Got Business Debt?

nyc criminal lawyers over 30 years of experienceLearn More About Delancey Street

Visit their website today. They can help resolve business debt.

Get Free Consultation

Business Debt Settlement: How It Works

By Spodek Law Group | February 20, 2024

How Business Debt Settlement Works

Business debt settlement, also known as business debt negotiation or settlement, is the process of negotiating with creditors to reduce business debt balances. It can be an effective way for struggling businesses to resolve unmanageable debt and avoid bankruptcy.

How It Works

The business debt settlement process involves several key steps:

1. Stop Making Payments

The first step is for the business to stop making payments on the debts that will be negotiated. This is important in order to show creditors that the business cannot afford the current payments and needs relief. However, it’s crucial to understand that stopping payments can negatively impact credit scores and may result in late fees or penalty interest rates.

2. Open Negotiations

Once payments have stopped, the next step is to open negotiations with each creditor. This can be done by the business directly or through the help of a professional debt settlement company. The goal is to negotiate a lump sum settlement that is less than the total balance owed. Creditors are often willing to accept less than full repayment if they believe it is the most they can reasonably expect to recover.

3. Make Lump Sum Payment

If negotiations are successful and a settlement offer is made by the creditors, the business will then need to come up with the lump sum payment amount. This is often done by tapping savings, getting loans from friends/family, or securing a debt settlement loan. It’s important to have the full settlement amount available before finalizing the deal.

4. Debt is Settled

Once the negotiated lump sum is paid, the creditor considers the debt settled and closes the account. The business is no longer responsible for repaying the remaining balance. Getting settlements in writing from creditors is critical before making final payments.

5. Impacts on Credit

Settling debt for less than the full amount can negatively impact business credit scores. Accounts included in a settlement are typically noted as “settled for less than full balance” on credit reports. However, a settled debt is still better than an unpaid, charged-off debt in terms of credit scoring.

What Debts Can Be Settled?

The most common business debts that can be settled include:

  • Business credit cards
  • Business lines of credit or loans
  • Past-due supplier/vendor invoices
  • Commercial real estate loans
  • Equipment financing loans
  • Business taxes (in some cases)

Personal debts tied to the business, such as an owner’s personal credit cards used for business expenses, can also potentially be included in settlements.

Benefits of Business Debt Settlement

There are several potential benefits for businesses that settle their debts successfully:

  • Avoids bankruptcy: Settlement allows businesses to resolve debt without resorting to bankruptcy, which carries severe long-term consequences.
  • Saves money: Settling debt for pennies on the dollar compared to the amounts owed allows businesses to resolve debt at significant discounts. This frees up cash flow once debts are settled.
  • Stops collections: Creditors will stop collection efforts and calls once debts are settled. This enables the business to focus on recovery without harassment.
  • Enables payment: By spreading out payments through settlement, businesses can fund settlements over time compared to coming up with full lump sums to pay debts immediately.

Risks and Considerations

While settlement can be an effective debt relief strategy, there are also important risks and considerations:

  • Creditors may balk at settlement offers and pursue full repayment through legal action if negotiations fail. Litigation can severely impact struggling businesses.
  • Settling debt may trigger tax consequences. Settled debt of $600 or more can be considered taxable income by the IRS.
  • Future access to credit may be limited after settling obligations for less than full repayment. However, after a few years, this impact lessens.
  • Settling debt still requires coming up with lump sums that can place additional financial stress on businesses during the settlement period. Defaulting on settlement payments can negate deals.
  • Reputational damage with creditors settled for less than full payment can impact important long-term business relationships.

Finding the Right Company

Choosing the right settlement company is critical to success. Warning signs of settlement scams include promises to eliminate debt entirely, requests for large upfront fees, or guarantees that creditors will accept proposals. Legitimate settlement companies charge performance-based fees only after settlements are negotiated.

When researching settlement companies, business owners should:

  • Vet credentials, complaints records, client reviews and BBB ratings
  • Understand fee structures – fees should be based on savings achieved
  • Get fee/service agreements in writing before committing

Reputable settlement professionals can make the process smoother and increase success rates in negotiations. However, businesses should still vet proposals carefully.

The Settlement Process

The business debt settlement process normally takes between 6-36 months from start to finish. It begins with stopping payments and opening negotiations. Creditors will continue collection efforts during negotiations, which may include lawsuits if progress stalls.

Once initial proposals are presented, additional documentation and financial disclosures will likely be required by creditors before countering. Negotiations tend to take some time to secure acceptable offers but can then move quicker as deals progress.

Most creditors will not agree to final settlements or sign release of liability agreements until they have received negotiated funds. This means businesses need to come up with lump sum amounts before finalizing.

Alternatives to Settlement

Other options beyond debt settlement for businesses struggling with unmanageable debts include:

  • Debt consolidation loans – Taking out a new loan to pay off multiple debts under one payment. This can reduce interest rates but will increase overall debt.
  • Credit counseling – Nonprofit credit counseling agencies can help businesses set up debt management plans. These plans enable reduced interest rates and payments through creditor concessions.
  • Bankruptcy – Filing for business bankruptcy protection like Chapter 11 enables businesses to eliminate qualifying debt entirely. However, bankruptcy can be complex and damaging long-term.

Many struggling small business owners consider debt settlement before resorting to bankruptcy or closing down entirely. By negotiating directly with creditors or working with a settlement firm, businesses can resolve unmanageable debts for fractions of amounts owed – often the only viable path forward.


How much can I settle debt for?

In general, business debt can typically be settled for between 40 to 60% of balances owed. However, results vary by creditor, balances, and negotiating strategy. With the help of a settlement firm, some debts may be settled for as low as 10-25% of balances owed in some instances.

Can I settle without hurting my business credit?

Unfortunately, settling debt for less than full repayment will likely have a negative impact on business credit scores as notated in credit reports. However, a settled account is still better than an unpaid, delinquent account in terms of credit.

Are all business debts eligible for settlement?

In most cases, unsecured business debts like credit cards, lines of credit, past-due invoices, and business loans can be settled. Exceptions include recent debts, secured debts like mortgages/auto loans, student loans, child support, alimony, and certain business taxes.

What debts should I start with when settling?

It is usually best to start settlement negotiations with smaller debt balances first. This enables lump sum payments to be made more easily to finalize settlements and build momentum. After initial successes, larger debts can then be tackled.

The Bottom Line

Business debt settlement can be a lifeline for struggling companies overwhelmed by unmanageable debts. Negotiating directly with creditors or enlisting the help of a settlement firm may provide the only path forward besides bankruptcy. While certainly not without risks or downsides, a carefully orchestrated settlement strategy can resolve crippling business debt and provide renewed viability.


What to Know About Business Debt Settlement

Everything You Need to Know About Business Debt Settlements

Business Debt Settlement: Is It Right For Your Company?

Business Debt Settlement: An Alternative to Bankruptcy?

Free Consultation


I was searching for a law firm with some power to help me deal with a warrant in New York . After 6 days I decided to go with Spodek Law Group. It helped that This law firm is well respected by not only the top law firms in New York , but the DA , Judge as well. I...

~Fonder Brandon

5 Stars
It was my good fortune to retain Spodek Law Group for representation for my legal needs. From the beginning, communication was prompt and thorough. Todd, Kenneth and Alex were the first people I worked with and they all made me feel comfortable and confident that the team was going to work hard for me. Everything was explained and any concerns...

~A G

5 Stars
After meeting with several law firms, I chose the Spodek Law Group not only for their professionalism and experience, but for the personal attention given to me right from the initial consultation. It is important to recognize how crucial having the right legal team is when faced with potentially life altering events that impact families and the lives of loved...

~George Cherubini

Spodek Law Group

White Glove Service

We Provide Superior Service, Excellent Results, At A Level Superior To Other Criminal Defense Law Firms. Regardless Of Where Your Case Is, Nationwide, We Can Help You.
View More

Request Free Consultation

Please fill out the form below to receive a free consultation, we will respond to
your inquiry within 24-hours guaranteed.


85 Broad St 30th Floor, New York, NY 10004


get directions

Los Angeles

611 S Catalina St Suite 222, Los Angeles, CA 90005


get directions


35-37 36th St, 2nd Floor Astoria, NY 11106


get directions


195 Montague St., 14th Floor, Brooklyn, NY 11201


get directions
Call Now!