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.