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Using Business Debt Settlement to Avoid Foreclosure or Repossession

Falling behind on business debt payments can lead to serious consequences like foreclosure or repossession. But business owners facing financial hardship have options, including business debt settlement. This approach involves negotiating directly with creditors or working with a settlement company to reduce what you owe.

Business debt settlement may help you avoid foreclosure, repossession, or bankruptcy. But it also comes with risks and downsides. This article explains how business debt settlement works, key things to know before trying it, and alternatives to consider first.

How Business Debt Settlement Works

With business debt settlement, you stop making payments on some or all debts. The goal is for creditors to eventually agree to let you pay a smaller lump sum that settles the account. This lump sum is usually 20% to 50% less than what you originally owed.

Settlement companies advertise that they can negotiate deals for pennies on the dollar. But realistically, most creditors will not accept less than 50% of the balance. Some may refuse to settle at all.

Either way, when you stop paying, late fees and interest will continue accumulating. Creditors may also sue you or report missed payments to credit bureaus. All this can hurt your business credit score.

Once you choose a settlement company, you’ll set up a dedicated account to save money for settlements. The company’s fees often equal 15% to 25% of the enrolled debt amount.

For example, if you owe $100,000 across several accounts, the company may charge $15,000 to $25,000 in fees. You would pay those fees first before money goes toward settlements.

The company won’t start negotiating with creditors until enough has accumulated in your account to make settlement offers. This process takes many months. Creditors have no obligation to accept initial offers, so negotiations may drag out even longer.

Meanwhile, you’re still responsible for making minimum payments to avoid default. You’ll need to juggle these payments plus the money going into your settlement account.

If negotiations succeed, the settlement company pays the lump sum from your account to the creditor. They do this for each account until all remaining debts get settled.

The Risks and Downsides

Business debt settlement seems appealing. But it’s a high-risk strategy that can leave you in worse shape if negotiations fail. Here are key risks to consider:

  • Settlements may not happen. There’s no guarantee creditors will accept settlement offers, even reasonable ones. You may go through the whole process only to end up still owing the full balance plus late fees.
  • Lawsuits and collections. When you stop paying creditors, they can sue you or send accounts to collections. Both hurt your business credit. Collections also may garnish your accounts or put liens on business assets.
  • Higher interest and penalties. Interest and late fees build up when you stop making payments. Creditors may also raise interest rates. This makes settlements cost more in the long run.
  • Tax consequences. The IRS may count forgiven debt from settlements as taxable income. You may owe taxes on tens of thousands in “canceled debt.”
  • Damaged business relationships. Defaulting on business debts burns bridges with creditors you may want to work with again later.
  • Upfront fees. Settlement companies charge hefty upfront fees from the dedicated account. Yet there’s no guarantee they’ll secure settlements for all or any debts.
  • Scams. Many settlement companies engage in fraud and charge excessive fees. Make sure to research any company thoroughly first.
  • Bankruptcy alternative. If settlements fail, you may have to file bankruptcy anyway to deal with debts that didn’t get settled.

Alternatives to Consider First

The risks make business debt settlement a last resort after exhausting other options. Here are some alternatives to review before resorting to settlement:

Talk to creditors. Contact creditors directly to ask for reduced payments or lower interest rates. They may offer options like hardship programs to help avoid default or foreclosure.

Non-profit credit counseling. Reputable non-profit credit counseling agencies offer free consultations and financial education. They can help set up debt management plans with reduced interest rates and payments.

Government programs. Federal, state, or local government agencies may have hardship assistance, grants, or loans for struggling business owners.

Business loans. A business loan to consolidate debts may provide relief through lower monthly payments. But it swaps unsecured debts for secured debt that puts business assets at risk if you default.

Bankruptcy. Chapter 7 or Chapter 11 bankruptcy stops collections and wipes eligible debts. But it damages credit, and you may lose assets. Chapter 13 bankruptcy sets up a repayment plan over 3-5 years.

Sell assets. Selling unneeded assets like equipment can generate cash to pay down debts and avoid default.

Cut expenses. Reducing operating costs may free up cash flow to catch up on payments. But drastic cuts can also reduce revenues.

Key Takeaways

Business debt settlement seems like an easy fix but comes with substantial financial and legal risks. Settlement companies also charge hefty fees with no guarantee of successfully reducing your debts.

Before resorting to settlement, exhaust all options like negotiating directly with creditors. Seek credit counseling and explore government assistance programs. With patience and perseverance, you may find alternatives that avoid settlement’s downsides.

But if you’ve run out of options, business debt settlement may still beat the consequences of foreclosure or repossession. Just go in with eyes open to the risks, and thoroughly research any settlement company before enrolling. Legal and financial advice can also help weigh if settlement is your best path forward.

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