If an owner is sued by one of their funders, they may feel like they lost any chance of a deal. That’s not necessarily true. The same factors that always shape any settlement still do: who the creditor is, what you have to offer, how much leverage each side has. Negotiations are not over just because you get sued and served.
The Amount You Can Realistically Settle For
A creditor’s willingness to settle is based on a few things: who the creditor is, the legal specifics of the debt, and its own attitude toward past-due debts. Some are more aggressive than others about clearing off past-due accounts, but a settlement of anywhere between 30% and 70% of a balance is not unusual. If you can get that cash together you’re in a good position to negotiate. The amount you can realistically settle for varies widely depending on the specifics of your case.
If your company is an LLC or corporation, and you didn’t personally guarantee any debts, then you have the advantage that the creditor knows that the most money they will likely collect from you personally is very small, and that gives you some room to negotiate if you want to offer a fraction of what your business owes. On the other hand, if you guaranteed the debt personally, or a friend or relative did, then the creditor has much more power. Once a business closes, creditors know it will be hard to collect. They may be willing to take 50, 60 or 70 cents on the dollar, and possibly even less when a professional debt settlement firm is negotiating for you.
A Professional Debt Settlement Company
In some cases, the creditors want a lot more or are just plain uncooperative. It might be time to call a lawyer, or a professional debt settlement company. At Delancey Street, we’re not a law firm, and when a sued owner needs a litigator, we refer them to a vetted independent attorney. The attorney-client relationship is solely between the business owner and the attorney. Our senior advisors are there to do the legwork and negotiating with lenders and funders.
Bringing in a professional raises the stakes, because the professionals can make a very convincing argument that you might file bankruptcy if the settlements aren’t agreed to. Most business lenders would rather try to avoid the expense and delays of bankruptcy, so they usually will go for a settlement rather than risk getting even less, and much later.
Bankruptcy lets you wipe out those debts you can’t pay and get a fresh start. You will suffer damage to your credit for up to a decade, though, and settlement’s effect on your credit is only about half that long. And bankruptcy can cost you some of your assets, too. That’s why so many owners find a settlement to be a more attractive choice. Still, it isn’t the answer for everyone. If the case cannot be won or a cheaper path exists, we say so on the first call. We refer owners to bankruptcy counsel, such as Subchapter V, when that is the better path.
Settlement Offers
After you’ve collected on receivables, sold off inventory, and sold equipment, you may be left with some cash, and now you can start making some settlement offers on what’s left. One trap when you owe several creditors: if you come to the table with offers to a few small ones, it does not help you much if the larger ones are still out there and aren’t offering to take less. Instead, you should consider making all your settlement offers contingent on everyone signing on to an agreement. If you have few creditors, you can just call and explain that you can’t pay in full but will pay them something. When you have more than just a handful of creditors, it is better to offer your settlement in writing rather than calling around.
If a secured creditor is involved, negotiate before you hand over the collateral, so you don’t end up owing a deficiency. You have more leverage until you sign the deal. If the business is closing and you still have leased equipment, arrange to return it. If you return the equipment early you may limit what you owe on the remaining payments, although you may incur an early-return penalty. That still makes you better off than having to pay for the full cost of the equipment.
If you’ve got personal assets pledged as collateral, but you want to keep them, pay those first. Once those are handled, you’ve got an order of priority to clear so nobody comes after your personal assets later.
- Wages and benefits first.
- Then loans you are personally liable for.
- Suppliers, credit card companies and leasing companies after that.
- Advertising, travel and entertainment, dues and subscriptions, then repairs and maintenance.
The right next step when you are sued is to get a free, confidential first consultation. Our fee is one percentage of the total enrolled debt. It is quoted in writing before any work begins. Take an honest look at where you are, and what you can offer to try to come up with a deal.
