Best Options When Your Business Credit Cards Are in Collections

I can’t repay an old business credit line, and I need to know my options.

In 1994, I got an unsecured $50,000 credit line from a bank for my 7-year-old business, and it was really useful. Over the years, I paid it down, then took money out again, and always paid it back. I started the business in 1987 and closed it in 2005. About four months ago, I stopped making payments because my rate went up and I couldn’t afford it with all the over-limit and late fees. It was charged off the books, but I never got a letter saying that. They called me last week offering me a settlement of $24,500. The amount is $58,000. I have to get back to them in three days and the payment is due at the end of the month. I can’t raise that much money, and I tried to negotiate, but they said no and told me it was going to the bank’s legal department, not a third-party agency. I feel awful because I always believed in paying my debts, but I don’t know what to do. I’m also worried that I might get a 1099-C tax form for the difference, even though it’s a business debt. So, where do I stand on all this and what can they actually do? What’s left for me to do, aside from paying the balance?

Wow, that’s a tough situation. Here’s the deal, though. A settlement at roughly 40 cents on the dollar would reduce the stated balance, but affordability and other consequences still matter.

Let’s look at two possible solutions. Independent counsel can explain your legal rights and liabilities.

Revolving Credit Line

A line of credit is essentially a loan. The lender gives you a revolving credit line to use as you need to, similar to a credit card. You can take out a line of credit only up to the amount approved by the lender, and you can use it as many times as you want, as long as you pay it off according to the loan’s terms. It’s usually used for short-term or seasonal working capital like inventory or operating expenses. They generally aren’t suited to borrowing to purchase property, equipment or fixed assets.

The example describes an unsecured line of credit, meaning the loan is not backed by collateral. Many business credit lines are unsecured debt. Credit cards, medical debt and signature loans are also unsecured. Some lenders do use fixtures, equipment or inventory as security.

A Charge-Off Does Not Cancel Debt

Here’s the misconception. A charge-off alone does not forgive a debt. Charging off simply means the lender has removed it from its current accounting books. Federal banking guidelines and accounting rules require that the lender charge it off as uncollectible after 120 to 180 days of non-payment. It doesn’t mean that the creditor has forgiven the debt or stopped collection.

In a charge-off, also called a write-off, the creditor (lender) elects to take a loss on the debt, so it no longer considers it a receivable. The charge-off date usually has little or no effect on the statute of limitations or credit-report timing. The creditor can even keep it in-house or sell it to a collector, often without any obligation to notify you first. Buyers pay discounted prices for charged-off debts, but they may seek the original balance, plus interest.

Debt Settlement Is About Negotiation

Debt settlement, also called debt negotiation, is an agreement by a lender to accept less than the amount owed to satisfy a debt. Any reduction requires the creditor’s agreement, and results vary. Debt settlement can be paid in installments or a lump sum. You or a hired negotiator try to convince a lender to forgive part of the debt. The idea is that settling a debt for some money is better than receiving no money or very little. Settlements can remain on the credit report. The forgiven amount is generally reported to the IRS on a 1099-C and is generally taxable as income, unless an exclusion such as insolvency applies.

You can negotiate debt yourself or hire a negotiator, but neither approach guarantees a settlement. A negotiator can review cash flow and discuss proposed terms with the creditor. The lender doesn’t have to negotiate, but it might if you are firm and reasonable and show that you’re willing to work with the creditor.

If your debt settlement efforts fail, or even while they are under way, the lender may sue you for breach of contract. If there is no viable defense, the court will generally enter a judgment. With a judgment in hand, the creditor can seek wage garnishment if state law allows it, a levy on your bank account and a lien on your property.

Further discussions with the lender may be possible. Settlement offers may have deadlines. The lender decides whether to accept proposed terms. A proposed agreement needs to reflect what the business can afford. Keep records, respond on time and bring legal notices to independent counsel promptly.

If you’re not confident in your negotiating skills, you might consider hiring a debt settlement firm to do it for you.

Remember that there is also the option of bankruptcy. An independent bankruptcy attorney can explain eligibility, costs and consequences for your situation. Any settlement requires creditor agreement; hiring a settlement firm does not stop collection or legal action.