Charles Phelan

While doing consultations with people looking into their debt relief options, here’s a question I hear over and over again: Can I settle my business debts the same as my personal debts? The short answer is YES. Small business debts can usually be settled for less than full balance, often 50% or less (much less in some cases), and the process generally works the same way as it does for consumer debt. That much said, there *are* some important differences between personal and business debt settlement, and in this post I’ll explain those differences.

First, how do we define “business debt”? Most small businesses have a blend of different kinds of debt. Business debts may commonly include:

• personal credit cards that were used to fund the business
• credit cards issued in the business name but personally guaranteed
• lines of credit or loans granted to the company itself
• vendor bills or trade payables

Virtually all of these are potential candidates for negotiated settlements.

Settlement of personal credit cards used to fund a business startup is the same process as personal debt. If there were significant cash advances taken on the account shortly before default, that can make it more difficult to settle, but otherwise settlements on this type of debt are routine.

If you have a credit card issued in the name of your business, but personally guaranteed by you, then this type of account is also very similar to a personal credit card. In fact, many so-called “business credit cards” are merely personal cards in disguise. This is especially true if your business structure is sole proprietorship. If you have a S-Corporation or C-Corporation, then there is still the personal guarantee required of most small business owners. It’s been my experience that most small businesses rely on the personal credit of the owner or partners for ALL of the credit, and that very few businesses have true business credit – where the liability is truly limited to the corporation and there is no personal guarantee involved.

Lines of credit and bank loans often involve larger balances than credit card accounts, and although these are usually issued to the business entity, here again the reality usually entails a personal guarantee by the owner. Settlement on this type of account is also quite common and routine.

Vendor payables are the credit accounts granted by suppliers and other merchants you regularly do business with. Negotiated settlements on this type of account may or may not make sense depending on the situation. If you are a restaurant owner struggling financially, it might make sense to seek a settlement on a bank line of credit. But it’s probably unwise to try settling the account of your favorite food supplier. If the restaurant has already closed down, however, then of course it makes perfect sense to negotiate this type of obligation as well.

The Key Differences with Business Debt Settlement

1. The first critical difference with business debt is that the Fair Debt Collection Practices Act only applies to consumer debt, and not to business debts. So, for example, don’t expect a collection agency working a business account to send you a notice that provides the customary 30-day right to dispute. Quite often, agencies working such accounts take advantage of the fact that the FDCPA does not pertain to collection activity on business debts.

2. The status of the business entity itself becomes a factor in the negotiation, to a far greater extent than the financial status of the consumer trying to settle credit card debts. If the business is an ongoing concern, then the challenge is to demonstrate the need for relief without falling back into a long-term payoff scenario all over again. If the business has already folded, then it’s a more straightforward path to resolution of the outstanding accounts via settlement.

3. On business lines of credit or loans, it is not unusual to see charge-off at 120 days of delinquency, rather than the usual 180 days for credit cards and most unsecured debt obligations. Therefore the collection pace on such accounts can move faster than expected, making it even more imperative to have a game plan in place for funding settlements as they become available.

4. Documentation is rarely required to obtain settlements on personal accounts. Not so with many types of business accounts. Especially on larger balance files like a $50k loan, it’s often necessary to provide profit-and-loss statements, balance sheets, and even personal tax returns. A proposal and package may have to be submitted in order to gain approval on a settlement offer. So the process can be more complicated than for personal accounts.

Aside from these important differences, the process of settling a business account is really no different from any other. Communicate with your creditor. State your case and make your offer. Start low and see what happens. A creditor’s first counteroffer is rarely their best discount. Be mindful of the charge-off deadline so you can time your negotiation for the deepest possible discount – with many creditors this is just prior to the charge-off deadline. It’s important for you to stay on top of the accounts, what agencies they are assigned to, what stage of the collection process they’re in – that way you won’t get blindsided by an unexpected legal action. And of course, focus on pulling together the funds needed to settle the accounts as the opportunities arise!

If you’d like some professional guidance while settling your business debts, please consider our Premium + Business Program, which includes extra support for small business owners. We’ve helped people all across the country keep their businesses going, or wind up their debts when they had already decided to move on. If you’re not sure whether debt settlement is right for you, just give us a call at 866-515-2360 or email us at [email protected] and tell us about your business circumstances. We’ll give you an objective opinion and help you figure out the right approach for your specific situation.

Although we are a bit late getting going on social media, ZipDebt is now on both Facebook and Twitter. We’re reaching out to our regular readers and former clients to help get us noticed out there!

If you have a Facebook account, please click this link, read a few of the short posts, and give us a “like” or two:

ZipDebt’s Facebook Page

If you have a Twitter account, please follow us here:

ZipDebt on Twitter

We’re also trying to do the same thing with our new site, SecondMortgageAdvice.com, so please follow us here as well:

SecondMortgageAdvice on Twitter

We greatly appreciate your support!

Thank you,

Charles J. Phelan

Steve Rhode over at GetOutOfDebt.org has published an excellent article exposing a new “debt relief” variation that will only spell trouble for consumers who are duped into enrolling. It’s called “debt restructuring,” and Mr. Rhode provides a very detailed discussion on the marketing approach being used to promote this program, including the totally absurd sales scripts used by boiler-room sales agents to sell this toxic sludge of a “service.”

By calling it “debt restructuring” instead of “debt settlement,” the people who have set up this program are trying to work around the FTC rules. After everything that has taken place in the debt industry over the past few years, the top players certainly must have full knowledge that their program is a scam from top to bottom, but they want their network of affiliate marketers (who move from debt program to debt program) to promote this as long as possible before it gets shut down and they move on to the next scam-du-jour.

For full technical details, please refer to Steve’s article, but the short version of the pitch is a fairy tale that goes like this:

WHOPPER #1: Stop paying your creditors and in six months they will charge-off the accounts and SELL them to debt purchasers. Don’t worry about lawsuits meanwhile, as creditors hardly ever sue that quickly.

WHOPPER #2. When your accounts get close to charge-off, we will send offers to your creditors to purchase your debts from them for DOUBLE what they normally receive from the debt purchasing industry.

WHOPPER #3. As part of your enrollment agreement with us, you agree to pay back 40% of the balance over time, but this money will go to the debt purchaser that we sell your account to, so the original creditor is out of the picture after the debt is bought away from them. Voila, guaranteed 40% settlement with no legal risk and no further credit impact.

WHOPPER #4. Yes, we know you are worried about lawsuits, and even though we downplayed that risk during the sales pitch, you should purchase our “optional” legal protection package for $3,000 to $5,000 extra. (How else are we going to get rich off you?)

The structure of this alleged “program” is actually quite a bit more convoluted than I have described it above. I have simplified it down to these four main points, because if the basic theory is not valid then obviously the whole program is bogus. Let’s tear these points apart one by one:

1. Yes, if you stop paying your creditors then after 180 days of delinquency the account will go past charge-off and be declared a loss on the creditor’s books. But the debt restructuring plan offers ZERO guidance to consumers during this crucial six-month period. As someone who has coached thousands of consumers struggling with credit card debts, this initial period of default is an emotional roller-coaster involving a barrage of collection calls and notices, legal threats, and potential lawsuits. It’s imperative for consumers to have solid coaching to get through this phase of collections.

Most importantly, it’s simply NOT true that lawsuits don’t happen before charge-off. They can, and do, and while they remain the exception rather than the rule, it’s impossible to apply one-size-fits-all advice to consumers. Every major creditor is different, and in some cases, a client could be targeted for early attack if their balances warrant it, or other factors on their credit report come into play. Telling people to “just ignore” the calls and letters for six months is extremely BAD financial advice.

2. There are three major problems with the assumption that offers to purchase debt accounts for double the going rate will be accepted by creditors with any consistency or regularity (which would be required in order for the program claims to be true). First of all, most creditors do NOT immediately sell their charge-off paper. In fact, they assign the accounts to contingency-based collection agencies, often on rotating assignments for 3-6 months. Therefore a “quick sale” is by no means assured even with those creditors who do tend to sell their accounts sooner rather than later. Second, there are certain major creditors that NEVER sell their accounts to debt purchasers under any circumstances. Nearly every client has a card from one of these creditors, so the program fails right out of the gate for people who have such accounts. Third, the purchase offers will quickly stamp a clear footprint on the technique used in this program. Such offers will quickly be coded and recognized for what they are – an offer coming from a debt restructuring firm. This will lead to retaliation by some of the major creditors, in the form of early-attack litigation against consumers using this system.

3. Aside from the problems discussed under points 1 and 2 above, there is the further problem that this type of arrangement violates every known standard of fiduciary responsibility. The role of debt service firm carries with it a fiduciary responsibility to do right by your clients and not become involved in a conflict of interest between your own needs and the clients’ needs. When a debt service company also becomes the purchaser of the clients’ debts, this clearly creates a conflict of interest. For one thing, it locks in the consumer to a 40% settlement plus the usual sky-high fees, when some creditors routinely settle for less. How does this serve the best interests of the consumer then? Anyone who understands the first thing about fiduciary responsibility will immediately recognize the potential for abuse in this type of approach.

4. The idea of a “legal defense shield” is essential to the sale pitch, since most consumers are savvy enough to realize that creditors have the right to sue for recovery on delinquent accounts. The insidious nature of this “optional add-on” is that it forms the basis for the high payout on sales commissions, so virtually every client will be “up-sold” until they buy the legal package. The problem is that it will be impossible for debt restructuring firms to deliver the claimed legal representation. If you get sued by a creditor, there is no magic defense against a judgment. And there will be an extra dose of intensity with lawsuits against clients using this system. The major creditors will want to stomp on this approach hard, so people will get punished by quick and aggressive litigation once their creditors catch on. The legal defense “shield” will be overrun with a barrage of lawsuits, and the whole thing will collapse of its own weight when the Internet becomes filled with consumer complaints. Many will be forced into bankruptcy as a result of their involvement with this program.

If you’re struggling with credit card debt, steer clear of bogus programs like this one and give us a call at 866-515-2360. We’ll help you analyze your situation and determine the best-fit strategy for your financial circumstances. What we do is not based on some theory, but rather what WORKS and has proven EFFECTIVE in resolving problem debt.

Today I’m proud to announce the launch of our new website. We are up and running at SecondMortgageAdvice.com.

We’ve built this new portal so that people looking for assistance with problem second mortgages can easily find the site and get help. Our country seems to be on the front end of yet another debt-related tidal wave (nearly $1 trillion in second mortgages, most of which are grossly overvalued on the banks’ books), so I’m quite certain that we’ll see the usual barrage of marketing efforts by shady operators in this arena. There are big bucks at stake, and consumers fearful of losing their homes or getting sued post-foreclosure are vulnerable to scams and schemes.

Since 2004, we’ve pioneered the “do-it-yourself-with-coaching” approach for resolution of credit card debts and achieved a track record that others can only wish they had. More recently, we have been applying that same approach to resolution of toxic second mortgages, with successful results. Just as with negotiation of credit card debt, the best approach with second mortgages is to keep control over the project yourself, but with guidance and coaching from a seasoned professional as you work through the process. This way you’ll avoid costly third-party services that will not obtain any better result than you can on your own.

If you’re looking for help with a second mortgage, please stop by the new site. We have individual pages for each of the 50 states, and as we accumulate additional data on trends for individual states, we’ll be adding to the content continually.

UPDATE: April 5, 2012

As of April 2012 we are offering PAID CONSULTATIONS ONLY on second mortgages or HELOCs, and no longer offer free consultations on this subject. Our fee is only $150, and includes 30 days of follow-up support via email. We made this change because our experience has been that each mortgage situation is totally unique, and requires careful analysis and discussion before a solid recommendation on strategy can be made. We have had so many inquiries on the topic of second mortgage or HELOC settlement, that we felt a paid consultation would be the most efficient method of assisting consumers to avoid scams and make the correct strategic decision. For additional details, please visit our other website at SecondMortgageAdvice.com.

UPDATE NOVEMBER 26, 2012:

Gerri Detweiler of Credit.com recently interviewed me on Talk Credit Radio on the subject of second mortgage and HELOC settlements. This is an in-depth podcast that covers a lot of important information consumers need to know on this topic. If you’d like to learn more about debt settlement as it pertains to mortgages or HELOCs, this is the audio file you’ve been hunting for! Click here to download the full podcast free of charge.

There is a “hidden” component to the real estate and financial crisis, and it gets very little attention by the media. I’m referring to the problem with second mortgages on homes that have lost market value during the real estate crash. Banks are being allowed by the Treasury Department to keep large portfolios of second-lien mortgages on their books at values close to those before the bubble burst.

Some estimates indicate that up to 50% of at-risk properties include this type of loan, so it’s a huge problem. There are more than $1 trillion in outstanding second-mortgage loans, with more than 40% of that concentrated among the four largest lenders. With housing prices down more than 30% average since 2006, many of these second liens are either completely without equity as collateral, or very close to it. Today, the major banks are carrying these notes at 86-93% of book value, when some estimates indicate that they are actually worth only 40-60 cents on the dollar on average.

Many consumers are unaware that it’s often possible to settle with creditors on second mortgage obligations for greatly reduced principal balances. Why would a second lender agree to a settlement on a debt that is secured? Simple. Once the property drops in value below the level where even the first mortgage is under water, then the second lender is completely exposed and is very unlikely to recover anything by way of foreclosure. In that situation, a settlement for even 10-15% of the face value on the mortgage often makes sense for the lender.

For example, let’s say you purchased a home for $300,000, with $30,000 down payment and a first mortgage of $270,000. Later the property appreciated in value $400,000 when the market was at its peak. Like so many Americans, you borrowed against the increased home value and took out a home equity line of credit (HELOC). With the home valued at $400,000 against a mortgage of $270,000, you had $130,000 of equity to work with. Being prudent, you didn’t borrow all of that, only $100,000. So you had a first of $270,000 and a HELOC for $100,000. Then the real estate crash happened. Your $400,000 house is now worth only $250,000, less than you originally paid for it. This means that the first mortgage of $270,000 is itself under water, since the house would sell for less than you owe on the loan. And therefore the second lien is 100% exposed. There is no collateral at all remaining to cover this note. In practical terms, this type of obligation can be settled the way any unsecured debt (like a credit card account) can be settled.

At ZipDebt, we’ve been assisting some of our clients to settle second mortgages, and the results have been nothing short of amazing. We’re seeing 10-15% settlements routinely, even less in some cases. But it’s important to understand that not all second mortgages can be settled, nor is it appropriate to use this strategy in all cases where the property is distressed. Sometimes there are other solutions more appropriate to the specific situation. It really requires a detailed analysis to determine whether a second mortgage or HELOC is suitable for the settlement approach. There are a number of key factors involved, such as whether the home is primary or a rental property, whether the state the property is located in is a “recourse” or “non-recourse” state, the specific type of mortgage contract involved, and of course, the equity figures relative to loan face values.

UPDATE: April 5, 2012

As of April 2012 we are offering PAID CONSULTATIONS ONLY on second mortgages or HELOCs, and no longer offer free consultations on this subject. Our fee is only $150, and includes 30 days of follow-up support via email. We made this change because our experience has been that each mortgage situation is totally unique, and requires careful analysis and discussion before a solid recommendation on strategy can be made. We have had so many inquiries on the topic of second mortgage or HELOC settlement, that we felt a paid consultation would be the most efficient method of assisting consumers to avoid scams and make the correct strategic decision. For additional details, please visit our other website at SecondMortgageAdvice.com.

UPDATE NOVEMBER 26, 2012:

Gerri Detweiler of Credit.com recently interviewed me on Talk Credit Radio on the subject of second mortgage and HELOC settlements. This is an in-depth podcast that covers a lot of important information consumers need to know on this topic. If you’d like to learn more about debt settlement as it pertains to mortgages or HELOCs, this is the audio file you’ve been hunting for! Click here to download the full podcast free of charge.

The original version of my do-it-yourself debt settlement training course was launched in 2004. After three years of working one-on-one with consumers as their debt coach, I had gained so much additional information that I started including a 55-page written update to the existing material.

This new content was incorporated into the completely revised 2008 version of the audio seminar, which expanded the recorded material from five hours to nearly eight hours. The program includes live coaching support, so it has not been necessary to revise the training material since the last release. However, a lot has happened since 2008, and prospective clients are justified in asking whether the material remains up-to-date.

After a thorough review of the course material, I’m pleased to report that about 95% of the recorded audio content of the existing version is still fully applicable to debt settlement in 2011. In terms of the core tactics of the strategy, nothing important has changed, and the system outlined in the course has proved *extremely* effective for clients. (See our reported results here.) So rather than re-recording a new version of the audio seminar, I have provided the key updates in the written Workbook included as part of the course.

What follows is an excerpt from the updated 2011 version of the Workbook for the Debt Settlement Success Seminar™:

General Update for 2011

The financial world is very different today from what it was in 2008. Bank failures, government bailouts, the foreclosure crisis – it’s certainly been an amazing period to live through. For consumers who need to tackle their debt problem, however, the good news is that debt settlement remains a powerful and effective strategy. This is especially true of do-it-yourself debt settlement (or more precisely, do-it-yourself with the assistance of a top-notch coach). In fact, it’s even easier today than ever before to settle your own debts. Settlement has become mainstream. Over the past three years, the banks have trimmed more than $160 billion of outstanding credit card balances. Many of those accounts were settled directly by consumers, with no need for third party intervention by “professional negotiators.” And while no creditor makes it easy to settle an account, virtually all of the major credit issuers are still settling in 2011, just the same as during the peak of the financial crisis during 2008-2010. As far as the banks are concerned, it’s business as usual, and the old principle of the “bird in the hand” still applies, just as it always has and always will! The three main changes that have developed since 2008 are discussed below, and for each individual audio track, the Workbook material to follow will note any important differences associated with updates for 2011 forward.

What’s Different in 2011?

1. Over the past three years, credit card debt balances have fallen by more than $160 billion, down to “only” $797 billion at the end of 2010, versus $957 billion at the time the 2008 course was recorded. Most of this reduction was due to charge-offs, and that included a great deal of settled debt. The bottom line is that over the past three years, settlement of delinquent debts has become a mainstream activity at the major credit card banks.

2. When the 2008 course was recorded, the Credit CARD Act of 2009 had not been passed yet. This new Federal law went into effect in February 2010, with the intent of helping consumers to avoid getting into trouble with their credit cards by making illegal various bank tactics like “double billing,” universal default, and due date tricks.

3. The debt settlement industry itself has completely changed. In the 2008 version of the audio course, I discussed the 15% front-loaded fee structure of the industry at large. After a ruling by the Federal Trade Commission that went into effect October 27, 2010, debt settlement firms are no longer permitted to charge in advance of performing services. The result is an industry in total chaos, with many firms closing their doors, while others try to survive by implementing a completely untested business model. With what’s happening today in the debt settlement industry, it makes more sense than ever to take the DIY approach (with guidance from a coach). Why trust a company with your settlement funds when they might not be around a few months from now?

If you’re not sure whether debt settlement makes sense for your situation, we’ll be happy to talk with you by phone and answer your questions. Our pledge is to give you a straight answer on whether this strategy is a good fit for your financial circumstances.