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How Business Debt Settlement Works: An Overview

If you run a small business, chances are you’ve taken on debt at some point. Loans, lines of credit, unpaid invoices – it can add up quickly. And when business debts become unmanageable, it can feel like there’s no way out.That’s where business debt settlement comes in. Debt settlement is a process where a business works with a debt settlement company to negotiate down what they owe. The goal is to settle debts for less than what was originally owed.For small business owners struggling with too much debt, settlement can provide much-needed relief. But how does business debt settlement actually work? And is it right for your company?

How Business Debt Settlement Works

Business debt settlement involves working with a settlement company to negotiate down outstanding debts. The process generally works like this:

  • You stop making payments on the debts you want to settle and instead make monthly payments into a secured special purpose account. This helps show creditors you’re serious about settling what you owe.
  • The settlement company contacts your creditors and seeks to negotiate a lump sum payment that settles debts for less than what’s owed – usually 40 to 60% of the balance.
  • If negotiations are successful, you make the agreed-upon lump sum payment from your special purpose account. The creditor considers the debt settled and stops all collection efforts.
  • While negotiating, the settlement company works to limit creditor harassment and prevent lawsuits until the debt is settled.

Essentially, the settlement company leverages not paying debts to negotiate a discounted payoff amount. This can work because creditors often prefer getting a portion of what they’re owed versus risking getting nothing through endless collection efforts or legal action.

When Does Business Debt Settlement Make Sense?

Debt settlement can provide critical relief, but it also comes with costs and risks. Key things to consider:

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Your Business Must Be Struggling Financially

Settlement only makes sense if you truly can’t afford monthly payments. Creditors won’t negotiate if they believe you can pay. So your business needs to demonstrate real financial hardship.

Your Credit Will Be Impacted

When you stop making payments, your business credit score will suffer. Missed payments can stay on credit reports for up to seven years. And settled debts are usually noted as such. So debt settlement can mean living with damaged credit for many years.

Lawsuits Are Still Possible

Just because you enroll with a settlement company doesn’t mean creditors can’t sue. Lawsuits may still happen before debts get settled. Be prepared for legal action, wage garnishments or asset seizures if negotiations stall.

Tax Implications Exist

The IRS treats settled debt as taxable income. So your business may owe taxes on whatever portion of debt was forgiven through settlement. This can reduce settlement’s financial benefits.If your business is facing unmanageable debts and few alternatives, settlement may still be your best option. Just understand the realities going in.

Finding the Right Business Debt Settlement Company

The settlement industry has its fair share of scam artists and shady operators. So finding a reputable provider is crucial. Warning signs of bad settlement companies include:

  • Upfront fees – Avoid any company asking for large upfront payments before settling debts. Fees should only come out of savings built up in your special purpose account.
  • Unrealistic promises – No company can guarantee specific settlement amounts or timeframes. Beware guarantees of settling debt for pennies on the dollar. Success depends on many factors.
  • Lack of experience – Seek companies with long track records in business debt settlement. It’s a complex process requiring specialized expertise.

The best settlement companies charge fair fees and make realistic promises based on extensive experience. They put clients first, offer full transparency around their processes and fees, and provide excellent customer service.Doing thorough research is essential to finding the right partner. The American Fair Credit Council provides a good starting point for identifying reputable firms.

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The Debt Settlement Process Step-By-Step

If you determine business debt settlement may be a good path forward, what should you expect? While each provider may do things a bit differently, the basic process looks like:

1. Initial ConsultationYou’ll have an introductory call to review your situation – the debts you need to settle, your financials, creditor information, etc. This helps the settlement company assess if they can assist.

2. Getting ApprovedThe settlement company reviews your full financial picture and debts to determine if settlement makes sense. If approved, you’ll sign agreements outlining fees/processes.

3. Opening Special Purpose AccountThis FDIC-insured bank account will hold funds to eventually settle your debts. You’ll make monthly payments into this account which won’t be touched until settlements are reached.

4. Stopping Payments to CreditorsYou’ll now default on the debts you want to settle. This shows hardship and that you can’t afford current payments. Just know credit damage starts now.

5. Debt Negotiation & SettlementsThis is the heart of the process. The settlement firm reaches out to your creditors and seeks to negotiate discounted lump sum payoffs. This can take months to complete for all debts enrolled.

6. Settling DebtsAs negotiations succeed with each creditor, you authorize payment from your special purpose account. Once the creditor receives payment, your debt is considered settled.

7. Completing SettlementsThe process concludes once all enrolled debts are successfully settled. You now have a clean slate with these former creditors. Just be aware of potential tax obligations.While the path can be difficult, many small businesses emerge from settlement process revitalized and ready to rebuild for the future. With persistence and the right partner, your business can do the same.

Alternatives to Business Debt Settlement

Debt settlement is one option for addressing unmanageable business debts, but other choices exist too. Depending on your specific situation, you may want to consider:

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Debt Consolidation Loans These loans roll multiple debts into a single new loan with one payment. This simplifies payments and sometimes lowers interest rates.

Business Bankruptcy Formal legal process for eliminating or repaying debts under court supervision. Drawbacks are legal complexities, damage to business credit, and required liquidation of assets.

Debt Refinancing Receiving new financing to pay off existing debts on improved terms. This requires strong enough finances to qualify and repay new debt.

Debt Management Plans (DMPs) Works with creditors to get reduced interest rates and more affordable payment plans. Typically need enough income for reduced monthly payments.

Informal Negotiations Attempt settling with creditors on your own. This is difficult and requires extensive documentation of financial hardship. Most small businesses lack the time or expertise to be successful.While other options exist, debt settlement often makes the most sense for small businesses in significant distress with few alternatives. Just carefully weigh the pros, cons and risks before moving forward.

Key Takeaways on Business Debt Settlement

  • Settlement helps negotiate discounted payoffs of unmanageable business debt
  • Struggling businesses can settle debts for less than what’s owed – often 40 to 60%
  • Drawbacks include damaged credit, potential lawsuits, and tax implications
  • Finding an experienced and reputable settlement company is critical
  • Settlement works best for businesses facing true hardship and few options

Business debt settlement provides a path to resolve crippling debts for struggling small companies. Despite downsides like credit damage, settlement lets business owners move on financially so they can work towards rebuilding.If your business is overwhelmed by debt, know that hope and relief may still be possible. Get a free consultation to review your situation and see if settlement could be a good solution. Contact our business debt experts at 212-210-1851 or visit Delancey Street to learn more. With commitment and expert help, you can overcome debt and work towards a brighter future.

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