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Navigating Business Debt Settlement: A Helpful Guide for Small Business Owners

As a small business owner, I know how tough it can be to manage finances. When cash flow gets tight, it’s easy to rely on credit cards or loans to stay afloat. But that debt can quickly snowball, leaving you struggling to keep up with payments. If you find yourself in over your head, debt settlement may seem like an appealing option. But it’s important to understand both the risks and potential benefits before moving forward.

In this article, I’ll walk through the ins and outs of business debt settlement. My goal is to provide an honest, human perspective on the pros and cons so you can make an informed decision. I’ll also share tips on negotiating with creditors yourself or finding reputable settlement companies. My hope is that you’ll come away better equipped to tackle your business debt in a strategic way.

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What is Business Debt Settlement?

Debt settlement involves negotiating with creditors to pay a lump sum that is less than the total amount owed. The creditor agrees to consider the remaining balance “settled” and stop collection efforts. This can be an alternative to bankruptcy or continuing with regular payments.

Settlement companies advertise that they can reduce debt by 40-60% on average. However, there are risks to be aware of. Your credit score will drop and creditors may sue you or continue harassing calls while you save up for settlements. Fees also range from 10-25% of enrolled debt, on top of any interest and late fees racking up.

That said, settlement can still provide relief if done strategically. The key is prioritizing which debts to target and having realistic expectations. Don’t believe promises of slashing debt in half with no consequences [1].

When Does Settlement Make Sense?

Settlement works best for unsecured debt like credit cards, medical bills, and personal loans. Debts with collateral like mortgages and auto loans are riskier. The lender can seize the asset if you default.

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You need a lump sum saved up to make credible offers. This means settlement works best for debts with a small enough balance that you can save the funds within several months. That might be $3,000-15,000 on a credit card, not $100,000 on a business line of credit.

Settlement also makes the most sense when you have a reasonable plan to avoid racking up new debt. There’s no point settling current debts if you’ll just accumulate new ones.

Weigh the Pros and Cons

Settlement can provide meaningful relief, but also comes with costs. Consider these key pros and cons:


  • Settle debt for less than you owe
  • Stop accruing interest and fees on settled accounts
  • End creditor harassment and collection calls
  • Avoid bankruptcy which can liquidate business assets


  • Fees to settlement companies often 10-25% of debt
  • Credit score drops 100+ points on average
  • Continued late fees and interest while saving up for settlements
  • Creditors may sue you before settlements paid
  • Taxable income on forgiven debt

As you can see, there are advantages but also substantial drawbacks. Make sure you’re clear on both before making any decisions.

Understanding the Process

If you decide to pursue settlement, here is a typical timeline:

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  1. Stop payments – You’ll stop making regular payments so you can save up for settlement offers. This will likely trigger late fees.
  2. Open dedicated account – Settlement companies require you to save lump sums in a dedicated account they can access.
  3. Wait for account to build – It takes several months to save enough to make credible offers.
  4. Settlement company negotiates – Once there are sufficient funds saved, the company negotiates with creditors.
  5. Creditor accepts or rejects offer – There’s no guarantee creditors will accept the initial offer amount.
  6. Settled debts paid off – If accepted, you pay the settlement amount and the account is closed.

Expect this to take at least 6-12 months. During that time, your credit score will drop, creditors may sue, and interest/fees accrue. Make sure you’re prepared for the consequences before moving forward.

Should You Hire a Settlement Company?

Settlement companies advertise that they can secure better deals with creditors compared to what you could negotiate directly. However, you need to vet companies carefully, as many overpromise and employ predatory tactics.

Watch out for any company that [2]:

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  • Charges upfront fees before settling debts
  • Guarantees specific settlement amounts or terms
  • Advises you to stop communicating with creditors
  • Touts “new government programs” to erase personal debt

Reputable companies will offer a free consultation, charge fees only on settled debts, and provide realistic assessments of what settlements you can expect. Get promises in writing and read the fine print!

Alternatives to Debt Settlement Companies

Negotiate Yourself

You can negotiate debt settlements yourself directly with creditors. This allows you to avoid settlement fees. Success depends on your negotiation skills and the creditor’s policies.

Inform creditors you’re experiencing financial hardship due to COVID-19 or other circumstances. Ask what options are available, like reduced payments or interest rates. Don’t admit you don’t intend on paying the full balance, as this gives them less incentive to settle.

Non-Profit Credit Counseling

Non-profit credit counseling services charge small monthly fees to act as an intermediary with creditors to reduce interest rates or create debt management plans you can afford. They can be a good alternative to settlement companies.

Be wary of “credit counseling” services that behave more like for-profit settlement companies.


Filing for bankruptcy stops collections and can discharge some business debts. However, you’d lose control of the process. An experienced bankruptcy lawyer is best able to advise if this is a good option.

What Debts Should You Target?

All settlement offers depend on the specific creditor. But certain types of debts have higher success rates:

Credit Cards

Credit card companies would rather take a partial payment upfront than nothing at all if you’re headed towards default. They’re often willing to settle for 40-60% of the balance.

Medical Debt

Medical providers also commonly accept discounted lump sums, often 20-50% lower than what’s owed. Some may also have financial assistance programs.

Old Debt

Debt that is older than the statute of limitations in your state (often 3-6 years) can sometimes be settled for 10-30% of the balance. Collectors may prefer a small settlement over nothing.

Be prepared for each creditor to accept different offers based on their internal policies. Don’t assume across the board discounts.

What If Creditors Sue Me First?

It’s possible creditors may file a lawsuit against your business to recoup debts, even as you attempt settlement. This is a last-ditch recourse for them to get paid. If you’re sued, be sure to respond within the required timeframe, either personally or through an attorney. You can still negotiate settlement or payment plans, often for a reduced amount. Ignoring a lawsuit will allow them to obtain a default judgment against you.

The Impact on Your Credit

Debt settlement will negatively impact your credit score. Accounts will likely be closed or charged off. Late payments will show up on your credit report. Your score could drop 100 points or more.

However, creditors will also stop reporting the settled debts. So over time, as long as you avoid new debt, your score can recover. But it may take several years.

The Tax Implications

One hidden consequence of settlement is that forgiven debt is treated as taxable income by the IRS. If a creditor forgives $10,000 of debt, you may owe taxes on that $10,000.

Certain exceptions apply, like if you are insolvent or bankrupt. But make sure to understand the potential tax liability, which could reduce the savings from settlement.

How Much Should You Offer Creditors?

There are no hard rules on exact settlement amounts, since it depends on each creditor. But based on typical accepted offers, aim for:

  • Credit cards: 40-60% of balance
  • Medical debt: 20-50% of balance
  • Old debt: 10-30% of balance

Lowball offers are often rejected while offers too close to the full amount remove creditors’ incentive to settle. Start on the lower end and negotiate up as needed.

Final Tips on Navigating Settlement

If you move forward with settlement, keep these tips in mind:

  • Get everything in writing – Verbal promises won’t cut it.
  • Send dispute letters – This can freeze collections until settled.
  • Keep meticulous records – Track all debts, fees, and settlements.
  • Set aside funds for the tax man – He’ll want his cut on forgiven debt.
  • Consult a tax pro – They can advise you on reducing tax liability.

Debt settlement is a major decision with consequences. But armed with the right information, you can make the best choice for your business. Wishing you the very best as you chart a path to financial stability.

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