Does my personal story matter to the SBA offer in compromise?

When it comes to filing an SBA Offer in Compromise, many borrowers believe that in order to get their settlement offer approved, they must explain their history of problems to the bank in great detail. I get it: For many people, losing their business (and in many cases their life savings) is an emotionally traumatic experience. You put your whole life into the business. He works 80-hour weeks, hasn’t taken a vacation in years, and can’t remember the last time he gave himself a paycheck beyond the meager amounts needed to put food on the table and keep the lights on. While it is understood that you have been through financial hell, the story of how your misfortune unfolded is not going to be the focus of your bank and SBA’s OIC decision.

When I discuss this topic with clients, I try not to sound heartless, but since I am paid to advise the client, I need to explain why the story of what led to business failure is basically irrelevant for two main reasons:

1) Every business that has failed has a story. Some are sadder than others, but the basic details are often the same. If the SBA were to forgive debt based on “bad luck” stories, it would forgive almost every loan that has ever defaulted. I can tell you that is not the case.

2) The main objective of the bank and the SBA is to recover the money that they delay. Their philosophy is simple: You borrowed the money, and you are legally responsible for repaying the debt regardless of how much money you lost on the business. While it’s tempting to rationalize that since you lost money, the bank should be willing to share the losses equally, that’s not how banks see it. If you do not have the ability to pay the debt in full, then yes, you may be able to settle your debt with the SBA. But just because you lost $50,000 in business doesn’t mean the bank or SBA will automatically forgive a portion of your loan. Even if you strongly believe the bank/SBA should share in the losses, it’s best not to tell your lender.

Just to make the point clear, here are some common questions and comments I get, along with my response:

Customer: I bought my business and it looks like the seller ripped me off. The business doesn’t make as much as the seller claimed he would. Will the bank take this into consideration and help me sue the seller?

Me: Unfortunately, the bank won’t care if you feel you were defrauded, and they’re usually not interested in litigating with the seller. In many cases, it takes a lot of time and money to prove fraud, and since banks have limited resources, that’s not a path they want to pursue.

Client: I lost [Insert Dollar Amount Here] in this business! That was a large chunk of my life 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: The banks focus on recovering the money that they delay. Unfortunately, how much you lost is not as important a factor as how much money you have left.

So if backstory doesn’t matter, what does?

Debt forgiveness, in most cases, is a business decision. This means that the bank chooses the option that will get them the most money back, so charity is not part of the equation. Many borrowers may think that the philosophy is not fair, but it is the reality of the situation when it comes to the SBA Offer in Compromise. This is not to say that your banker will not be sympathetic to your situation, especially if he has a good relationship with them. Even in such a case, it’s important to remember that the SBA has final say on your OIC, so even if your banker were your mother, they don’t have the power to approve your OIC without SBA approval.