Settle Business Debt for Less: 5 Factors Behind a Supportable Offer

A creditor will take less than the full balance only when you’ve demonstrated that less is the best the creditor can hope to receive on a net basis. Your offer must represent a better alternative than what the creditor could get by pursuing any other means to collect the debt. Settling debt for less than the full balance requires a creditor to evaluate what they are being asked to give up if they take your offer. That’s why not all offers to settle are accepted.

Which Offers They Will Take

Five factors determine which offers they will take:

• documentation of your inability to pay the debt in full,
• the costs of collection the creditor would incur if they pursued you,
• the value of any collateral backing the debt,
• the strength of any personal guarantee you gave,
• and what your creditors’ policies are for accepting compromise settlements.

Your best bet for settling for less is if the creditor knows you do not have the money to pay them. People do not give up money if they do not need to. If you have assets and income that could be used to pay in full, why would a creditor take anything less? Your creditors will be more likely to accept an offer to settle a debt when you document your inability to pay your balance in full. If you show your creditor that your expenses exceed your income, for example, they will know that you’re not just tossing an offer out to see what might happen.

In general, your offers of compromise on IRS tax debts are going to be refused if there is a tax debt that you could pay in full through a payment plan or if you have assets with sufficient equity to pay. The IRS will weigh your income, expenses, and asset equity. The offer in compromise formula the IRS uses is your assets at quick sale value plus either 12 or 24 months of future income. If you make a lump-sum payment, the IRS counts your monthly income over 12 months. If you pay in installments, it’s 24 months. Assets are normally valued at 80% of market value to approximate their quick sale value.

Settlement is about more than the assets on a balance sheet; a creditor must also weigh the costs and risks of a long enforcement process. If your creditor knows they would incur a financial loss by trying to collect their money from you, they may be more willing to settle for less. Each enforcement and collection measure shrinks the amount they will get and leaves you more room to offer them something smaller than what they are owed. When they will have to fight you in court or incur months of collection costs to get back to the same spot you’re offering them today, they are often willing to take a reduced offer today. The same weighing applies in bankruptcy: a Chapter 11 plan of reorganization is an up-down vote on a distribution that pays impaired creditors at least what they would get in a liquidation, even when they vote against the plan.

A debt that is secured by collateral is usually less negotiable. If a creditor knows that collateral backs a debt, they know they can recoup their money through foreclosure or repossession. Without collateral, however, a lender is more inclined to make settlement deals that give them the best chance of getting some of their money back. SBA loan offers are submitted for acceptance only after all collateral has been liquidated in accordance with SBA guidelines. There’s no single plan of action that will work for every creditor or debt when you try to resolve more than one debt. When there are multiple debts, debts secured by collateral must be managed separate from unsecured debt.

A personal guarantee makes you personally liable for the debt. If you signed a personal guarantee on a loan, you make settlement less likely. Your personal guarantee may keep the debt fully collectable even after the business debt is settled. Business debt settlement does not automatically release your personal guarantee. It’s a separate negotiation, and you must see it in your settlement agreement before signing.

Some creditors take a more charitable approach than others. When a creditor does not want to settle for less, they won’t. Settlement patterns vary wildly in the nonbank world. To show hardship, you must present historical data on how your income has fallen from when you took on the debt to where it is now. Six to twelve months of bank statements and year-over-year financials will beat any subjective argument.

Settlement options can be reduced by stopping payments:

• a balance could come due all at once,
• creditors can seek to enter a confession of judgment against you,
• and your bank accounts can be frozen.

Some creditors need to know you cannot pay before they will talk; others will talk to you while your account is current. You want to demonstrate hardship through documentation, not by trying to manufacture a situation.

Settlement Agreements

The most common mistake people make in negotiations is not getting the deal in writing. Settlement agreements should state clearly that your creditors consider the balance satisfied in full and release any personal guarantees. Filing a UCC termination does not happen when you pay. Keep all your documents; old claims resurface years later.

The forgiven part of a settled debt is generally taxable income unless an exclusion applies. Tax exemptions such as insolvency can exclude it from taxable income. Creditors that must report file 1099s at $600 or more. The tax exclusion for insolvency is helpful, but it only protects a taxpayer up to the amount that their liabilities exceeded the market value of all their assets just before the debt was canceled. It is necessary for you to get your own tax advice.

List All Your UCC Filings and Debts

Before you call anyone, list all your UCC filings and debts, and figure out how much cash is left after you cover your expenses. Anyone that gives a percentage over the phone before they see your file is guessing, not estimating.

Any leverage you have derives from the economic reality of what the creditor would get if they didn’t reach an agreement with you. If the creditor is going to get more money in a foreclosure than by taking your offer, there is no economic justification for the creditor to accept your offer. Even with the best offer or plan, you are still at the mercy of a creditor that chooses not to accept it.