What Debts Can Be Settled Through Business Debt Settlement?
If you run a small business, chances are you’ve heard about debt settlement as a way to resolve financial obligations you can no longer afford to pay back in full. But what exactly is business debt settlement, and what kinds of debts does it apply to?In this article, we’ll break down the ins and outs of business debt settlement – including the types of business debts that may be eligible for settlement. We’ll also provide tips on how to negotiate debt settlements effectively.
What is Business Debt Settlement?
Business debt settlement is an agreement between a business and a creditor to settle an outstanding debt for less than the full amount owed. It typically involves the business making a lump sum payment to the creditor, who then agrees to forgive the remaining balance.Debt settlement can be an attractive debt relief option for small business owners struggling with unmanageable debt burdens. By settling debts for pennies on the dollar, businesses may be able to avoid bankruptcy and continue operating.However, debt settlement also comes with considerable downsides, like damage to business credit scores and tax implications on forgiven debt balances. So business owners should weigh the pros and cons carefully before pursuing settlement agreements.
What Debts Can Be Settled?
Not all business debts can be settled out of court. Creditors have no obligation to accept less than full repayment, unless a business files for bankruptcy. Even then, certain debts get priority treatment.But in practice, many creditors are willing to negotiate debt settlements to recoup at least part of what they’re owed. Common business debts that may be settled out of court include:
- Credit Card Debt: Credit card companies often agree to take a lump sum payment for 30-50% of a debt to avoid nonpayment. Settlement amounts vary based on factors like your payment history.
- Business Term Loans: Term lenders may settle outstanding loan balances if you can make a reasonable lump sum offer, like 25-50% of what you owe.
- Accounts Receivable Financing: Factoring companies may agree to debt settlement if your business has unpaid invoice balances that are unlikely to get collected.
- Business Lines of Credit: Banks may settle credit line balances through debt negotiation, especially if your business is in distress and risks bankruptcy.
- Equipment Financing Loans: Finance companies may settle leases or loans for less than the early termination amount if you return leased equipment.
- Business Mortgages and Commercial Real Estate Loans: Lenders may agree to short sales or note reductions to mitigate losses on property with depressed values.
- Unpaid Supplier Invoices: Settlement may be possible with trade creditors owed money for unpaid inventory, materials, or services.
- Unpaid Tax Debts: The IRS and state tax agencies may agree to reduce tax debts through settlement programs like Offer in Compromise.
- Court Judgments: Creditors with legal judgments may settle debts for less than owed to avoid further legal action.
As a general rule of thumb, unsecured debts like credit cards, business term loans, and lines of credit tend to be the most settlement-friendly. Tax debts and commercial mortgages can also often be settled, despite their secured status.On the other hand, newer debts that are still actively serviced are typically harder to settle. Missed or late payments usually need to occur first before creditors will entertain settlement offers.
How Does Business Debt Settlement Work?
There are two main ways businesses can pursue debt settlement:
- Work Directly With Creditors: Business owners can initiate settlement talks directly with creditors. This may involve repeatedly calling creditors to negotiate deals or sending debt settlement letters making lump sum offers.
- Hire Debt Settlement Companies: Businesses can also outsource settlement talks to debt relief companies. These firms charge fees but take over all negotiations. This can save time and reduce stress.
Regardless of approach, the settlement process typically follows similar steps:
1. Assess Debts for Settlement Potential Review all business debts to identify accounts in arrears that may be eligible for settlement. Focus on unsecured debts first.
2. Determine Lump Sum Payment Amount Decide what you can realistically afford to pay as a one-time lump sum. Often 25-50% of the balance.
3. Initiate Settlement Talks Contact creditors directly or work with a debt settlement firm to start negotiations. Be persistent and willing to negotiate.
4. Reach Settlement Agreements Creditors agree to accept a lump sum payment by a set date in exchange for forgiving the remaining balance.
5. Formalize Deal Terms in Writing Get written settlement agreements finalized before making payment. Spell out everything clearly.
6. Make Lump Sum Payment Pay agreed settlement amount by the deadline date. Get receipt confirming zero balance.
7. Follow Up on Credit Reporting Verify the creditor reports the settled debt properly to preserve business credit scores.This process can take anywhere from a few weeks to several months depending on negotiation duration. Tax implications may also exist on forgiven debt. So consult a tax pro.
Tips for Negotiating Business Debt Settlements
When trying to settle business debts, these tips can help you negotiate effectively:
- Do Your Homework – Calculate settlement budgets beforehand. Know the laws around debt collection/settlement too. Being informed gives you more leverage.
- Gather Documentation – Have details like original contracts, statements, and accounting records on hand to verify disputed debts.
- Lead with Financial Hardship – Demonstrating inability to pay often motivates creditors to make deals to get some payment.
- Start Low – Many experts suggest offering 25% to 30% of the balance initially. Creditors expect counteroffers.
- Consider Sweeteners – Offering lump sum payments or shorter timelines can help secure favorable settlements.
- Get it in Writing – Don’t make settlement payments until formal written agreements are signed by all parties.
- Seek Tax Advice – Consult a tax professional to understand any tax liabilities on forgiven debt balances.
With persistence and the right approach, settling business debts for less than owed is possible. Just make sure to consult lawyers and financial pros first to understand all your options.
Other Business Debt Relief Options
If debt settlement doesn’t work out, a few other legitimate business debt relief options may be worth exploring:
Debt Consolidation Loan Debt consolidation loans allow businesses to roll multiple debts into a single loan with one monthly payment. This can reduce interest rates and improve cash flow.
Business Credit Counseling Non-profit credit counselors can help create debt management plans and negotiate directly with creditors on your behalf.
Chapter 11 Bankruptcy Reorganization Filing for Chapter 11 bankruptcy allows financially distressed businesses to restructure debts under court supervision.
Chapter 7 Business Bankruptcy Liquidation Chapter 7 bankruptcy liquidates business assets to pay creditors, discharges remaining debts, and allows owners to start over.Be wary of shady debt relief companies making unrealistic promises. Legitimate debt relief helps create realistic budgets and repayment plans creditors may accept. But outcomes aren‘t guaranteed.
Bottom Line
Business debt settlement can be a financial lifeline for small businesses drowning in unmanageable debt burdens. By negotiating lump sum payoffs to settle debts for pennies on the dollar, businesses can avoid bankruptcy and continue operating.However, debt settlements also damage credit, have tax implications, and won’t work for all debts. Business owners should carefully review their debt profiles for settlement eligibility and consult financial/legal professionals beforehand to understand the risks.With persistence and the right approach, settling business debts for less than what you owe is possible. Just make sure to do your homework first.
