Yes, your business line of credit and business credit cards can be settled, even if you signed a personal guarantee. The fact that you signed a personal guarantee doesn’t change our ability to settle. The same goes for business accounts that are open in the name of an S corp, C corp, LLC or DBA. The mechanics are pretty much the same as with consumer debt settlement. And of course the extra concerns are anything to do with the business itself if you plan to keep it running after default.
Say you own a small S corporation that sells wholesale flower seed, and for seven years you have kept it going on credit lines, business cards and supplier credit. But with sales on the decline and your supplier cutting you off from more seed, you’ve reached a crossroads. You have about $30,000 in cash from receivables that should help. But you’re talking about $74,000 in debt, including two debts — one from Wells Fargo at $42,000 on a line of credit and another from the Wells Fargo business credit card at $14,000 — that have been personally guaranteed by both you and your spouse, as well as a business card on Amex at $18,000. How do you fit that square peg into a round hole without filing for bankruptcy?
If you’ve defaulted on business loans and want to continue operating under the same company name, you’re going to have a tough time. Vendors and suppliers will probably cut you off unless you agree to pay in cash. Getting a new supplier may be tricky, too, as they may not be willing to work with you if your Dun & Bradstreet listing shows damage. If you try to break a lease, the leasing company will probably repossess the equipment. An owner who brokers deals from home may avoid this all.
Settle Business Accounts
Just like consumer credit cards and lines of credit, Wells Fargo and the other big banks will settle business accounts for a lot less than the total owed. But loans over a certain amount tend to be handled a little differently. Start by coming prepared. It helps if you can provide things like a profit and loss statement or a tax return. And be aware that settlements on that size loan often require sign-off from senior managers, so it isn’t as simple as handing cash to the recovery agent. The usual guys in the recovery department are still the ones doing the actual leg work, but sometimes management will quickly rubber stamp a deal, and other times they’ll request a review where more information is required to approve or deny the settlement.
Wells Fargo settles business loans that qualify for their program at 35 to 45 percent. If it’s a business credit card, you should be able to negotiate down like a consumer card to roughly 40 percent of the balance, though some card settlements have gotten sticky at 45% lately. Some will go lower depending on your hardship, so be prepared to explain that well. If you had cash on deposit at the bank any time lately, be prepared to use talking points in case that fact comes up.
You can’t really negotiate with a creditor until the account is close to being charged off as a loss on their books. And that means being several months late. The best deals often involve being 4 or 5 months behind, though it helps to be setting the table for the settlements while you’re waiting. The waiting can be a good time to compare settlement to bankruptcy.
American Express has been a moving target lately. They do almost no negotiating directly with consumers on their cards, be it personal or business. Instead, they outsource almost all accounts to third-party collection agencies and debt attorneys. Depending on who has the account and how long it’s been since the last payment, you can usually settle for between 35 and 60 percent of the balance, provided you’re not being sued. It’s very hard to pick a number if you don’t know who is collecting on the account.
Let’s run the numbers on your situation. Say both the Wells Fargo accounts, your $42,000 line of credit and the $14,000 card, both get settled at an even 40 percent. That would be about $22,500. Say the Amex, with its $18,000 balance, gets settled at 50 percent. That’s another $9,000. Call it $31,500 at those rates. Across the realistic range, your low-end estimate is a bit under the $30,000 you have available, and your high-end estimate is a touch more. So I think your square peg can probably be forced into your round hole, without the need for bankruptcy.
Your Personal Credit Score
It’s hard to know exactly what damage you’re doing to your personal credit score when you have business debts. Pull your credit reports (and your spouse’s, if they guaranteed too), and see whether the business accounts appear there. If they do, then a payment 30+ days late is probably already showing, and your score has already dropped. Being 4-5 months late to settle means more damage, but probably not the size of a bankruptcy, especially if the accounts were settled before being charged off. And it won’t stay on your report nearly as long as a bankruptcy would.
Business credit cards and lines of credit are sometimes completely invisible on your personal credit report, which is not all that uncommon. Missing payments and early settlement may keep them off, but some business accounts can suddenly pop up on your personal report once the bank charges them off and sends them to its late-stage collection pipeline.
Comparing Debt Settlement with a Chapter 7 Bankruptcy
As for bankruptcy, comparing debt settlement with a Chapter 7 bankruptcy is hard without knowing all the details of your situation. Set your credit score out of the picture for a moment (Chapter 13, however, is a different discussion). If you have cash on the sidelines, the Chapter 7 trustee would take the money you’re offering creditors and pay it out. In a sense, the trustee settles your debts in the same way you could, but you’d have the bankruptcy on your credit report too. Other factors come into play: the personal property and home equity exemptions in your state, to start. And you definitely want to consult a bankruptcy attorney before you settle anything, just in case. If the attorney tells you to do a Chapter 13, or the Chapter 7 creates other problems you want to avoid, then debt settlement is the right choice.
