When it comes to submitting an SBA Offer In Compromise, many borrowers believe that in order to get their settlement offer approved, they need to explain their tale of woe to the bank in great detail. I get it: for many people, losing their business (and in many cases their life's savings) is an emotionally traumatic experience. You put your whole life into the business. You work 80 hours a week, haven't taken a vacation for years, and you can't recall the last time you gave yourself a paycheck beyond meager amounts needed to put food on table and keep the lights on. While it's understood that you've been through financial hell, the story of how your misfortune unfolded is not going to be the focus of your bank's and the SBA's OIC decision.
When I discuss this topic with clients, I try not to sound heartless, but since I'm being paid to advise the client, I do need to explain why the story of what led to the business failure is basically irrelevant for two main reasons:
1) Every business that has failed has a story. Some are a more sad than others, but the basically details are usually the same. If the SBA were going to forgiven debt based on "hard luck" stories, they would forgive just about every loan that ever defaulted. I can tell you that's not the case.
2) The main goal of the bank and the SBA is to recover the money that they lent to you. Their philosophy is simple: you borrowed the money, and are legally responsible for repaying the debt regardless of how much you lost money on the business. While it tempting to rationalize that since you lost money, the bank should be willing to share equally in the losses, it's just not how banks view it. If you don't have the ability to repay the debt in full, then yes, a settlement of your SBA debt may be possible. But just because you lost $50K on the business doesn't mean that the bank/SBA will will automatically forgiven a portion of your loan. Even if you strongly believe that the bank/SBA should participate in the losses, you're better off not expressing this to your lender.
Just to drive the point home, here are some common questions and comments I get, along with my response:
Client: I bought my business, and it appears that the seller defrauded me. The business doesn't make as nearly as much as the seller claimed it would. Will the bank take this into consideration, and will they help me sue the seller?
Me: Unfortunately, the bank won't care that you feel you were defrauded, and they usually are not interested in litigation with the seller. In many cases, it takes lots of time and money to prove fraud, and since banks have limited resources, that's not a path they are interested in going down.
Client: I lost [Insert Dollar Amount Here] on this business! That was a huge chunk of my life's savings, including my retirement accounts, a home equity loan, and my stock portfolio. The bank needs to understand this. I still have savings, but the bank needs to realize how much I've already lost.
Me: Banks are focused on getting back the money they lent to you. Sadly, how much you lost is not as much of a factor as the amount of money you have remaining.
So if the background story doesn't matter, what does matter?
Debt forgiveness, in most cases, is a business decision. This means that the bank chooses the option that will result in them recovering the most money, so charity is not part of the equation. Many borrower's may think that philosophy is not fair, but it's the reality of the situation when it comes to the SBA Offer In Compromise. This is not to say that your banker won't sympathize with your situation, especially if you have a good relationship with them. Even in such a case, it's important to remember that the SBA has the final say on your OIC, so even if your banker was your mother, they don't have the power to approve your OIC without SBA approval.