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Drowning in Business Debt? A Wake-Up Call for Wake County Entrepreneurs

You started your business with big dreams – to be your own boss, pursue your passion, achieve financial freedom. But now, the debts are piling up. Unpaid invoices, maxed-out credit cards, looming loan payments. It‘s keeping you up at night.You’re not alone. Many businesses in Wake County struggle with overwhelming debt. The good news? You have options – if you act decisively. This guide explores one powerful strategy: business debt settlement.But first, let’s start with a hypothetical scenario:

You own a thriving restaurant in downtown Raleigh. The pandemic hit hard – forcing you to shut down for months. You took out loans and maxed credit cards to stay afloat. Now you‘re open again, but crushed by over $200,000 in debt. Your cash flow can‘t keep up with the payments. You’re wondering – is debt settlement the answer?

Read on to understand the pros and cons, and whether it could help rescue your business.

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What is Business Debt Settlement?

Debt settlement is negotiating to pay a lump sum amount for less than what you originally owed creditors. The creditor “settles” and forgives the remaining balance.For example, if you owe $50,000 on a loan, the creditor may accept a $25,000 lump sum payment as full settlement.This option appeals to creditors because they get at least partial payment immediately, rather than risking you defaulting entirely. But it’s still a loss for them – so they’ll drive a hard bargain.

Debts You Can Potentially Settle

Not all business debts qualify for settlement. The most common candidates include:

  • Business credit cards
  • Business loans/lines of credit
  • Past-due supplier invoices
  • Commercial mortgages
  • Equipment financing

You may also settle personal debts used for business purposes, like personal credit cards or loans you co-signed.

See also  Debt Consolidation Calculator

How Much Can You Save?

The big question – how much less can you settle for? There’s no set formula, but many experts suggest:

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Debt Type Typical Settlement Range
Credit Cards 30% – 50%
Unsecured Loans 30% – 70%
Secured Loans 50% – 80%

So on a $100,000 credit card balance, you might settle for $30,000 – $50,000.Of course, creditors won‘t accept pennies on the dollar without a fight. Which brings us to…

The Negotiation Dance: Getting Creditors to Play Ball

Here’s where debt settlement gets tricky. Creditors have zero obligation to accept reduced payment – it‘s 100% voluntary on their part.So how can you convince them? By demonstrating your inability to pay the full debt, while also showing you can scrape together a lump sum settlement amount.This may involve tactics like:

  • Drafting a hardship letter explaining your financial situation
  • Providing documentation like bank statements, tax returns, P&L statements
  • Offering to enter debt settlement program through a third-party firm
  • Threatening bankruptcy as the only other option

The creditor will weigh the settlement offer against the cost/hassle of pursuing the full debt or dealing with your bankruptcy. If it makes business sense, they’ll likely accept.But don‘t expect them to jump at your first offer. As with any negotiation, there will be back-and-forth. Creditors may start high, you’ll start low, and you‘ll eventually meet in the middle.It’s a delicate dance – and one misstep could leave you still on the hook for the full debt. This leads us to a key question:

Should you hire a professional debt settlement company to negotiate on your behalf?

The Pros and Cons of Professional Debt Settlement

Negotiating debt settlements is tricky business. One option is hiring an experienced debt settlement firm to handle it for you. But there are pros and cons to weigh:Pros of Using a Settlement Firm

  • Expertise in negotiation tactics and creditor policies
  • Leverage of representing many clients vs. just you
  • Convenience of handing it off to professionals
  • Formal debt settlement program may be more persuasive

Cons of Using a Settlement Firm

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  • Expensive fees – typically 15-25% of your total debt
  • Loss of control over negotiation process
  • Potential conflicts of interest with the firm
  • Debt may continue accruing during negotiations
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Many businesses attempt to negotiate directly with creditors first before hiring a firm. But if you get stuck or lack negotiating experience, a settlement company could be worthwhile.Of course, you’ll need to thoroughly vet any firm and read the fine print. Some have faced accusations of unethical practices or hidden fees.

The Debt Settlement Process: A Step-by-Step Guide

If you do decide to pursue debt settlement – either on your own or through a firm – here’s a general overview of how the process works:

  1. Compile Your Debts and Finances
    First, gather documentation on all your outstanding debts, assets, income, and expenses. This helps build your case for settleme
  2. Stop Making Payments
    This may seem counterintuitive, but most programs require you stop paying creditors so you can accumulate funds for a lump sum settlement off
  3. Open a Dedicated Account
    You’ll deposit money monthly into a dedicated account used to accumulate your settlement fun
  4. Let Negotiations Begin
    Once you’ve saved a settlement amount, your firm (or you) will start negotiating with creditors one-by-o
  5. Make Settlement Payments
    If a creditor accepts your offer, you’ll pay the agreed lump sum from your dedicated accou
  6. Receive “Paid in Full” Notice
    Upon payment, the creditor should legally agree to remove any remaining debt from your credit repo

The process typically takes 24-48 months from start to settlement of all debts. It requires discipline in setting aside those monthly deposits.But what if you get sued by a creditor before completing negotiations? This leads us to…

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Facing Creditor Lawsuits? Know Your Rights

Unfortunately, stopping payments on debts you legitimately owe may prompt creditors to take legal action against your business.If sued, you have two main options:

  1. Respond and Defend Yourself
    You can respond to the lawsuit, appear in court, and argue your case for debt settlement. This buys time for negotiatio
  2. File Bankruptcy (If Needed)
    If negotiations fail and judgments pile up, bankruptcy may be your only option to discharge the debts entire

Creditors know this – which is why many accept reasonable settlement offers to avoid a total loss in bankruptcy.But whatever you do, never ignore a lawsuit summons! That will result in an automatic judgment against you.

See also  How to Handle Medical Debt as a Self-Employed Entrepreneur

The Pros and Cons of Debt Settlement

By now, you‘ve likely realized – debt settlement is a powerful tool, but one with risks. Here‘s a quick recap of the key pros and cons:Pros of Debt Settlement

  • Reduce your total debt burden
  • Avoid bankruptcy
  • Stop harassment from creditors
  • Improved cash flow going forward

Cons of Debt Settlement

  • Damage to your credit score
  • Potential tax hit on forgiven debt
  • Accounts will be closed after settlement
  • Difficulty obtaining new credit temporarily

For many businesses, the pros outweigh the cons – especially if bankruptcy is the only other option. But it‘s not a magic wand. Careful planning is required.

Protecting Your Personal Assets: The Importance of Business Entity Selection

One major factor determining your personal liability? The type of business entity you operate:

  • Sole Proprietorship/Partnership
    As the owner(s), you are personally responsible for all business debts. Creditors can pursue your personal asset
  • Corporation/LLC
    These entities are legally separate from their owners. Creditors cannot easily pursue personal assets for business debt

If you operate as a sole proprietor or general partnership, debt settlement takes on extra urgency. Failure to settle could put your personal assets like homes and vehicles at risk.Corporations and LLCs provide much more liability protection. But even then, creditors may try to “pierce the corporate veil” if you commingled business and personal funds.The lesson? Carefully consider your business structure and asset protection plan from day one.

Hypothetical: Settling a Struggling Restaurant’s Debts

Let’s return to that hypothetical restaurant scenario from earlier:

Your Raleigh restaurant emerged from the pandemic with $200,000 in credit card debt it can‘t pay back. You‘ve incorporated the business, but you also personally guaranteed some of those debts when you first opened. What are your options?

Here’s one potential path forward using debt settlement:

  1. Triage Your Debts
    Separate the business credit card debts from any personal guarantees. Only the business debts are eligible for settlement through the corporati
  2. Cut Expenses to the Bone
    Reduce all unnecessary expenses and direct every dollar of profit toward a dedicated settlement fund. This may mean staff layoffs or other painful choic
  3. Hire a Settlement Firm
    With $200k in debt, this may be worth the 20% fee to leverage their negotiating expertise and formal progr
  4. Negotiate the Business Debts
    Through the firm, negotiate lump sum settlements on all business credit cards – ideally saving 50% or mo
  5. Settle the Personal Guarantees
    For any personal debts, attempt to negotiate smaller settlements yourself. Or explore other options like debt consolidati
  6. Revamp Your Business Plan
    With a clean slate, update your business plan and growth strategy to avoid repeating past mistak

This allows you to tackle the debts systematically while protecting personal assets behind the corporate veil. But it requires sacrifice to save the business.

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