What is Business Debt Settlement?
Business debt settlement, also known as debt arbitration or debt negotiation, is the process of negotiating with creditors to pay off debts for less than what is actually owed. It involves coming to an agreement to settle on a reduced lump sum payment instead of paying off the full amount over an extended repayment plan.
Pros of Business Debt Settlement
Business debt settlement does offer some potential benefits:
- Saves money – Settlements typically allow you to pay off debts at a fraction of what you owe. This frees up cash flow to reinvest in your business.
- Avoids bankruptcy – For businesses on the brink, settlement may help avoid having to file for bankruptcy protection and liquidate assets.
- Stops collection calls and lawsuits – Once a settlement agreement is reached, collection calls and legal actions over the debts should cease.
- Rids debt quickly – Rather than paying off debts over years, settlement allows you to eliminate them in months with a lump sum payment.
- Settles business and sometimes personal debt – Business debt settlement can cover both company debt and owners’ personal debts tied to the business.
Cons of Business Debt Settlement
However, some downsides exist with pursuing a business debt settlement strategy:
- Damages business credit – Settling debt for less than owed negatively impacts your business credit reports and scores. This can hurt future financing options.
- Tax consequences – The IRS may count forgiven debt from settlements as taxable income. This can result in a hefty tax bill.
- Paying off debt becomes priority – After settlement, all extra cash often has to go toward paying off the reduced lump sum owed. This leaves little for investing back into the business until debts are eliminated.
- High settlement fees – Debt settlement companies often charge 15% to 25% of the amount saved. Attorney fees can also add to costs for business owners who hire legal help.
- No guarantee of settlement – Creditors have no obligation to accept a settlement offer. You may pay fees but still owe the full balance.
Key Factors in Deciding if Business Debt Settlement is Right
As a business owner, you’ll need to weigh your specific situation carefully when deciding if settlement makes sense:
- Ability to pay lump sum – Ensure you can realistically afford the lump sum payment typically required in a settlement.
- Type and age of debt – Unsecured debt not backed by collateral, like business credit cards or lines of credit, often have the best chance for settlement.
- Current status of accounts – Creditors usually prefer settling older debt that is delinquent or has gone into collections rather than newer debt.
- Credit needs – Be mindful of impacts to credit if you’ll need financing soon for things like equipment, vehicles or property.
- Other options – Compare settlement to alternatives like debt consolidation loans, restructuring agreements and payment plans.
What to Look for in a Reputable Business Debt Settlement Company
If you decide settlement is your best path forward, partnering with a reliable settlement firm can streamline the process. Warning signs of untrustworthy companies include:✔️ Promising specific results they can’t guarantee✔️ Charging upfront fees before settling any debts✔️ Having a trail of complaints with the Better Business BureauInstead, look for settlement companies that:
- Are transparent about likelihood of settlement success
- Charge fees as a percentage of savings achieved
- Have a long history of satisfying clients
- Employ attorneys to negotiate with creditors
Reputable companies like Delancey Street check these boxes. Their team of experts has helped countless business owners settle debt and regain financial freedom.
Explore All Your Options
While settlement could offer debt relief, also examine other strategies that may better fit your situation:
- Debt consolidation loans
- Payment plans with creditors
- Debt restructuring agreements
- Selling assets to pay off debts
- Declaring bankruptcy as a last resort
Consulting with a credit counselor or attorney can provide clarity on the wisest path forward. The pros and cons of each approach will differ based on your specific business’ circumstances.The bottom line? Approach business debt settlement carefully, eyes wide open to both benefits and drawbacks. And know reputable companies like Delancey Street stand ready to answer your questions at 212-210-1851 as you evaluate the best road to financial recovery.
