasize that you are unable to pay the full amount of the loan in a reasonable amount of time. This fact must be demonstrated with clear evidence and proof. The required evidence often depends on the amount of outstanding debt. For example, it will be easier to prove that you are unable to pay back a $2 million loan than it would be to prove that you can’t pay back a $5,000 loan in a reasonable amount of time.

When you are able to show proof that the full amount can’t be paid back in the near future, the SBA may see that the offer in compromise you are making provides a better option for recovering at least some of the funds. In some cases, an offer in compromise may include real estate or other valuable assets in exchange for payment in full of the loan.

When making an offer, you must also include the details of all of your business and personal expenses. These details will outline your disposable income, which helps the SBA determine whether you are financially able to pay back the loan or if the offer in compromise is fair, based on your financial situation. You may want to work with a financial professional to gather the necessary information, as you don’t want to forget any of your monthly expenses on the documentation.

Offer in Compromise Over Enforced Collection

The SBA has the legal right to refer the debt to the Department of Treasury for enforced collection. It will not agree to an offer in compromise unless you can clearly show the value of accepting that offer over referring it for collection. The Department of Treasury has a number of collection tactics in its arsenal, including the following:

  • Federal payment offset.
  • Administrative wage garnishment.
  • Litigation.
  • Tax refund offset.

When you make an offer in compromise to the SBA, you must clearly outline why your offer is a better deal than what the SBA might collect if it turned the account over to the Department of Treasury. In order to understand what the enforced collection process could result in for the SBA, you should consult with a legal professional who has experience with what the government would expect to collect through enforced collection.

The Department of Treasury typically adds up to 30% to the debt when it is involved with the enforced collection process. When you submit your offer, make sure to include the details of how you arrived at your offer based on the potential collection by the Department of Treasury.

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How Much Can You Settle For?

The question that often arises in issues of SBA loan default and the potential to submit an offer in compromise is the amount of the settlement. This amount will ultimately depend on how much you owe and the terms of the loan, but the SBA does provide the offer in compromise program to its lenders as a way to avoid bankruptcy and make a settlement in good faith with the lender.

When financial strain impacts your business, an offer in compromise can be a good solution for outstanding debt with the SBA. At Solvable, we offer solutions that can help you free yourself and your business of financial debt. Our in-depth personalized education and access to debt relief options can provide you with immediate assistance, so contact us today for more information.

Allison Blackham
Expert Contributor
Last Updated: