The Small Business Administration, or SBA, offers loans to entrepreneurs that allow them to start small businesses all over the nation. These loans have backing from the federal government and include repayment schedules the entrepreneur must follow to avoid penalties and fines.
If a small business owner faces financial struggles after starting a new company, however, he or she could have difficulty repaying the loan. When this occurs, borrowers might default on the loan, impacting their credit substantially.
An alternative to defaulting on the loan is making an offer in compromise. This debt relief program is offered through the SBA, allowing a borrower to submit an offer of an amount they can afford to pay. If the SBA reviewer accepts the offer in compromise, the amount offered is accepted as payment in full, and any remaining debt is written off.
When the SBA accepts an offer in compromise, the borrower can start fresh with no outstanding business debt.
If you have an SBA loan you are unable to pay, you must take action to avoid having the loan go into default status. Defaulting on an SBA loan will have consequences to your credit, which could impact your ability to get another loan in the future.
The SBA has tools at its disposal to collect on your debt until it’s repaid, including garnishing any wages you earn or withholding tax refunds from the federal government.
To avoid these consequences, you must submit an offer in compromise if you are unable to repay the full amount of the loan. The first step is preparing Form 1150, which is an SBA Loan Offer in Compromise form. Form 1150 has detailed completion instructions you should review before filling it out.
Start by filling out your name and address at the top, as well as the name and address of the individual or entity from whom you borrowed the funds. Although SBA loans go through the Small Business Administration, the funds will come from a lender. Next, you will need to include personal details about yourself, including your Social Security number and your loan number and balance.
The following sections on Form 1150 need to include the offer you are making toward your debt, which you are requesting to be accepted in exchange for a full settlement of the amount owed. If your offer is too low, the SBA will not accept it. The offer you make must be reasonable. When reviewing the amount you offer, the SBA will consider what it could expect to collect from you in a reasonable amount of time.
In section three, outline the reasons you are unable to pay the full amount owed. These reasons can vary, depending on your financial situation and the success of the small business you launched when you borrowed the money. Make sure to include supporting documentation, including:
Finally, sign the form and date it. At the bottom of Form 1150, you will see a disclaimer that the offer you made has not been accepted by the SBA until you receive written approval. Additionally, be sure all the information on the form is true and accurate. You could face a substantial penalty of up to five years in prison or a fine of up to $10,000 if you knowingly provide inaccurate or false information on Form 1150.
In nearly all cases of SBA loans, the funds borrowed are secured by your company’s assets. These can include:
If you’ve set up your company as a corporation, limited liability company, or other structure that protects your personal assets from business debt, your personal assets may be safe from collections. If you are a sole proprietor or have not protected your personal assets, the lender can go after your vehicle, personal items, valuable collections and more, excluding the primary residence where you live.
Before you submit an offer in compromise, you will likely need to shut down the business and come up with a plan to sell the assets. Some business owners choose to work with the lender who loaned them the funds. The bank can value the business assets and take ownership of them, applying the value to your loan balance.
After you have closed your business and liquidated any remaining business assets, you can then submit your offer in compromise to the SBA. Waiting until you have reached this point ensures the balance you include on the form is accurate. If you have assets you could sell and apply toward the balance owed, the SBA might reject your offer.
The most common reason for the SBA to reject an offer in compromise is if it believes a larger amount of money could be collected in a reasonable amount of time. This is why it’s especially important to make a fair offer that would benefit both you and the SBA. You can appeal a rejection, although you will have to make a better offer or provide more details as to why you believe your offer should be accepted.
If you’re struggling with small business debt, learn more about how to overcome the financial difficulties at Solvable. We offer tools, education, and resources that can help you get back on your feet and start fresh without the heavy load of debt hanging over your head.