The problem with unpaid debt is that it affects both the business owner and the creditor. It causes stress and anxiety for you. On the other hand, it also creates a lot of trouble for the creditor. That is the reason settlement exists, and it is why the first question most owners ask us is how much it will take to make the debt go away. The short answer is, it varies quite a bit. Typically, a lender can decide to settle for anything between 10% and 50% of the amount you owe. Most are willing to negotiate in the 30% to 50% range, but it can depend on the owner’s financial situation, such as how much cash they have on hand.
A debt settlement is simply an agreement between you and a lender in which you pay a one-time payment and they agree to write-off the remaining balance. Many times the creditor realizes that they may not collect the full balance, so they will consider a one time payment to close the loan. For example, if you owe a company $15,000 and you offer them $10,000 as a lump sum, the creditor might agree to your offer. They would then cancel the remaining $5,000 balance. That’s not always the case though. Sometimes you’ll need to have a different approach based on the loan structure.
Why would a creditor take less than it is owed? Creditors are more likely to accept the offer if they see it as likely to be written off, or if they need cash. Most settled debts are unsecured, meaning there is no collateral. This means the creditor has nothing to seize. So they may accept part payment over nothing.
Timing plays a part as well. Most creditors will refuse to settle unless your payments are at least 90 days late. It is generally better to settle before there is a judgment. If you have a judgment already the goal is 50% or less on an unsecured debt. And once the debt gets to be about 5 months late, the creditor will likely send it out to a collection agency.
Before you settle on a target, ask whether settlement is the right move at all. Sometimes credit counseling or even bankruptcy is a better and faster option. You might want to consider those first. Can you afford settlement? The settlement fund can come as a lump sum or in installments, but you do need to have the funds. Setting up settlement yourself can save you significant fees. However, you also need to have the confidence. If you don’t, you can always hire a settlement company.
If you go ahead, be clear on the terms. The most important thing is to know exactly how much you can afford to pay. You should also have a very clear idea about how the settlement will show on your credit report. We recommend aiming for 30-50% of your debt but think in dollars when setting your target. Make a budget and know what you can really afford. Remember, if you settle a debt for less than the balance due, you may need to pay taxes on the difference if the forgiven amount is $600 or more. Also keep in mind that any settled debts will appear on your credit report as Settled or Paid Settled. This isn’t good news for your credit rating. Instead, ask the creditor to report the debt as Paid as Agreed. A note about debt settled for less than the total amount due can remain on your credit report for seven years.
The key thing to remember with a negotiation is that it’s all about persuasion and persistence. Sometimes you’ll negotiate with the same company over one call, sometimes it will take multiple calls. If the representative you’re talking to isn’t supporting you, ask to speak with a manager. We also recommend that you explain your current financial situation and do your best to make the creditor sympathetic towards you. How much a creditor will settle for often depends on it. The offer should always begin low. So if you can pay 50% we would typically start at 30% and work from there. The best point at which to begin your offer on a Full and Final settlement is usually around 30% to 35%. If you owe multiple creditors, we recommend that you pay each of your creditors a pro rata portion of your total lump sum settlement offer. Do not agree to anything you cannot afford.
If your account has already gone to collections, the same logic applies. To get the collection agency to take less, it is important to offer them the money as a lump sum. You can also ask the collector to settle for about half the balance. It’s always good to start out low so that you have room to negotiate when they give you a counter offer. Know your rights, too: the collection agency can’t harass you, lie to you, threaten you or call you outside of business hours. Remain calm and use reason when you negotiate with them.
Whoever you settle with, get the deal in legally binding writing before you pay anything. When you sign this agreement it holds all parties accountable, and the creditor must honor it. But if you miss any payments the agreement can be rescinded. Once your settlement amount is paid, your account balance is then considered zero with a full satisfaction of the debt. This will bring all collection efforts to a halt. Paying in full is always better for your credit score, but settling for less is often the only option for a business in serious financial hardship.
At Delancey Street, we mainly help with merchant cash advance debt (including stacked advances), as well as SBA loans, equipment finance, and lines of credit. Our senior advisors negotiate with the funders and lenders for less than the full balance: we don’t sell another loan. Our fee is a percentage of the total amount of debt we enroll, which is quoted in writing up front, before we begin any work. We are not a law firm. If you need bankruptcy help (like Subchapter V) or litigation work, we will refer you to a vetted independent attorney. Our first consultation is always free and confidential. If we can’t win the fight or we know there’s a cheaper path, we tell you up front.
