Negotiate Business Debt: 6 Parts of an Offer a Creditor Can Assess

An Offer to Settle a Debt for Less

A creditor, like an SBA Lender, that gets an offer to settle a debt for less looks at six things:

• how what they’re being offered compares to their own chances of enforcing collection.
• What your financial statement says.
• Why you can’t pay the full amount.
• What repayment terms you’re suggesting.
• Whether there’s collateral, like a home, to secure part of the obligation.
• And the written release from any further obligation that they would get.

First, what you’re offering compared to what the SBA thinks they can get in forced collections. You might assume that any offer would be better than a zero return for the lender. Not always. What the lender could recover through litigation, and get paid only some years later, might be better than your settlement offer and so a deal with you might not be worth it.

The SBA can file suits against debtors and their principals on personal guarantees. It can seize assets secured by the loans and, through the right of offset, it can garnish wages and take tax refunds and Social Security benefits. The possibility that these methods are available in collections through litigation means that any offer made by a debtor needs to overcome both the odds of success in collections for the government and the time value of money.

Even tax agencies, in some situations, may be willing to take less. The reason they’ll sometimes accept that is that collections can be hard and the government does have limits on the amount of money they’ll spend trying to recover payments. It could lose in court. Settlement for “pennies on the dollar” generally won’t be offered if they’re fairly certain they can get paid in full anyway.

Next comes your financial statement. Every creditor is very interested in how much money you have, what your cash flow is, and how much you owe. For the SBA, that means SBA Form 770, showing assets, liabilities, income and expenses. Since the 770 is signed under penalty of perjury, it’s a very important document.

The offer always has a few documents, besides the 1150 offer form, that have to be sent in. First is IRS Form 4506-T, which gives the IRS authorization to release transcripts of the borrower’s and guarantors’ past tax returns. The SBA wants to see that two years of tax returns have been submitted. After the lender reviews everything you send in, the package gets bundled and sent on to the SBA.

Third on the list is a written statement of why the loan can’t be repaid in full. Usually the story has to do with a shuttered business, with assets disposed of. The liquidation could have been forced or voluntary, with the proceeds too little to cover the debt. If the funds didn’t, in fact, come up short, there’d be no need for a settlement. The only way the SBA will think about an offer from someone still in operation, it has to be as part of an effort to save the business, with all its debts.

Fourth on the list is how you’d make payments. Terms include not just how much but how, including the form of payment, on what schedule, and from whom. The SBA usually wants one lump sum payment, payable within sixty days of the approval date. Monthly payments aren’t usually accepted. No guarantee release or lien releases until full payment is made. And under federal rules, the agreement should say that a default restores the entire balance, minus any payments already received.

Fifth on the list is assets like collateral. If your loan is secured by your home, your offer must be for the amount of the equity; that is the fair market value, as if it were put up for sale. Subtract any senior mortgages as well as the costs for a sale. Those include a broker’s fee and transfer taxes. The government will also take into consideration that your home might be shielded by a homestead exemption. This would be any debt on the property, plus homestead and expenses of sale, subtracted from appraised value.

Sixth, for the deal to mean anything for you, you need a written release, which sometimes has to be held until full payment is made. You should get a copy of the signed document. It should say that there is an offer and compromise, the amount you’re paying and the deadlines to get the money in to them. The release should say that the creditor reports to the credit bureaus that the debt is paid or settled.

Tax Bill

When a lender forgives $600 or more, they have to report it to the IRS and to you on Form 1099-C. And that usually means a tax bill on the debtor. The amount of the debt can be exempt only up to the amount you were insolvent. It’s called the insolvency exclusion. Get it by filing an IRS Form 982.

Able to Submit an Offer

Not every borrower or guarantor is able to submit an offer at all. The loan has to be in liquidation status. And neither bankruptcy nor a statute of limitations can be at issue. No fraud or misrepresentation.

If a demand letter arrives, submit your offer within its 60 day deadline. The process takes six months to a year. Otherwise the SBA can turn to the collection methods described earlier. So doing nothing with a balance is not an option.