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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
- You stop making payments while settlement negotiations happen (usually several months)
- Your credit score will drop initially when payments cease
- Not all creditors will accept settlement offers
- Any savings may be taxed as income
For some business owners facing extreme financial hardship, debt settlement can be a path to paying off otherwise unmanageable debt. But the process comes with consequences too. Let’s explore in more detail how it works.
How Does Business Debt Settlement Work?
The debt settlement process generally works like this:
- Stop Making Payments: You stop paying creditors when you start working with a settlement company. This allows you to accumulate funds to save up lump sums.
- Open Settlement Account: The settlement company helps you open a dedicated bank account to deposit funds that will eventually go towards settlement offers.
- Negotiate With Creditors: The settlement company negotiates with your creditors on your behalf to settle debts. This can take several months. Negotiations happen individually with each creditor.
- Make Settlement Offer: When enough funds accumulate in your account to make a worthwhile offer, the settlement company presents a lump sum settlement offer to individual creditors. Offers are usually for 30-50% of the amount owed.
- Creditor Accepts or Rejects Offer: If the creditor accepts, they agree to consider the debt settled in full once they receive the negotiated payoff amount. If they reject, negotiations start over or move on to the next creditor.
- Settled Debts Paid Off: You repeat steps 4-5 until all possible debts are settled. The settlement company distributes payment from your account to creditors who accepted settlement offers.
- Restored Credit: With creditors paid off, you now owe them nothing more. You can start to rebuild credit by making on-time payments and keeping low credit card balances.
The process allows you to pay off debt for less than you owe. But it comes with consequences like damaged credit and no guarantee that creditors will accept reduced payoff offers.
Pros and Cons of Business Debt Settlement
Business debt settlement can be a financial lifeline but also comes with downsides. As you weigh options for handling unmanageable business debt, consider these pros and cons:
Potential Pros
- Pay off debt for less than you owe
- Avoid bankruptcy
- Consolidate multiple debts into one monthly payment
- Get out of debt much faster than minimum payments
- Free up cash flow once debts are settled
Potential Cons
- Hurt credit score initially when payments stop
- Continue getting collection calls while settling debts
- Creditors may sue if they won’t negotiate
- Owe taxes on amount of debt forgiven
- No guarantee creditors will accept reduced settlement
Debt settlement can deliver a fresh start when done right. But just over half of settlement offers get accepted on average. And creditors who won’t play ball might sue over unpaid debt instead.
What Debts Can Be Settled?
For business debt settlement to work, you need creditors who are motivated to negotiate. These generally include:
- Credit Cards: Issuers often agree to reduce payouts to recoup losses from unpaid cards.
- Medical Debt: Doctors and hospitals settle readily to avoid getting little to nothing.
- Personal Loans: Lenders lack collateral and prefer getting something over nothing.
- Business Loans: Banks may negotiate business loans not backed by collateral.
On the other hand, creditors like the IRS and mortgage/auto lenders usually won’t settle because they have ways to collect like liens and repossession.When exploring settlement, focus first on creditors likely to negotiate payoff deals. This helps build momentum towards resolving all your debt.
Finding the Best Business Debt Settlement Companies
Choosing the right debt settlement company matters hugely. Reliable services employ experienced negotiators who can persuade creditors to accept reasonable offers. Be wary of scammy providers overpromising on unrealistic settlements.
Tips for Picking a Reputable Business Debt Settlement Company
- Check credentials with the American Fair Credit Council
- Read reviews on third-party sites like Trustpilot
- Ask about success rates negotiating with creditors
- Understand all fees clearly before signing anything
- Make sure they offer flat-fee services, not percentage-based
Reputable companies charge flat monthly fees averaged out over the number of months it will take to settle all your debts. Fees usually total 15-25% of total debt enrolled. Steer clear of companies charging large upfront fees or a percentage of debt reduced.
Can Business Debt Settlement Affect Your Credit?
Yes, business debt settlement can negatively impact your credit, at least initially. When you stop making payments to creditors, your scores will take a hit. Missed payments get reported to credit bureaus and show up for 7 years. Other potential credit consequences include:
- Decreased credit scores due to missed payments
- Increased credit utilization ratios
- Accounts closed and charged off by creditors
- Public records like liens and judgments
On the bright side, as settled accounts get paid off and fall off your reports, you can start to rebuild credit. Having less debt month-to-month also helps lower utilization ratios.Just bear in mind, the process won’t be helpful if you need to rely on strong business credit anytime soon. Expect your scores to rebound in a few years after debts get resolved.
Can Creditors Sue You for Unpaid Debt?
Yes, some creditors may sue business owners over unpaid debt, even during settlement negotiations. Lawsuits usually happen after you default on debt owed to creditors not willing to negotiate reasonable settlements. Typical scenarios include:
Breach of Contract Lawsuits Creditors can sue for breach of contract when you stop making agreed upon payments on loans or credit accounts. They argue you broke terms you originally agreed to.
Debt Collection Lawsuits Debt collectors who buy old debt may sue in hopes you’ll pay without responding. Most bring lawsuits over smaller consumer debts under $15,000.If sued, you must respond promptly, usually within 20-30 days of receiving the lawsuit documents. Ignoring lawsuits risks automatic default judgments against you.Consult a business lawyer if sued over unpaid debts. An attorney can review your options, file responses on your behalf, and try negotiating settlements. Legal defenses like expired debt statutes of limitations may also dismiss collection lawsuits outright.
Should You Consider Business Bankruptcy Instead?
Business bankruptcy differs from debt settlement in key ways. The process gives you legal protection from creditors trying to collect overdue bills you can’t pay. Chapter 7 bankruptcy liquidates assets to pay off as much debt as possible. Chapter 11 restructures debt under a court-approved repayment plan you can actually afford.Bankruptcy stops collections calls and lawsuits in their tracks with automatic stays. And eligible debts get legally discharged, meaning they are wiped clean without ever having to pay them back.
When Business Bankruptcy Makes More Sense Than Settlement
- You have assets creditors could seize outside bankruptcy
- Lawsuits have already started and need to be paused
- Mortgage/car loan payments have become unaffordable
- Major tax debts are causing IRS enforcement (liens, levies)
- Creditors won’t negotiate reasonable settlement offers
Talk to a business bankruptcy lawyer if you want to reorganize finances under court protection rather than deal directly with creditors. Either route can work, depending on your specific situation.
What to Expect from a Business Debt Settlement Company
Reputable debt settlement services provide complete transparency upfront about what to expect. Here’s an overview of key things that happen after you sign up:
Initial Consultation
- Review business finances to understand total debts owed
- Explain process and expected timeline to become debt-free
- Discuss available savings and monthly deposits towards settlements
Stop Making Payments
- Halt payments to enrolled creditors so funds can accumulate
- Set up dedicated settlement account to deposit ongoing savings
Settlement Negotiations
- Reach out to individual creditors to negotiate reduced payoffs
- Update you on status of all ongoing settlement attempts
Settlement Offers
- Make lump sum offers when sufficient funds accumulate, usually 30-50% of debt
- Secure final negotiated payoff details in writing from creditors
Settled Debts Paid Off
- Distribute payment to creditors who accept settlement offers
- Provide documentation that specific accounts are resolved
Ongoing Credit Repair
- Give guidance on rebuilding credit over time
- Recommend methods to boost credit scores after debts eliminate
Reputable providers oversee everything from initial reviews through final payoffs. They take all the work off your plate so you can focus on putting savings towards settlements.
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