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Business Debt Settlement: An Overview

Dealing with business debt can be overwhelming. Unpaid bills pile up, creditors call nonstop, and you feel like you’re drowning with no relief in sight. But there are solutions available to find your way out of debt, restore your financial health, and move forward on steadier ground. Business debt settlement may be an option worth exploring.

What is Business Debt Settlement?

Business debt settlement involves negotiating with creditors to pay off debts for less than the full amount owed. A debt settlement company works on your behalf to put together a settlement offer, usually for 30-50% of what you owe, to fully resolve what you owe. If creditors accept the offer, your debts are considered settled and you are no longer responsible for paying the full balances.Key Things to Know About Business Debt Settlement

  • It involves negotiating to pay off debts for less than you owe
  • A third party company handles negotiations with your creditors
  • Creditors must agree to accept the reduced settlement offers
  • Settled debts are closed out for less than full balances

Business debt settlement gives struggling business owners a way to resolve unmanageable debts they have no reasonable ability to pay in full over time. It can help prevent bankruptcy and avoid the potential loss of business assets.

Who is Business Debt Settlement For?

Business debt settlement is intended for business owners facing extreme financial hardship with sizable debts owed to multiple creditors. To be a strong candidate, several factors come into play:

Situations Where Business Debt Settlement May Help

  • Business suffered major financial losses or revenue declines
  • Debt balances are very large relative to income
  • Paying minimums still takes up 50% or more of current cash flow
  • Business can’t qualify for lower cost debt relief options

Business debt settlement works best for business owners facing financial crisis through no real fault of their own – such as loss of a major customer or client, catastrophic business interruption, major employee theft issues, or struggling with the fallout of an economic recession.It also helps those dealing with high debt balances well in excess of what current revenues can reasonably manage. This allows them to resolve debts they have virtually no ability to pay back in full over time.

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Business Debt Settlement Eligibility Considerations

  • At least $10,000 in business debt, often $20,000 or more
  • Fallen behind on payments to multiple creditors
  • Facing collections calls and letters
  • Credit score dropped below 600

By the time most small business owners consider debt settlement, they have already fallen substantially behind on payments to many creditors, collections activity has picked up, and credit scores have taken a major hit. It‘s generally viewed as a last resort before bankruptcy.

How Does Business Debt Settlement Work?

The business debt settlement process involves several key steps once initiating services with a settlement company:

  1. Stop Making Payments: The first step is to stop making monthly payments to creditors so funds can accumulate to make settlement offers. This requires allowing accounts to fall delinquent.
  2. Open Dedicated Settlement Account: All business revenue gets deposited into a dedicated settlement account rather than general operating accounts.
  3. Cease Communications with Creditors: The settlement company handles all communications with creditors from this point forward.
  4. Creditor Verification Process: The settlement company verifies all business debts enrolled to begin the negotiation process.
  5. Settlement Offers & Negotiations: Settlement offers go out to individual creditors generally starting at 30-50% of balances owed. Multiple rounds of negotiation can take place until offers are accepted.
  6. Settlement Payments: Once a creditor accepts the offer, the agreed upon settlement amount gets paid from the dedicated settlement account.
  7. Debt Resolution: The settled account gets closed out and noted as settled for less than full balance on the business credit report.

The debt settlement process takes an average of 12-48 months to complete depending on total debts enrolled and how receptive creditors are to accepting reduced settlement offers.

Pros & Cons of Business Debt Settlement

Business debt settlement can be an effective debt relief strategy when facing extreme financial crisis, but it also involves consequences to consider before moving forward.

Potential Benefits

  • Resolve unmanageable debts for less than full balances
  • Avoid business bankruptcy and potential asset liquidation
  • Restore financial stability more quickly
  • Potentially preserve business credit scores

Risks & Drawbacks

  • Fees average 15-25% of enrolled debt balances
  • Monthly savings required rather than debt payments
  • Accounts become delinquent and often charged-off
  • Credit score drops initially before improving
  • Potential tax liabilities on settled debt

Business owners must weigh the pros and cons of debt settlement to decide if it’s the most appropriate debt relief option compared to the alternatives. It produces results when used judiciously, but also comes with real credit consequences in the short term.

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What Debts Can Be Settled?

Many types of business debt can be included in a debt settlement program, but not all. Business debt settlement companies focus efforts on unsecured debts since there is no underlying asset behind the debt.

Common Debts Eligible for Settlement

  • Business credit cards and lines of credit
  • Outstanding accounts with vendors
  • Past due utility bills and telecom debts
  • Business loans and merchant cash advances
  • Commercial leases (some exceptions)
  • Judgments awarded to creditors

Most business debt settlement companies avoid pursuing negotiations on debts that have collateral tied to them. This includes SBA loans, equipment financing loans, and certain commercial leases that could put important business assets at risk if defaulting while pursuing settlement.

What Does Business Debt Settlement Cost?

Reputable business debt settlement companies don’t charge any upfront fees. Instead, fees get taken from the dedicated settlement account as debts get resolved.

Typical Fee Structures

  • No upfront fees
  • Fees range from 15-25% of enrolled debt
  • Initial setup/consult fees of $500+
  • Monthly maintenance fees of $50-100

Based on industry averages, business owners can expect to pay around $1,500 initially to set up an account, then $50-100 per month in maintenance fees. As settlements occur, average fees of 18% get taken on the amount settled.On $100,000 in enrolled business debt, average fees would total $18,000 if all gets settled ($1,500 setup + $7,200 maintenance + $9,300 in settlement fees). This gets deducted from funds set aside in the dedicated settlement account so no out-of-pocket expense.

What Are The Tax Implications?

One potential consequence of business debt settlement is tax liability on the amount of debt forgiven by creditors. The IRS generally views settled debt as taxable income.

Debt Settlement Tax Issues

  • Settled debt may be viewed as taxable income
  • 1099C forms issued on settled amounts over $600
  • Tax rates often 25-30% on amount settled
  • Potentially substantial increase in tax liability

On $100,000 in settled business debt, the cancelled debt amount would be $70,000 if settled at 30% of balances owed. This could produce over $17,500 in taxes owed (25% tax rate) in the year settlements occur.Business owners can consult tax experts on options to potentially exclude tax on cancelled debt, such as arguing insolvency. But there is usually at least some tax liability involved.

Red Flags When Evaluating Firms

  • Charges large upfront fees
  • Makes unrealistic settlement promises
  • Lacks transparency on process & risks
  • Isn’t experienced helping business owners
  • Isn’t accredited or rated by the BBB

Things to Look For

  • Free consultation and risk review
  • Detailed explanation of process & risks
  • Clean record with BBB and state regulators
  • Long track record settling business debt
  • No pressure sales tactics

Reputable companies realize business debt settlement carries real consequences and isn’t the right solution for all business owners. They focus on setting proper expectations upfront so owners can make informed decisions. They also tailor programs to individual situations rather than taking a one-size-fits-all approach.

Is Business Debt Settlement Your Best Option?

Business debt settlement can produce tangible results settling otherwise unmanageable debts, but also comes with real credit and tax consequences to factor in. Business owners struggling with extreme debt crisis should consult with a reputable settlement firm to fully understand if it’s the most appropriate debt relief option for their unique situation, or if alternatives like debt consolidation loans or restructuring debts may be better suited.The key is gaining clarity on the full scope of debts owed and having an expert provide advice tailored to your specific business finances. This allows properly weighing the pros and cons of settlement versus other options.There are few easy answers when facing major business debt crisis, but exploring alternatives like settlement can provide a lifeline to resolve issues and move forward in a stronger financial position. As extreme and stressful as the situation may seem right now, just know there are solutions and a way forward.

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