How Does Business Debt Settlement Work?
The process of settling business debt through a settlement company generally follows this overall workflow:
1. Free Consultation
The first step is to schedule a free consultation with a settlement provider. This allows the business owner to explain their full financial situation and debt details confidentially. Consultations typically last 20-40 minutes and are conducted over the phone, via video chat or in-person.There are no commitments or fees charged for initial consultations. They simply provide the chance to discuss the specifics of the business’ debts and get professional advice on the viability of settlement – including estimated settlement amounts, timelines and total fees.
2. Onboarding & Retainer Payment
If settlement seems like the best path forward after the consultation, the next step is formally enrolling in the settlement company’s program. This involves signing agreements authorizing the company to negotiate with creditors on the business’ behalf.A retainer payment is also collected upfront which covers the settlement company’s flat fees. Retainers allow firms to begin settlement work immediately rather than waiting until debts are paid off months or years later to collect service fees.
3. Stop Communicating with Creditors
Once legally authorized to act as the business’ representative, the settlement company sends notifications to creditors that the business owner can no longer discuss the accounts. This is vital to ensure negotiation efforts are not jeopardized accidentally by the business communicating with creditors directly.From this point forward, creditors can only address settlements by working through the settlement company. This finally gives the business owner reliable relief from creditor calls, letters, lawsuits and other collection harassment.
4. Documentation Gathering
To start developing settlement proposals, the settlement company collects information from creditors like:
- Outstanding Balances
- Account History
- Interest Rates & Fees
- Last Payment Date
- Settlement Policies
This financial picture allows settlement agents to determine realistic settlement targets based on the individual creditor and debt details.
5. Settlement Negotiations
Once targets are set, the real negotiations with creditors begin. This involves back-and-forth communication – offers and counteroffers over weeks or months – until an agreement is eventually reached.Settlement specialists leverage different strategies to secure settlements from creditors for 40-60% less than the total owed. Negotiations can take 90-180 days on average depending on creditor policies.
6. Settlement Payments
As soon as a settlement agreement is formally offered and accepted by a creditor, the first payment becomes due right away. Settlement payments are made monthly over a pre-defined period of 12-48 months typically.The business owner brings all settlement funds to the settlement company each month and they properly disburse payment installments to individual creditors. This ensures creditors only get paid if funds are available and protects the business if they miss payments.
7. Debt Free
This gradual process continues until all settled accounts reach a $0 balance. It takes persistence and discipline to stick to monthly payment plans that can take years to complete. But once all settlements are fully paid off, the business finally emerges debt-free and gets a fresh financial start!
What Does Business Debt Settlement Cost?
The costs involved with debt settlement primarily come from two areas – the settlement company’s fees and creditor payoff amounts.
Settlement Company Fees
Reputable settlement firms charge flat fees based on the total enrolled debt amount as well as monthly maintenance fees. These cover the extensive services provided through the multi-year process.
- Retainer Fee – Upfront flat fee based on total debt enrolled (e.g. 15% of $100K debt = $15,000 Retainer)
- Monthly Maintenance Fees – Charged every month to oversee payments and communications ($50+ per account)
So for example, a business with $100,000 total debt could pay around $15,000 upfront and $500+ monthly. Successful settlements then allow the business to resolve debts for just 40-60% of what they owe.
Creditor Settlement Offers
This is the actual money paid to creditors to satisfy accounts – which is set through negotiations. Generally, creditors agree to accept 40-60% of the outstanding balances depending on factors like:
- Age/Status of Accounts
- Business Financial Hardship
- Litigation Risks & Collection Costs
- Settlement Company Reputation
Say a business owes a creditor $20,000. Through settlement they may agree to accept just $8,000 – 60% less than what’s owed. This saves the business $12,000 vs. paying in full!
Finding the Best Business Debt Settlement Company
The debt settlement industry historically gets a bad reputation since it is unregulated and filled with scam companies and debt relief scams. But there are trustworthy and competent settlement firms that produce consistent results if you know what to look for:
Warning Signs of Debt Settlement Scams
- Charges large upfront fees before settling any debt
- Promises to make debt “magically go away” using questionable tactics
- Pressures enrollment and makes verbal promises rather than providing written contracts
- Lacks transparency about process, likelihood of success, total costs, etc.
Signs of a Good Settlement Company
- Specializes in business debt settlement – not a “jack of all trades”
- No upfront fees – charges modest retainer after enrolling
- Thorough written contracts covering services, costs, contingencies, etc.
- Detailed documentation for tracking settlement progress
- Proven experience and high business debt settlement success rate
- Member of American Fair Credit Council industry association
The best indicator of a reputable settlement provider is checking their actual performance history settling business debts – not just taking their word. They should provide portfolio examples of real settlements secured for other businesses to instill confidence they can produce results.
The Business Debt Settlement Process Step-By-Step
Now that we’ve covered the basics of what business debt settlement entails, let’s explore the steps of the settlement process from start to finish in more detail. Here is what a business owner can expect when working with a professional settlement company to resolve their unmanageable debts outside of court.
Initial Consultation
The process kicks off by scheduling a free one-on-one consultation with the settlement provider. This is the chance to give full transparency into the struggles your business is facing with debt and get expert advice on the viability of settlement.In the consultation, be prepared to discuss:
- The Total Amount Owed – Have detailed statements showing the current balances owed to each creditor handy. This allows the settlement company to tally the full debt amount to enroll.
- Account Statuses – What is the status of each account? Are they still current, delinquent, sent to collections or sued by creditors already? This impacts settlement strategy.
- Payment History – When did you last make payments to each creditor? Have you been consistently paying, sporadically or stopped payments completely already?
- Financial Hardship Details – What specifically caused you to fall behind like loss of customers, COVID impacts, supply chain issues, etc? Creditors consider this when settling.
- Bankruptcy Considerations – Have you explored bankruptcy or decided settling debt is definitely the better path forward? Be ready to discuss the pros/cons you’ve weighed.
- Questions/Concerns – What worries you most about the process? What results do you need to achieve for settlement to be worthwhile? The more the consultant understands about your unique situation the better.
This information allows the settlement company to assess if a program can realistically help resolve your business debts properly. They will explain how settling works, provide settlement estimates, discuss fees and give their recommendation on next steps.
Enrollment & Retainer Payment
If moving forward with settlement seems viable based on the consultation, the next step is completing the enrollment process. This includes:
- Reviewing/Signing Agreements – Carefully read all contracts detailing the firm’s services, fees, processes, contingencies and your responsibilities before signing. Reputable companies happily answer any questions on the terms.
- Paying the Retainer – The retainer fee, typically a percentage of total enrolled debt, must be paid after signing up. This allows the settlement company to start securing settlements immediately rather than waiting months or years to collect their main fees. Retainers are put toward eventual settlement fees.
- Compiling Documentation – Provide details on all enrolled debts like balances owed, account numbers, creditor contact information and recent statements. Thorough documentation helps move the process along quickly.
- Opening Dedicated Account – Settlement companies require enrolled clients to set up a new checking account that will be used exclusively for making monthly settlement payments moving forward. This allows oversight of funds availability.
During enrollment you are also assigned a dedicated Account Representative who will personally oversee your settlement program from start to finish.
Cease Creditor Communication
Once legally authorized through the signed Limited Power of Attorney agreement, the settlement company sends notifications to your creditors informing them you will no longer discuss the enrolled accounts.These notifications state that creditors must go directly through the settlement firm moving forward regarding any collection efforts, negotiations or questions about enrolled debts. This is vital to ensure you do not accidentally say something that could jeopardize settlement efforts.From this point on, you must refer all creditor calls to your Account Rep and allow the settlement company full control over communicating with creditors only. This provides immediate relief from collection harassment!
Gather Documentation on Debts
Next your Account Representative begins gathering intel on your debts from creditors that will allow them to negotiate the best possible settlements. Information collected generally includes:
- Outstanding Balances – The total still owed on each account, including any interest, penalties and fees.
- Payment History – Records of your last payments showing when accounts went delinquent.
- Charge-Off Status – Whether accounts have been closed/written off by original creditors.
- Collector Details – Contact info and policies if 3rd party collectors bought the debts.
- Judgment Status – Whether any creditor has taken legal action to secure a judgment.
- Settlement Policy – What payment plans/discounts creditors may offer to settle.
This documentation paints the full picture of each debt so your Rep understands the landscape and can devise the right negotiation strategy. They use the intel to set realistic settlement targets for each account.
[youtube-feed feed=1]
[custom-twitter-feeds feed=1]