I opened my business in 1987 and closed in 2005. A bank extended me an unsecured revolving line of credit in 1994 for $50K. The annual interest rate kept going up. Over-limit fees and late payment fees were added. I paid the minimum monthly payments but have missed the last four months, which may lead to collection or legal action. I attempted to work out a plan with the bank by calling them and asking if we can work something out. Their response was “NO.” I called to speak with someone and ask if we can work out a payment that I can afford to pay. They recently charged off my account and I received no written notice. A week ago a recovery rep from the bank called and offered to settle the $58,000 debt for $24,500. I must decide in three days or less, and pay by the end of the month or the account will be turned over to the bank’s legal department. She also said it’s not a third-party collection agency. I want to pay. I believe it is important for a person’s soul to pay their debts. What happens if I accept the settlement? Will it appear on my credit report as a paid charge off or a paid collection account? I’m worried about receiving a 1099-C for $33,500 (which I may not be able to pay income tax on). If I don’t pay in the next few days what will be their next move? Could they pursue legal action?
The forty-cent offer requires coming up with the $24.5K to meet it.
Understanding Liability for the Debt
To understand the options, it helps to understand a few terms and how liability for this kind of debt generally works.
A line of credit is an on-demand loan that provides you with the cash to pay for short-term operating expenses or to build up inventory. It allows you to borrow money up to a certain amount and to carry a balance as you see fit. Business lines of credit are suitable for covering a shortfall in working capital but are generally not the proper tool for buying long-term assets, like property and equipment.
Credit card accounts are unsecured, as are most credit lines, medical bills, signature loans, and service debts. Other lines may be secured by your company’s inventory, equipment or fixtures.
When a business creditor writes off a line of credit as a bad debt, it does not mean you have won a reprieve. It is a subtle change in the status of the debt, but it remains a debt. The creditors may keep calling and writing to collect payment, but once an account is 120 to 180 days past due, federal banking guidelines generally require banks to “charge off” unsecured accounts as bad debt. A charge-off alone does not cancel the debt.
The charge-off date has little effect on the statute of limitations for a creditor to sue or to report a debt on your credit reports. And the bank can keep the debt in-house or sell it. The bank generally does not need to tell you either way. If sold, the buyer pays a discount for the debt but can generally seek the full balance, plus interest charges allowed by the agreement and applicable law. The buyer has purchased a piece of paper saying the debt is owed, but the sale by itself does not change who is liable or reduce the amount owed.
Debt negotiation, also called debt settlement, is an agreement between a lender and a borrower, in which the borrower pays back only a part of the loan’s principal balance. Once the settlement payments are completed, the unpaid part is forgiven. Any reduction requires creditor agreement; negotiations alone do not change what is owed or when it is due. You pay it back with monthly payments or in a lump sum. However, the Internal Revenue Service may consider any forgiven debt taxable income. The creditor may report the forgiven portion to the IRS on a Form 1099-C. The forgiven debt may show up on your credit history, too.
It is possible to settle business debt yourself, but results depend on the creditor’s agreement and the business’s finances. A settlement company can review finances and negotiate proposed terms with creditors. Creditors aren’t required to negotiate, so if you try this, push hard for your best-case scenario.
Be mindful of what could happen if you can’t come to an agreement with the creditor. The creditor has the right to sue you for breach of contract. If there is no viable defense to a breach-of-contract claim, the creditor generally wins and gets a legal judgment. If the creditor wins a judgment, it can garnish your wages (where state law allows), levy your bank account, or lien your real or personal property.
As for negotiating, my advice is to keep trying to talk with the bank. Stick to your financial guns, but start by asking for the best terms possible. Keep records of offers and respond to notices on time. Bring any demand letter, lawsuit, or court paper to independent counsel promptly; negotiations do not stop collection or legal action.
While you are negotiating, you may want to get some advice from a local bankruptcy lawyer. That discussion can cover bankruptcy options and their consequences. Whether bankruptcy is appropriate depends on your circumstances.
About Delancey Street
Delancey Street is a business debt settlement company that helps business owners negotiate with creditors. Our goal is simple: negotiate proposed settlement terms, subject to creditor agreement. Based out of New York, we review business finances and discuss settlement options. We tell you how it is; because your business and future is on the line.
