Running a business is often an all-consuming endeavor. But while hopes are often high among entrepreneurs, the fact is that many businesses struggle. According to the Small Business Administration, 50% of small businesses fail in the first five years. Even if you’re still around, you may have needed to turn to high-interest debt like merchant cash advances, credit cards, and unsecured loans to cover operating costs.
If you’ve gotten to the point where you’ve borrowed more than you can repay, your creditors may start coming after you. At some point, you may even need to consider business debt settlement to escape worse consequences.
If you’re behind on your payments for long enough, your creditor may sell your debt to a collection agency. You may even run into some issues if your company goes out of business and you can’t pay your debts. If any of these situations describe yours, here’s what to know and do.
What is Business Debt Settlement?
Commercial debt collection functions similarly to consumer debt collection. Debt collectors buy debts for pennies on the dollar, then turn around and try to collect the original amount owed.
You may start receiving phone calls, which can happen at a frequency that constitutes harassment or is at least close to it. You may also receive letters in the mail, and if it’s gone on long enough, the commercial debt collection agency may file a lawsuit against you.
Business debt settlement is the process of negotiating to pay less than what you owe. If you can get a collection agency to agree to settle, you pay a fraction of the original debt balance, and the agency forgives the rest.
How Does Debt Settlement Work?
The business debt settlement process can be a lengthy one. You’ll likely need to enlist the help of a debt settlement company or business debt settlement lawyer.
They’ll notify the collection agency that you’d like to pursue a settlement and can request that the collection agency no longer contact you directly. If you have money that you can use to negotiate, the attorney or company representing you can start the process immediately. If not, you’ll typically pay into an account with the firm each month until you have enough for them to negotiate on your behalf.
If the agency agrees to the settlement, it’ll provide a written statement that the debt has been satisfied and forgiven the remaining balance.
Why Do I Need to Settle My Business Debt?
Depending on your situation, settling a debt can have several benefits. If your business is at risk of going under, for instance, settling for less than what you owe could make it easier to stay in business.
If you’re going out of business, it can be a good way to protect your personal assets.
If a debt collector has reached out to you to pay a debt your business owes individually, it may be because you personally guaranteed it.
These personal guarantees mean that you agreed when you applied for the loan that you’d personally pay back the debt if your business can’t. Even if your business is a limited liability company (LLC) or corporation, you can’t get out of owing a debt that you’ve personally guaranteed.
This also means that in addition to reporting the collection account to the commercial credit bureaus, the agency will likely also report it to the consumer credit bureaus.
Why Would a Debt Collector Agree to a Settlement?
The debt collection process can be expensive, especially if it’s drawn out. Remember that these commercial debt collection companies pay very little for debt. So if they can still make a profit and avoid unnecessary costs, they may go for it.
Don’t expect them to roll over at the start, though. In many cases, collection agencies will opt to file a lawsuit in hopes of collecting the entire amount. If the court rules in the agency’s favor, you could experience several negative ramifications, including:
- Wage garnishment
- Bank account freeze and garnishment
- Liens on your business or personal property
If they believe they have a good case and can win the lawsuit, engaging in a debt settlement discussion can be challenging. But as legal expenses are added on top of collection expenses, they may be willing to listen.
If you’re going out of business, a debt collection agency may be more willing to talk early on. That’s especially the case if you didn’t personally guarantee the debt. This is because they know that you likely also have other obligations you have to pay, and the longer they take to try to collect, the less money they’ll receive.
How to Pursue Debt Settlement for your Business
The debt settlement process can be tricky, especially if you’ve never worked with collection agencies before. You may be considering trying to negotiate on your own, especially if your business budget is tight or you’re going under.
Hiring a business debt settlement lawyer can ultimately help you save more money in the long run because debt attorneys are experienced in working in the industry. They understand how collection agencies work and the tactics they’ll use.
They can also inform you of your rights and ensure that you’re protected if the collection agency breaks the law.
Finally, a business debt settlement lawyer can act as a middleman between you and the agency, which means all communication goes through the firm. That way, you don’t have to worry about collectors calling constantly.
You’ll start by getting a consultation with an attorney. This meeting should be free and helpful in determining your next steps. If you choose to hire the attorney, they’ll contact the agency and request that they go through the law firm with their communications. Then, you’ll discuss the best way to come up with the money to negotiate.
Again, that can be a lump sum amount you already have or a series of recurring payments until you have enough.
Then the attorney will negotiate for you. Depending on how much you owe, they could help you save thousands of dollars.
What to Do if Settling Isn’t the Right Fit
If your financial situation is bad enough that putting money toward a settlement is out of the question, you may need to consider bankruptcy.
Bankruptcy can help by either wiping the debt clean or by getting you on a reorganized repayment plan. Make sure to consult with a debt attorney on this process, as they can help you determine the best path forward.
Keep in mind, too, that bankruptcy can have a significant negative impact on your credit score, which can last for years. But if you’ve explored all other options and none work, it may be the best solution for your long-term financial well-being.
The Bottom Line
Dealing with debt collectors can be a stressful and frustrating experience. If your business can’t pay what it owes and you can’t afford to repay personally guaranteed debt, settling can be a good way to get rid of the debt without needing to pay the full amount.
Take some time to explore your options, and enlist the help of a debt attorney who can help you find the best solution based on your situation and goals.