Business Debt Settlement FAQs Answered

Your options are refinance, restructure, settle, or bankruptcy; of those, settlement is the one that reduces what you owe without court. Basically, you negotiate a settlement with your creditor for less than the full balance. There is nothing illegal or unethical about negotiating with your creditors. You keep running your business (if you want to). You usually only get offers to settle debts for less than the balance when the creditor thinks they won’t get paid otherwise, or that litigation will be more expensive than getting you to pay a lump sum.

Most settlements are for unsecured credit like business credit cards, loans, or lines of credit. You can even settle what they call “merchant cash advances,” online loans, supplier balances and some equipment leases. Stacked merchant cash advances settle too.

You can settle an SBA loan, but there are some special considerations. An “Offer in Compromise” is your chance to pay less than the full amount and get a release. The SBA only considers it after they sell all the collateral and you still cannot pay the rest. Each person or business wanting release has to fill out SBA Form 1150 and send a financial statement. An unpaid SBA loan more than 180 days delinquent generally goes to the Treasury Department’s Bureau of the Fiscal Service. You may still settle it for less.

Paying a Settlement Takes Planning

Negotiation doesn’t just “happen.” It requires that you decide how much you can afford, how that money can be raised or arranged, and who will handle negotiations with the creditor. Start by gathering the details on all of your balances. You need how much is owed, how much (if anything) is being paid, and who the creditor is. Then you need to know what income you have and how much you can pay toward the settled amounts per month. If you’ll raise the money over time, you’ll need a repayment arrangement. It takes money to make settlement offers. Often, that money comes from the cash flow that used to go to daily or weekly payments to merchant cash advance companies. Obviously, when making settlement offers you have to leave enough cash for payroll, rent, inventory, and taxes.

Once you appoint an agent, that person starts talking to the creditor, not you. Most companies start with the funders threatening to pull money out of your bank account or sue you.

A settlement shouldn’t just be an amount of money you agree to pay. The actual terms need to say the creditor agrees to accept less than the full amount due and will release you (or you and the guarantor) from further liability. It should set deadlines for the creditor to file a UCC-3 lien termination or dismiss any lawsuit. Have the creditor agree to how it will report the settlement to the credit bureaus. Don’t pay off a bill based on what they promise over the phone. Always get it in writing and keep proof of all payments. After your last payment, ask for a paid-in-full letter and make sure the creditor files a lien termination.

The process can take somewhere between 6 and 24 months in most cases. It depends how many creditors you’re negotiating with and how deep your pockets are. Creditor tactics can also slow settlement.

If you hire someone else to help you, you can expect to pay a fee for their services. Whether you work with a debt settlement law firm or a debt settlement company, you’ll generally pay the fee as a percentage of the debt you enroll or your savings. Make sure you know what fees you’ll pay and how they’ll be charged before you hire anyone. Consumer debt relief companies are banned from charging a fee before the debt is settled, but business debt relief is not covered under those laws. It’s very important to get the fee terms in writing, know when they’re charged, and compare the total cost you’d pay.

You get fewer protections than consumers, but there is one. Since May 16, 2024, the Telemarketing Sales Rule bans outright lies and misleading statements by phone solicitors offering products or services. Guaranteed percentages, same-day pressure, and oral only fee arrangements might be signs of a bad settlement company.

A Higher Tax Bill

You may end up with a higher tax bill if a settlement successfully reduces the balance of your debts. The IRS generally considers debt forgiven in a settlement or discharge to be taxable income. When a lender cancels at least $600 in debt, the IRS requires them to send you and the IRS a Form 1099-C. You must report canceled debt on your return whether or not you received the form. Sole proprietors use Schedule C, Line 6. There are exceptions. The insolvency exclusion is one you can claim if your total debts exceeded the total value of everything you owned before your debts were discharged. If you were insolvent, the income is taxable only to the extent it exceeds the insolvency. You have to complete Form 982 to make the claim. It’s complicated and not guaranteed, so talk to a tax pro before you settle any debt.

Getting sued is another unpleasant possibility, especially if payments stop. There’s no sure way to stop a creditor or debt collector from suing you. Not every negotiation results in a lower balance. Some creditors refuse offers and demand payment. If you personally guaranteed a business debt, the creditor can come after you as well as the company. A settlement should make the creditor release your liability. Your business credit score can take a hit from settlement, late payments, and judgments. But a personally guaranteed debt in settlement, default, or after a judgment can hurt your personal credit score.

Make Business Sense

Debt settlement can make business sense if the company is viable and can operate at a profit with lower payments. Making payments to lots of different funders can be difficult because of the high daily or weekly costs. Companies and owners may turn to settlement if they cannot refinance or don’t want to file for bankruptcy. It may not be worth it if you can get a reasonably-priced refinance, or if the business is not viable and debt is mostly secured by assets to be liquidated. In some cases, short term cash shortfalls can be handled with a payment deferral.

Subchapter V bankruptcy, a form of Chapter 11, can be a faster alternative if your debts are at or under $3,424,000 and at least half of that is related to business activity. The filing fee for Chapter 11 bankruptcy is $1,167 plus an administrative fee.

You can settle business debts for less than the full balance without filing bankruptcy. It takes planning, perseverance, and persistence. Make sure you understand how the settlement program you choose works, what it will cost, and what the tax implications will be.

The questions that follow are the ones merchants ask before they retain counsel. They deserve precise answers.