Qualifying for Business Debt Settlement When Bankruptcy Isn’t an Option
What Is Business Debt Settlement?
Debt settlement involves working directly with your creditors to negotiate a lump sum payment that settles your debt for less than the full balance owed. It provides a way to resolve debt without bankruptcy when you have some available funds, but not enough income to maintain minimum monthly payments.
With business debt settlement, you’ll work with creditors like lenders, vendors, suppliers, contractors, and anyone else you owe outstanding balances to. The goal is to come to an agreement to settle these debts for a portion of what you owe – often between 40-60% on average.
-For example, if you owe a total of $100,000 across multiple accounts, you may be able to negotiate settlements of around $50,000 in total if you can come up with the lump sum. This allows you to resolve the debts and receive a reduced balance letter from the creditors indicating the accounts are settled in full.
When Is Debt Settlement a Good Option?
Debt settlement can be a viable alternative to bankruptcy when:
- You have a lump sum available to offer as a settlement – This may come from selling assets, loans from friends/family, or any other source. Creditors are more likely to accept a concrete settlement offer with funds ready to pay.
- Your business has failed or you’ve shut down operations – If the business is still operating and profitable, creditors will be less likely to settle.
- You can’t afford monthly payments but want to avoid bankruptcy – Settlements allow you to resolve debt without damaging your credit or a public bankruptcy filing.
- Your debts are mostly unsecured – Debt settlement works best for unsecured debts like credit cards, medical bills, vendors invoices, etc. Secured debts like mortgages or car loans can’t usually be settled without surrendering the collateral.
- You have some leverage to negotiate – Creditors prefer to settle and recoup something rather than risk nonpayment if you file bankruptcy.
- You have a reasonable lump sum ready to offer – Creditors will want to see you have skin in the game and funds available to back up settlement offers.
Gather Details on All Outstanding Business Debts
Before starting settlement negotiations, you need a clear picture of every business debt you owe. Compile details on:
- Original amount owed
- Current balance including interest and fees
- Payment history (have you missed or been late on payments?)
- Collateral tied to any secured debts
- Account numbers, creditor contact info, statements, etc.
Prioritize debts by importance. Critical accounts like business loans that impact your personal credit should take priority. Unsecured debts with smaller balances can possibly be negotiated for lower percentages.
-Having organized records of all debts will make discussions more productive by allowing you to make reasonable settlement offers based on your total liability.
Calculate a Realistic Lump Sum Settlement Offer
Once you’ve confirmed all debts owed and prioritized them, determine an affordable lump sum you can offer. Factors to consider include:
- Total amount of available funds from all sources
- Minimum amounts needed to settle critical priority debts
- Percentages creditors may accept for less vital unsecured debts
Ideally your lump sum should allow you to settle all debts, or at least the high priority critical ones. Anything left unpaid could potentially still go to collections or be pursued in court.
Many creditors will accept 40-60% of the total owed on average. But the more you can offer as a percentage, the more likely they are to accept your settlement.
Contact Creditors to Negotiate Settlements
With your debts organized and settlement offers calculated, you can begin contacting creditors to negotiate. Communication is key – clearly explain your financial situation and desire to settle debts without bankruptcy.
-Be prepared to provide details on your settlement offers and available lump sum. Creditors will assess whether it makes sense to accept your offer or pursue further collection attempts and legal action.
If negotiating directly with creditors, consider:
- Leading with your best offer – Don’t lowball or leave room for multiple counteroffers. Make your best initial offer.
- Remaining calm and professional – Emotions can run high but maintaining composure will help negotiations.
- Listening to creditor concerns – Understanding their perspectives can help you craft solutions.
- Explaining the benefits – Accepting your settlement avoids the risks and costs of you filing bankruptcy.
- Following up in writing – Get any verbal agreements in writing before paying.
You may also benefit from working with a debt settlement firm or attorney to negotiate settlements on your behalf. This adds credibility and can provide strength in numbers.
-Get Settlement Agreements in Writing
Once a creditor verbally agrees to a settlement offer, you need to get it formalized in writing before paying anything. A written agreement should state they will accept the lump sum payment as settlement in full of the debt, and release you from any further liability.
Having a signed agreement protects you legally and ensures the account is properly updated to show as settled. Follow up any verbal discussions with a formal written agreement to prevent misunderstandings.
Explore Alternatives Like Debt Consolidation
Debt settlement is not the only option for dealing with business debts. Debt consolidation through a loan or working with a non-profit credit counseling agency are alternatives to consider.
Consolidating multiple debts into one new loan with lower payments may allow you to avoid settlement or bankruptcy. Non-profit credit counselors can assist with negotiating debt relief solutions as well.
Carefully compare all options – settlement, consolidation, bankruptcy, etc. Determine the best approach for your unique financial circumstances.