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Business Debt Settlement: An Overview
Dealing with business debt can be extremely stressful and overwhelming. As a business owner, you may have racked up significant debts – from business loans, to credit cards, to unpaid invoices. The financial pressures can feel inescapable.However, there are options. Business debt settlement may provide a path forward. This article will provide an overview of business debt settlement – what it is, how it works, the pros and cons, and more. We’ll also share actionable tips for navigating the process.
What is Business Debt Settlement?
Business debt settlement involves negotiating with creditors to pay off debts for less than the full amount owed. A business will work with a debt settlement company to put together a settlement offer – usually paying 30-50% of the total debt amount. If creditors accept the offer, the remaining debt is forgiven.For example:
- A business owes $100,000 across multiple credit cards and loans
- They work with a debt settlement firm to put together a settlement offer of $50,000
- The creditors accept the $50,000 as payment in full
- The remaining $50,000 is forgiven
Debt settlement can be an alternative to bankruptcy or debt consolidation loans. It may make sense for businesses with few assets and significant unsecured debts they have little hope of paying back in full.
Key Benefits
There are several potential advantages of settling business debt:
- Pay off debt for less than you owe – Debt settlements allow businesses to resolve debts they can’t afford to pay in full
- Avoid bankruptcy – Settlements provide an alternative to declaring bankruptcy
- Become debt-free faster – Compared to setting up prolonged repayment plans, settlements allow businesses to resolve debts more quickly
- Free up cash flow – Less money going to creditors each month improves cash flow critical for business operations
Settlement Preserves Assets
Unlike declaring bankruptcy, debt settlement does not require businesses to forfeit assets to pay off debts. This can be crucial for small businesses needing to preserve collateral tied up in real estate, equipment, vehicles or other holdings pledged against loans.Settlements deal only with unsecured debt obligations. So businesses can resolve pesky debts without losing equity in key business assets that took years to accumulate.
How Does Business Debt Settlement Work?
The debt settlement process involves several key steps:
- Assess debts – Compile all outstanding unsecured business debts to understand total obligations. Prioritize highest interest rates.
- Review settlement options – Research reputable debt settlement firms to understand available programs, services, fees and savings potential.
- Set up dedicated account – Work with settlement firm to establish a dedicated bank account that will be used solely for making monthly payments to save up for settlement offers.
- Stop making payments – Halt payments to creditors so debts fall into default. This is necessary for creditors to seriously consider deep discounts. Note: Defaulting will negatively impact business credit scores.
- Receive collection calls – Expect an uptick in collections calls from creditors seeking payments on past due debts. Let all calls go to voicemail to be documented by settlement firm.
- Fund settlement account – Make consistent monthly contributions to the dedicated settlement account until there are sufficient funds to make settlement offers.
- Settlement firm negotiates deal – Debt settlement company compiles documentation on debts and financial hardship to negotiate discounted lump sum payoffs with creditors.
- Creditors accept or reject offer – If a creditor agrees to the proposed settlement amount, the deal closes quickly. Otherwise, the settlement firm goes back and negotiates further or moves on.
- Settled debts forgiven – Once a creditor accepts the lump sum payment, the remaining amount is forgiven, closing out the debt.
The process allows financially distressed businesses to resolve unsecured debts they have little hope of paying back otherwise. Settlements do come with financial and credit implications businesses should consider.
What Debts Can Be Settled?
Ideal candidates for settlement have these traits:
- Unsecured debts – Business loans, credit cards, unpaid invoices, utility bills and other unsecured obligations qualify. Debt backed by collateral cannot be settled without forfeiting the assets tied to the debt.
- Past due status – Creditors have little incentive to settle debts that are current. Allowing accounts to fall 90-180 days past due puts businesses in best position to negotiate.
- Owe $10K+ – Creditors usually won’t consider settlements if owed less than $10,000. The process requires more effort from creditors to justify the deep discounts given to larger debts.
Businesses with the above criteria can potentially settle:
- Business credit cards
- Unsecured term loans
- Unpaid supplier & vendor invoices
- Past due lease or rental payments
- Business utility bills
- Judgments won by creditors in court
- Outstanding tax obligations
Debt settlement works best for unsecured obligations where creditors have few options to compel repayment beyond collections calls and lawsuits.
Pros of Business Debt Settlement
Settling can offer struggling businesses significant financial breathing room:Resolve debt you can’t afford
- Settle large debts for pennies on the dollar instead of declaring bankruptcy
Become debt free faster
- Settle multiple debts in 24-48 months instead of 5+ years of minimum payments
Improve cash flow
- More working capital not going to creditors each month
Avoid collections & lawsuits
- Creditors agree to stop collections efforts after settlement
If done properly, settlements can provide an affordable path for distressed small businesses to eliminate crippling debts and get back on steadier financial footing.
Cons of Business Debt Settlement
While settlements can provide financial relief, businesses should weigh drawbacks:Damages Business Credit Scores
- Defaulting on accounts tanks a business credit profile making financing difficult
Tax Implications
- Debt forgiven may count as taxable income, creating a surprise tax bill
Upfront Fees
- Reputable settlement firms charge 15-25% of enrolled debts upfront before any settlements
No Guarantees
- Creditors can reject settlement offers leaving businesses still on the hook for full amounts
For any behind on business debts, settlements can make sense. But the process comes with financial and credit consequences to factor into the decision-making process.
What Does Business Debt Settlement Cost?
Legitimate debt settlement companies charge fees based on total enrolled debt. Fees often follow this structure:
- Upfront fee – Average 15-25% of total debt owed to get started
- Monthly service fee – Ranges from $50-100 per month for the duration of the program
- Settlement fee – Average fee is 15-20% of each settlement successfully negotiated
With the combination of upfront and settlement percentage fees, reputable companies generally charge between 20-35% of total enrolled debt over the full program.The monthly fees cover document preparation, creditor negotiations, and continued account support. Settlement fees are contingent upon successfully negotiating resolutions with creditors.So for a business with $100K in debt enrolled into a program, expected fees could total $25K or more over a 2-3 year period. While still substantial, it allows the business to resolve debts for $.25-$.35 on the dollar versus full repayment.
Warning Signs of Debt Settlement Scams
While debt settlement can offer financial relief for struggling businesses, the industry does attract its share of scammers seeking to take advantage of desperate situations.Red flags of debt settlement scams include:
- Guarantees of specific savings or settlement amounts
- Requests payments upfront before any settlements
- Pressure to enroll quickly without proper vetting
- Lack of thorough documentation on process & timeline
- Claims of special relationships with creditors
- Difficulty verifying company backgrounds, credentials and reviews
Reputable debt settlement firms will invest time educating business owners on the risks and uncertainties inherent to the process. They offer transparency on their fees and track records getting deals done. And they will provide extensive documentation explaining the process before asking businesses to commit.As when engaging any professional financial services, businesses should thoroughly research any firm before sharing sensitive information or paying fees. Reputations and results matter.
Tips for Business Debt Settlement Success
For businesses considering a debt settlement program, keep these tips in mind to boost chances of success:Pick Reputable Provider
- Vet several providers thoroughly based on credentials, reviews and complaint records
- Verify actual settlement rates and savings amounts
- Read all contracts carefully to understand process & total fees
Enroll with Settlement-Friendly Creditors
- Research which of your creditors have history negotiating settlements
- Prioritize debts with creditors open to settlements
Have Reasonable Expectations
- Be prepared for process to take 2-3 years to finish
- Expect only 50-60% of debts to ultimately settle
- Be ready to pay taxes on any forgiven debt
Stick to Dedicated Account
- Treat settlement account as untouchable to fund deals
- Make consistent monthly contributions
- Avoid withdrawing funds for other business needs
The business debt settlement process requires patience, discipline and reasonable expectations. But for those struggling under crippling debts, settlements can offer a lifeline back to financial solvency.
Business Debt Settlement FAQs
Can I settle business tax debt?
- Yes, state and federal tax obligations like payroll taxes, sales tax, payroll taxes and income taxes can potentially be settled. The IRS and state tax authorities do have established programs for negotiating tax debt settlements based on proven financial hardship.
When will creditors stop collections after a settlement?
- Creditors typically agree to cease all collections efforts and credit reporting as soon as they accept a settlement offer and receive the negotiated funds. With the debt officially settled and closed out, they should no longer contact the business.
How long before a settled debt comes off a credit report?
- Settled accounts will remain on business credit reports for 7 years from the date the debt originally went delinquent leading up to settlement. So expect a major derogatory mark on the business credit profile for nearly a decade.
Can I settle a debt myself without a settlement company?
- Attempting DIY debt settlement is not advisable. Professional firms have extensive experience negotiating with a variety of creditors. They have pre-existing relationships and know what offers each will realistically consider. Creditors also take businesses more seriously when represented by a firm.
When do I have to start making payments to the dedicated settlement account?
- It is advisable to begin consistently funding the dedicated settlement account even before formally stopping payments to creditors. Get several thousand dollars built up before letting accounts fall behind. This puts businesses in better position to start saving up for the initial settlement offers.
Business Debt Settlement Key Takeaways
- Debt settlement allows financially distressed businesses resolve large unsecured debts for less than full amounts owed through lump sum settlements
- Ideal candidates have at least $10K in past due, unsecured business debt with creditors open to negotiating discounts
- The process can take 2-3 years to complete but allows businesses to resolve debts for 30 to 60 cents on the dollar
- Reputable settlement firms charge between 20-35% of total enrolled debt to negotiate and finalize settlements
- Settlements provide an alternative to bankruptcy but do considerable damage business credit profiles in the process
While not an easy path, business debt settlement can offer struggling companies a vital financial lifeline. For those saddled with crushing debts leaving few options, settlement may clear the path toward rebuilding business solvency
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