I’ve been a SBA Workout Consultant for a while now, and if there is one thing that drives me nuts, it’s this:  Clients who make settlement offers, then realize they can’t afford the settlement once the bank and the SBA has approved the offer. 

So here is today’s DLA advice of the day:

ONLY MAKE A SETTLEMENT OFFER IF YOU HAVE THE MEANS TO HONOR THE TERMS OF YOUR OFFER!

Situations like this drive me nuts for a number of reasons:

Loss of Credibility – If you try to re-negotiate a settlement once it’s approved, your banker and the SBA will at some point begin to wonder if you fully grasp your own finances, and whether you truly intend to honor the terms of the settlement.

Red Tape (Times 2!) – After working on a settlement for a number of months, your banker is going to be annoyed when you want to re-negotiate the settlement. First, they need to get their manager or loan committee to buy into the new settlement, which means going through the time and effort of amending the original proposal.  They also would need to provide an explanation about why the offer has changed.  If enough time has passed, they may ask you for updated paperwork.

When a client’s potential settlement offer is low relative to other settlements I’ve negotiated for other clients, I always tell them that all we can do is make their best offer. Regardless of what the bank or SBA wants, or what it says on paper that they can afford, the bottom line is that the client needs to be fairly confident in their ability to follow through on the settlement.  To agree to a settlement in order to get that temporary sign of relief can be tempting, but taking that route will only come back to bite you.  Most settlement agreements, you see, contain a provision that is known as a “claw back” provision.  In a nutshell, it says that if you default on the terms of the settlement, the bank has the right to take action against you for the FULL AMOUNT OF PRINCIPAL AND INTEREST.

So what’s a person to do when they can afford $100 per month, and the bank wants $200?  It’s time to get creative.  Given that tens or hundreds of thousands of debt are at stake, nothing should be off limits.  Even with a 10% penalty, taking funds from your 401-k should be considered.  Even if you take out $50K and pay a $5K penalty, having $100K or more forgiven might make it worth enduring the associated taxes and penalties.