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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 save your business. Business debt settlement is one potential path forward when facing unmanageable business debts.

What is Business Debt Settlement?

Business debt settlement, also called business debt negotiation or settlement, is the process of negotiating with creditors to pay off debts for less than what is actually owed. It involves working with a settlement company to act on the business‘s behalf to negotiate deals with creditors.The goal is to settle accounts for a fraction of the outstanding balance – often between 40-60%. This allows the business to resolve what they owe and make payments they can realistically afford. It provides immediate debt relief rather than staying trapped paying high-interest debt for years.

When Should a Business Consider Debt Settlement?

There are a few key times when business debt settlement starts to make the most sense:

  • The business has several delinquent accounts and charges high interest rates and penalties
  • Monthly payments to creditors are too high to keep up with
  • The business has experienced financial hardship like reduced sales, issues paying payroll and vendors, etc.
  • Bankruptcy is on the table but not the preferred option
  • Creditors refuse to negotiate reasonable repayment plans directly

Essentially – if a business cannot afford high monthly payments, is facing aggressive creditor legal action, and sees no other way out, then settlement could provide the lifeline needed.

The Benefits of Business Debt Settlement

There are many advantages small businesses can gain by entering into a professional debt settlement program, such as:

  • Immediate Relief from Collection Calls & Lawsuits – Once enrolled with a settlement firm, the harassment from creditors and collectors legally must stop. This alone can provide huge relief.
  • Lower Payoff Amounts – With professional negotiators on your side, businesses often settle debts for pennies on the dollar. This makes payments affordable.
  • Consolidated Payments – Rather than juggle 10+ credit accounts every month, you make one consolidated payment to the settlement firm who then pays creditors.
  • Prevents Bankruptcy – For businesses who can avoid filing bankruptcy, settlement provides an alternative path to become debt-free without damaging your business’s credit rating long-term.
  • Faster Way to Become Debt Free – Because balances get reduced significantly, debts can be resolved in 12-48 months rather than paying on that same debt for 7-10+ years.
  • Tax Benefits – In some cases, savings from settled debt may be tax deductible.
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How Does Business Debt Settlement Work?

The process to settle business debts through a settlement company typically follows this general workflow:1. Free ConsultationThe first step is to speak with a settlement specialist to review the full picture of your business debts, financial situation, and goals. They help determine if a settlement program is the right fit.2. Client Agreement & RetainerIf settlement seems viable, a client agreement explains the full process in detail along with expectations and legal protections. A retainer fee is also collected which goes into a dedicated settlement account.3. Open NegotiationsNow the real work begins! The settlement company compiles details on each debt account and begins contacting creditors to start settlement negotiations.4. Creditor AgreementsAs creditors agree to settlement offers, written deals are obtained with new reduced payoff amounts and closed accounts in exchange for lump-sum payments.5. Settlement Account FundingAs deals are made, you contribute monthly payments into your settlement account so adequate funds are available when settlements are reached.6. Account ResolutionsFinally, as enough funds accumulate to cover settlements, the negotiator secures final creditor acceptances, accounts get closed, debts are resolved, and the business becomes debt free!

What Types of Debt Can Be Settled for a Business?

Many non-secured business debts can be included in settlement programs, such as:

  • Business Credit Cards – Both company and personal cards used for business can settle.
  • Business Loans & Lines of Credit – Settlement applies to term loans, SBA loans, HELOCs, and almost any installment loan.
  • Business Medical Debt – Doctors, hospitals, and medical providers can all negotiate and settle balances.
  • Business Tax Debt – While challenging, even IRS and state/local tax debts can sometimes settle through an Offer in Compromise.
  • Business Utility Debt – Cell phones, gas, electric, water, and telecom bills can generally settle.
  • Business Lease Deficiency – After breaking a lease, remaining rents due can often negotiate down.
  • Business Judgments & Charge Offs – Default legal judgments and debts charged off by creditors can resolve through settlements.

In some cases even debts that normally cannot be discharged, like student loans or child support, may be eligible for settlement.

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Step 1: Free Consultation

The first step any business owner should take is to speak with a business debt specialist for a free, no obligation consultation. Together you will conduct an in-depth review of the full picture of business debts owed.The specialist gathers details on:

  • All open business accounts – the creditor, account numbers, balances owed, interest rates, payment status, etc.
  • Business income and average monthly revenue.
  • Monthly business & personal expenses.
  • Collateral tied to any debts.
  • Any assets the business owns.
  • The full story on what led to the debt situation.

This allows them to understand the complete financial position of the business. They use this data to put together a detailed proposal showing the projected savings a settlement program can provide.

Step 2: Client Agreement & Retainer

If the proposal seems like a good solution, the next step is entering into a client agreement that outlines the debt settlement process and timeline in detail. This ensures full transparency and sets clear expectations upfront.As part of the agreement, an initial retainer fee is also collected, which serves a few important purposes:

  • It shows commitment to completing settlements.
  • It goes into a dedicated settlement account used to secure creditor deals.
  • It ensures available funds to start settlements right away.
  • It is a required good faith gesture for creditors to take settlements seriously.

Retainers are based on total debt enrolled in the program and average from 7-15% of that total. This must come from business funds, not from taking new debt. The retainer is a vital step for successful settlements in the months ahead.

Step 3: Open Negotiations

With signed agreements in place, the real work begins – contacting creditors to negotiate settlements!Settlement specialists compile all necessary account documentation including:

  • Statements showing balances, interest rates, and payment history.
  • Original account applications and signed promissory notes.
  • Details on any legal actions taken or threats made by creditors.

Armed with this information, negotiations commence making settlement offers to creditors for reduced payoffs. This involves lots of back and forth communication, submitting documentation, and persuading creditors to accept reasonable offers.It is imperative to work with experienced negotiators who know what settlement deals creditors will actually approve. They leverage their past success stories and legal protections to secure the very best settlements.

See also  How to Negotiate a Release of a UCC Lien in Merchant Cash Advance

Step 4: Creditor Settlement Agreements

As creditors begin to accept settlement proposals, written deals are obtained. These agreements define the exact settlement terms, such as:

  • Reduced payoff amount (often 40-60% less than actually owed)
  • Lump-sum payment deadline to close accounts
  • Contingencies to settle multiple accounts together
  • Any other special stipulations required

Getting binding agreements in writing locks creditors into deals and prevents them from backing out later. This provides certainty and security as the business works toward final account resolutions.

Step 5: Settlement Account Funding

A second vital component is consistently funding the dedicated settlement account set up during client enrollment. This requires making monthly “savings” payments over the course of the program to ensure available funds to cover settlements as deals are made.There are a few options on how settlement accounts can be funded:

  • Fixed Monthly Payments – Easiest option is to pay the same amount each month, like $1,000. This guarantees steady savings growth.
  • Variable Payments – Payments fluctuate based on extra monthly cash available beyond running the business. Allows flexibility.
  • Lump-Sum Contributions – Some may deposit larger lump sums from tax refunds, loans from owners, or other business cash infusions. Can speed up settlements.

No matter how accounts get funded, it is imperative to save enough to meet settlement deadlines secured by negotiators with creditors. Falling short on available funds will blow up deals and put settlements in jeopardy.

Step 6: Final Account Resolutions

The final step is resolving accounts by paying settlements secured out of the dedicated savings account. This is where all the previous hard work pays off!As negotiators inform the business that enough funds are available to cover settlements, the green light is given to execute deals. Creditors are contacted to reaffirm and activate agreements. Once approved, settlement payments are released from the savings account.Upon creditors receiving payment, accounts get closed and updated to show zero balances owed. With accounts formally settled and closed, collections stop and the business can finally move beyond the debt to focus on future growth and success.

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