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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 at a discounted amount they can realistically afford to pay. It helps them avoid bankruptcy or other more drastic measures.
When Should a Business Consider Debt Settlement?
There are a few key signs that a business may benefit from debt settlement services:
- The business is struggling with high, unmanageable debts exceeding $10,000 across multiple accounts
- Loan and interest payments are becoming very difficult to stay current on
- Creditors are calling about late or missed payments
- Business revenue has taken a hit and making even minimum payments is a stretch
- Bankruptcy feels imminent without relief
Essentially, debt settlement is most viable when a business realizes they will likely never be able to pay back what they owe in full. Accepting discounted settlements is a last resort to resolve debts without closing down the business entirely.
The Business Debt Settlement Process Step-By-Step
If a business determines they meet the criteria for a legitimate debt settlement candidate, these are the main steps involved:
1. Review Business Finances for Settlement Candidacy
- Work with a settlement company to conduct an in-depth review of the business’ finances
- Gain clarity on the full scope of debts owed – the balances, interest rates, creditors, etc.
- Ensure settlement aligns with business goals and desired financial outcomes
- Determine a realistic lump sum amount the business can commit to debt repayment
2. Open Dedicated Settlement Account
- Business owner opens separate bank account and begins making monthly contributions
- These funds will later be used to make settlement offers to creditors
- Account is used only for settlement purpose – no other transactions
3. Stop Payments to Creditors
- Business owner stops making payments to creditors once settlement account is opened
- This is key leverage to get creditors to agree to settle for less down the road
- Creditors will become eager to recoup what they can as nonpayment persists
4. Settlement Company Contacts Creditors
- Settlement company takes over communicating with creditors from this point
- Will contact each creditor to introduce themselves as representative of the business
- Notifies creditors that settlement offers are coming as funds accumulate
5. Make Settlement Offers
- After several months of savings built up in settlement account
- Settlement company presents discounted payoff offers to creditors
- Typically structured as one-time lump sum payments equaling 40-60% of total owed
- Includes paying settlement fee amount owed to settlement company
6. Negotiate Final Settlement Terms
- There may be some back and forth negotiating final settlement amount
- Most creditors accept initial offers, but compromise may be needed
- Once all parties agree on terms, move forward with settlement
7. Business Owner Pays Agreed Amount
- Settlement company provides payment instructions to business owner
- Business owner pays agreed settlement amount to creditor from dedicated account
- Usually paid out within 30 days once settlement is formally reached
8. Creditor Marks Account Settled/Paid
- Upon receiving negotiated payoff amount, creditor marks account “Paid in Full”
- They waive rights to pursue further collection on remaining balance
- Business is relieved from original debt burden
Going through settlement from initial review to final settlements can take anywhere from 6-12 months depending on specifics of each case. It’s not a quick fix, but rather a strategic process that takes patience and financial discipline along the way.
Finding the Right Business Debt Settlement Company
The settlement company a business chooses can truly make or break the likelihood of success in getting accounts settled. It’s critical to vet potential companies thoroughly upfront.
Warning Signs of Untrustworthy Settlement Firms
- Charges very high upfront fees before settling any debts
- Promises to make debts magically disappear
- Pressures business owner to stop communicating with creditors
- Lacks transparency about process, expectations, and chances of settlement
Signs of a Reputable Settlement Company
- Charges performance-based fees only after settlements achieved
- Sets realistic expectations about possible settlement amounts
- Encourages open communication with creditors
- Explains process thoroughly and tailors plan to business’s situation
Debt settlement is already a stressful endeavor. Putting trust in the wrong settlement company often ends up making the situation more chaotic. Do in-depth due diligence to find an experienced team that will provide excellent support each step of the way.
Pros of Business Debt Settlement
If done correctly, business debt settlement provides several advantages:
Resolves Unpayable Debts for Less
- Settles accounts for fraction of balance – typically 40-60%
- Bypasses need to pay full amount owed
Prevents Bankruptcy
- Allows business to avoid declaring bankruptcy
- Avoids associated legal fees and court procedures
- Allows business to continue operating rather than liquidating
Stops Collection Efforts
- Creditors stop calling about late payments after settlement
- Resolves debts legally – no risk of future collections/lawsuits
Frees Up Cash Flow
- Business no longer strained paying high monthly payments
- More money freed up to invest in growth priorities
Rebuilds Financial Health
- Brings stability back to cash flow without debt burden
- Lays foundation to improve credit over time
- Puts business in better position for future financing options
For many businesses facing extreme debt distress, settlement provides a lifeline to regain their financial footing without having to close down.
Cons of Business Debt Settlement
While settlement can be a financial savior, there are also downsides to consider:
Credit Score Damage
- Defaulting on accounts severely hurts business credit scores
- Typically drops score 100-300 points depending on debts
- Remains on reports for 7 years though improves over time
Tax Implications
- Any amount of debt forgiven over $600 deemed taxable income by IRS
- Will receive 1099-C forms showing cancelled debt totals
- Must pay income taxes on this “income” even though no money exchanged hands
Upfront Savings Required
- Business must stick to dedicated settlement account contributions every month
- Builds up lump sum amounts needed to put forth settlement offers
- Difficult for businesses already struggling financially
No Guarantee of Settlement
- Creditors are not obligated to accept reduced payoff offers
- While unlikely, there’s a chance settlements are unattainable
- Business still defaulted on accounts but without settlement to show for it
While the ability to resolve debts at deep discounts makes settlement appealing, expectations need to be realistic about the negative credit impact and tax consequences. And no settlement is ever 100% guaranteed.
What Debts Can Be Included in Business Debt Settlement?
These types of business debts are commonly included in debt settlement programs:
- Business Credit Cards – Most popular. Often have highest interest rates.
- Business Term Loans – Bank/SBA loans for operations, equipment, lines of credit.
- Business Lines of Credit – Defaulted revolving credit facilities.
- Accounts Receivable Financing – Failed to repay invoice factoring companies.
- Equipment Leasing – Missed payments for essential equipment rentals/leases.
- Business Real Estate Loans – Commercial mortgages, HELOCs.
Personal debts linked to the business like credit cards used for business expenses or a home equity loan funding the business may also be eligible for inclusion.
What Debts Are Not Eligible?
These types cannot be settled and require separate strategies:
- Federal/State Tax Debt – Requires payment plans or Offer in Compromise.
- Federal Student Loans – Rarely settled but some payment programs available.
- Child Support Arrears – Garnishment/suspension of licenses if left unpaid.
- Alimony Payments – Contempt of court if payments are missed.
- Court Judgements – Must appeal judgement or set up payment schedule.
Also most apartment rental leases, cell phone bills, and utilities are not eligible for the debt settlement process.
What Does Business Debt Settlement Cost?
Legitimate settlement companies work on a contingency fee basis, meaning they only earn fees if they successfully settle accounts on a business’s behalf. There are generally two fee components:
Settlement Administration Fees
- Charged as percentage of total enrolled debt, often between 7-15%
- Due if company gets minimum 1 settlement with 40%+ savings
- Covers their costs for administering full settlement program
Individual Settlement Fees
- Added percentage fee tied to each individual settlement
- Typically range from 15-25% of the specific settlement amount
- Performance-based – only charged if settlement achieved
Reputable companies won’t ask for large upfront payments before securing settlements. Fees should incentivize the settlement firm to get optimal discounts that save clients as much money as possible.
How Much Can Businesses Save Through Debt Settlement?
Exact savings ultimately depend on specific factors like enrolled debts, creditor policies, and negotiated amounts. But most businesses save a substantial percentage through settlement.
- Average business saves $126,500 through debt settlement
- Median business settlement amount is $43,564
- Average amount saved on each settled debt is 53%
Based on industry data, a business with $100k in debt could reasonably expect to settle for around $50k – translating to $50k in total savings off what is owed.
How Does Settling Debt Affect Business Credit Reports?
Business debt settlement has an undeniable negative impact on credit. When accounts are left unpaid for 6+ months, creditors will charge off debts as losses and may sell to debt buyers.
- Charge Off Status – Creditors writes balance owed as a loss. Significant derogatory mark.
- Debt Collection Status – If sold, new debt owner tries to collect on charge off balance. Additional negative item.
These damaged credit statuses can remain on business credit reports for over 7 years. While scores gradually recover over time, these past defaults can’t be erased until they naturally fall off a company’s credit file after that long period.
Can a Business Borrow Again After Debt Settlement?
Despite the considerable credit damage, businesses who complete settlement programs can still qualify for financing in the future once they’ve reestablished healthy business revenue and cash flow.
- High-Risk Business Credit Cards – Easiest to qualify for after 12 months of settlements. High fees/rates.
- Merchant Cash Advance Loans – Approve based on sales. Expensive but usable capital.
- Alternative Business Loans – Specialize in rebuilt business/personal credit loans. Also expensive.
- SBA Loans – After 2+ years, SBA loans possible with good post-settlement financials.
- Bank Loans – 4+ years post-settlement before bank loan consideration in most cases.
The ability to secure business financing returns over time. And the improved cash flow and savings from resolving debts ultimately puts companies in better shape to fund growth priorities.
Key Takeaways on Business Debt Settlement
- Settlement allows businesses to resolve unmanageable debts for fraction of what’s owed through negotiated discounts with creditors.
- Best option for businesses with $10k+ in debt and inability to continue making even minimum payments.
- Involves stopping payments to creditors and contributing to dedicated settlement account for 6-12 months as leverage for maximum savings.
- Creditors often accept 40-60% settlements to recoup losses from non-payment status.
- Settling defaults severely damages credit and cancelled debt totals may be taxed as income.
- Still, settlement allows businesses to avoid bankruptcy and rebuild over time.
- Choosing right settlement company to handle negotiations is critical to success.
Business debt settlement provides struggling companies a lifeline to move forward when bankruptcy feels imminent. Despite its credit impacts, a chance to resolve debts for pennies on the dollar presents an invaluable opportunity.
Frequently Asked Questions About Business Debt Settlement
How long does the business debt settlement process take?
Most debt settlement programs take between 6-12 months from start to finish. It takes time to stop payments, accumulate enough funds to put forth lump sum settlement offers, negotiate with creditors, and finally pay out agreed amounts.
Can all types of business debts be settled?
No, certain debts like federal student loans, alimony, child support, and recent tax debt cannot be included in settlement. Revolving debts like credit cards and lines of credit are most commonly settled.
Will my business receive a 1099-C for cancelled debt?
Yes, creditors are required to issue a 1099-C form to any business where they forgive $600+ in debt. Even though no money exchanged hands, the IRS considers forgiven balances as taxable income.
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