A lot of businesses carry debt. According to Zippia, at least 70% of small businesses in the U.S. have some form of debt: loans, credit cards, or merchant cash advances. The average small business debt hovers at around $195,000, according to another news organization. If you find yourself behind on payments and a creditor is threatening to sue, know that you’re not alone. Will settling the debt keep you out of court? It might help, but you can’t be sure.
An Agreement with a Creditor
Business debt settlement is exactly what it sounds like: you reach an agreement with a creditor to pay off a debt for less than the full amount you owe. You can use it with loans, credit cards, and merchant cash advances. It’s something to look into if you can’t realistically repay the debt in its current form. In most cases, you’ll agree to pay a lump sum that’s lower than what you owe, or you’ll restructure the deal so the repayments are manageable.
After you fall behind and start missing payments, you get the late fees, the collection calls and letters. And the bigger fear, the one that keeps people up at night is the lawsuit: the judge’s gavel, the judgment against you, wage garnishment. Settlement speaks to both. The obvious benefit is it stops late fees and it stops the dunning calls and letters. But more importantly it can prevent the big stuff like a lawsuit that can result in a judgment or a garnishment, or worse, bankruptcy. So yes, settling can often keep a lawsuit from ever getting started.
But settlement is a negotiation, not a promise of anything. Sometimes the creditor will refuse to negotiate, or will sue you to collect the balance. If it does that, and you’re under contract with a debt settlement company, there’s nothing much the company can do about it: it can’t act as your counsel in a lawsuit, or in a bankruptcy. You’d need a lawyer in that situation.
Debt Resolution
There are three basic paths to debt resolution: doing it yourself, retaining a business debt settlement company, or hiring an experienced debt settlement attorney. Do-it-yourself debt settlement involves reaching out to each creditor on your own. You may be less likely to obtain a good settlement than if you worked with a professional, but there’s no law that says a fair deal is impossible if you do it yourself.
A business debt settlement attorney will represent you in negotiations with your creditors and debt collectors. They will take over all communication with them, which means you don’t have to deal with them anymore and they stop calling and writing you. They’ll do the negotiations and put together the settlement agreement for you. If negotiations don’t work, they can represent you in the lawsuit or help you with your bankruptcy.
You might wonder if a settlement company or an attorney makes more sense for your business. They can negotiate on your behalf. But an attorney is bound by an ethical code (the American Bar Association has competency, communication, confidentiality, and more guidelines, and each state regulates attorneys). Settlement companies face little industry regulation (some maintain high standards, but a lot of people have a bad experience with them). And you get less scope — the company can only settle; if it fails, it can’t defend you in court.
On the plus side, you get expertise and legal guidance—you don’t have to be an expert on debt collection laws, because your lawyer is. A great attorney will negotiate with creditors day in and day out, so they’re likely to get you a better deal than you would on your own. Even if a settlement falls through and you get sued or file for bankruptcy, the lawyer can still come through for you. Finally, you’re protected from harassment: some creditors are unethical and try to badger you, but once you have an attorney they’re required to communicate with the attorney, not you.
There are downsides to hiring an attorney. First, the fees. Attorneys can be pricey, and how much you end up paying depends on how complex your case is. It’s true that a lawyer can save you money in the long run, but it’s an upfront expense that you’ll have to cover. Second, you’re not done working. You’ll still need to handle and provide documents and information the attorney requests. Finally, it’s not a guarantee. The creditors can still say no and sue you anyway.
There are three situations where calling a lawyer makes sense: you can’t afford the debt anymore; you feel a collector is being unethical or abusive, maybe even harassing you; and especially if you already have a lawsuit hanging over your head. A lawsuit can quickly become more than you can manage alone, and settlement agencies won’t be able to represent you.
If you’re looking for an attorney, start by finding someone with experience in cases like yours. Other business owners and colleagues can be a great source of recommendations, including names of attorneys that they felt did a good job. You can ask about their success rate and experience, but keep in mind no one can guarantee a settlement; they should be able to explain the various possible outcomes to you. Find several and talk to them; many offer a consultation. Make sure to read over any contract, including any fine print related to services and fees, before you sign. Above all, it’s really important to hire someone you can trust. When choosing a settlement company, be wary of scams.
A settlement isn’t necessarily the only path out of a bad spot. There are options such as debt consolidation which lighten the load and allow you to pay over time. Conversely, if you’re that far behind, bankruptcy might be your only relief, and that’s a situation where hiring a lawyer becomes important.
Look, we both know paying back every dime of your business debt isn’t always easy or even possible, and it feels heavy right now. But many business owners face exactly this. Usually, settling does take the load off, and often it keeps the creditor from filing a lawsuit. It doesn’t guarantee they’ll stay out of court, though, and once they have, that’s when you need a lawyer who can stand in front of the judge with you.
