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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 is one potential path to resolve what you owe and make a fresh start.

What is Business Debt Settlement?

Business debt settlement involves working with a debt settlement company to negotiate with your creditors to pay less than the full amount you owe. The goal is to come to an agreement to settle accounts for a lump sum payment that is more affordable for you. This can help you avoid bankruptcy and the severe financial consequences that come with it.Here’s a quick rundown of how the debt settlement process usually works:

  • You stop making payments to creditors and instead put money into a dedicated account. This helps show creditors you’re making an effort in good faith to pay what you can.
  • The settlement company negotiates with creditors on your behalf to reduce the balances. Often they can get accounts cut by 40-60%.
  • You pay the negotiated, reduced amount as a lump sum to settle each account. Doing this leaves the accounts marked “paid as agreed” instead of “paid in full.”
  • The process continues until all your debts are resolved. Many people become debt-free in 24-48 months.

The key benefit is settling debt for less than you owe. This makes payments more affordable so you can resolve balances and avoid bankruptcy.However, business debt settlement also comes with costs to consider before jumping in. Let’s look at pros and cons to weigh as you evaluate options.

Pros of Business Debt Settlement

  • Pay Less Than You Owe. With the help of an experienced settlement company, you can negotiate with creditors to reduce balances significantly. Instead of paying in full, you resolve accounts by paying a percentage of what you owe. Every dollar you save is a dollar freed up to reinvest in your business.
  • Avoid Bankruptcy. Settling your debts keeps your business alive and lets you avoid the long-term devastation of filing bankruptcy. While bankruptcy wipes out many debts, it severely damages your business credit rating for years. Debt settlement lets you resolve debt without inflicting as much harm on your finances.
  • Become Debt-Free. Closing out all your accounts for less than you owe provides a clean slate. You can move forward unburdened by old debts and use the cash flow once tied up in payments to improve business operations instead.
  • Peace of Mind. Getting out from under the stress of debt collectors, lawsuits, business failure, and bankruptcy provides huge relief. Settling your debts clears the slate to focus energy on business growth rather than fighting to stay afloat.
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Cons of Business Debt Settlement

While settlement provides many advantages, there are also downsides to weigh:

  • Fees. Reputable settlement companies charge 15-25% of the debt amount as their fee for services. These fees come out of the total savings. While still often much less than paying balances in full, fees reduce funds available to put back into the business.
  • Tax Consequences. The IRS may count forgiven debt from settlements as taxable income. This means you may owe taxes on the amounts creditors reduce. Proper planning is essential to minimize tax liability.
  • Credit Score Damage. As accounts become delinquent during the settlement period, your business credit score drops significantly. While your score eventually recovers after becoming debt-free, settlement hurts your credit in the short term.
  • Collection Efforts Continue. You stop making payments to creditors during settlement, which means collections calls and letters continue. Work with your settlement company to handle these properly. While unpleasant, this pressure helps prompt creditors to negotiate and settle.

As you weigh the pros and cons of debt settlement for your business, the full picture emerges. There are many advantages but also costs. The process brings hardship in the short term but freedom in the long run. Understanding both angles allows you to determine if settlement aligns with your goals, values, and overall financial situation.

Is Business Debt Settlement Right For You?

Deciding if debt settlement fits your small business depends on several key factors:

1. Account Statuses

  • Which debts are current and which already lapsed into delinquency? Settlement works best for accounts that are already behind but not yet charged-off.
  • How much do you owe on each account? Settlement delivers the biggest savings on larger balances.
  • Who are the creditors? Some lenders refuse to negotiate settlements. Others routinely agree to deals. Check if your key creditors participate in programs.

2. Ability To Save

  • How much can you afford to set aside each month? Enough savings must accumulate during settlement to fund lump sum payoffs.
  • What cash flow is available after covering business expenses? Any surplus gets redirected toward settlement savings.
  • Can you cut overhead or increase revenue to free up more cash each month? Getting creative helps boost savings.
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3. Creditworthiness

  • What is your current business credit score? Significantly low scores below 580 already show severe delinquency. This signals you may struggle to keep saving up for settlements.
  • How many public records like judgments, collections, or liens appear on your credit report? Too many red flags warn that settlement may fail and bankruptcy could follow. Tally these to see where your profile stands.
  • Have you already started receiving legal notices from creditors? Lawsuits make settlement more complex and must get handled carefully in negotiation talks.

If you can save enough monthly to fund settlements, keep accounts from escalating into lawsuits, and understand the impact on taxes and credit, the process may suit your situation well. Taking time to review the key considerations helps inform the right path.

Step-By-Step Business Debt Settlement Process

If you decide business debt settlement is your best route to resolve debt, what steps should you take to get started? Follow this roadmap to navigate the process successfully:

1. Stop Paying On Accounts

To begin accumulating savings, direct any extra cash flow toward your settlement fund rather than sending payments to creditors. This shift demonstrates hardship and prompts creditors to negotiate.

2. Open Dedicated Savings

Set up a separate bank account to reserve all settlement funds. Never mix this money with general operating expenses. Keep a clear paper trail showing good faith efforts to stash cash.

3. Seek Tax Advice

Meet with a tax professional to discuss any potential tax liability on settlement savings. You want to avoid surprises down the road. Proper planning at the start helps minimize taxes owed.

4. Research Settlement Companies

Thoroughly vet several settlement firms before choosing who to work with. Select an established company with extensive experience negotiating business debt settlements with major banks and creditors.

5. Compile Necessary Documents

To analyze your financials and begin settlement talks, your chosen firm needs documents like recent tax returns, profit/loss statements, complete credit reports, and details on all outstanding debts.

6. Open Settlement Accounts

The company sets up new accounts specifically for settlement. As lump sums get negotiated, you transfer saved funds into these accounts so payments can get drafted.

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7. Stop Communications With Creditors

Cut off all direct contact with creditors and refer everything to your settlement company. This ensures consistent messaging and that no promises get made that undermine negotiations.

8. Wait For Offers

Now the waiting game begins. Typically it takes 90-180 days before settlement firms procure offers from creditors. The first deals often settle accounts for 50 cents on the dollar.

9. Consider Offers Carefully

Evaluate each settlement offer independently and determine if accepting makes sense based on savings vs. the remaining balance owed. Don’t feel rushed to accept; you can decline and try for better terms.

10. Finalize & Repeat

Once an offer gets accepted, transfer the agreed-upon funds to draft the lump sum payment. Then repeat the process with the next creditor. Persistence and patience leads to resolving all debts.

While not easy or quick, this structured settlement path helps you chip away at balances until you become 100% debt-free. Sticking to the plan brings life after debt within reach.

Finding the Best Business Debt Settlement Company

Choosing the right settlement company as a partner makes all the difference. Look for an experienced team with extensive knowledge of relevant laws and a strong track record getting results. Use this checklist when researching options:

  • Years in Business. Only consider firms open at least 10-15 years. This proves long-term viability.
  • Company Reviews. Check third-party review sites to see detailed feedback from past clients on their experiences. Look for consistently high ratings.
  • Expertise. Ensure the company specializes solely in business debt settlement, not personal. They should have in-depth experience negotiating with major banks and creditors.
  • Legal Compliance. An upstanding company follows all regulations and industry best practices. They keep your account protected under attorney-client privilege and adhere to fiduciary standards.
  • Customer Service. Look for responsiveness to questions, clarity communicating options, customized debt analysis based on your situation, and compassion helping through a difficult process.
  • Flexibility. Each settlement has unique nuances, so find a company open to trying different negotiation strategies based on the circumstances of your debts.

Vetting several top contenders against these criteria makes your choice clear. The right settlement company empowers you to resolve debt faster so you can thrive.

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