Settle Business Debt: 5 Steps Toward an Agreement You Can Perform

The best way to settle a commercial debt is to reach an agreement with the creditor that works for you. Creating an agreement you can perform means you need to know a great deal about the problem and the remedy you can implement. With this knowledge, you can define the issue, prepare a plan and propose the solution.

A debt settlement takes place when a creditor accepts less than the balance owed as payment in full. You can prepare for the process by analyzing your cash flow, creating a payment plan, reaching out to creditors, negotiating, and confirming your deal in writing before paying. The process takes time, and you will need to commit to pursuing it until all the agreements are in place.

How Much You Can Afford to Pay

Before trying to make a deal, you want to know the complete list of debts and how much you can afford to pay. Write down each creditor, the amount owed, the terms of the contract, and whether there are any personal guarantees. Know if the lender has filed a UCC lien on any of your business assets, and check if anyone has filed any collection lawsuits. Look at where the money comes in and how much, and look at when the money goes out and how much. Put each expense in its month, and if you have variations, work in an average amount for each expense. Subtract all the expenses from the income and list a monthly payment amount that can go towards debt reduction.

Make sure you can continue to pay other critical costs of business operations, like payroll, rent and taxes. A settlement agreement involves a lump sum, or you can offer regular payments over several months. One strategy for coming up with a settlement offer is to pay what you had been putting towards the debt before the offer monthly until you reach the settlement amount.

Approach the Creditors

Now that you know how much you can pay, it is time to approach the creditors. Create a plan for who to contact first. If one creditor has filed a collection lawsuit or threatens to, they should be at the top of the list. Try not to lose sight of the fact that the creditors want to be paid, and your goal is to pay them. Focus on keeping a business-like atmosphere, and offer solutions. Whenever you talk, write down who you spoke with, the date and time, the substance of the discussion and any agreements.

Do not accept any terms that you are not sure you can complete. If you can, negotiate a payment schedule with creditors so you pay what you offered over several months. Check if there is a personal guarantee on the loan, and see if it will go away in the agreement. If a creditor has filed a collection lawsuit against your business, get it included that it will be dismissed. The creditor may agree to file a termination of the UCC-1 lien within a set amount of time. Finally, ask about how the account will report to the credit bureau.

Wait for written confirmation of all terms. The settlement letter should state the lender agrees to accept the amount proposed, over the time proposed, as payment in full. When the creditor accepts your proposal, you will know the exact terms that need performing. Keep up with payments as you agreed, and keep records of them. When you make the last one, ask for a written release letter to keep for your records. Confirm that the lien has been released.

The timeline for all of this can depend on how many creditors you need to make deals with and how much negotiating you must do. It can often take 6 to 24 months to prepare and work out a settlement. If your business operations can immediately afford to pay, then it will be a quicker process.

There is always a risk in the meantime, because the creditor can file suit, demand payment from any personal guarantor, affect credit, or refuse to settle. Can the business stay operating if a lawsuit hits, or is it unable to fulfill its promises to customers? Do the personal guarantors have a backup plan if a creditor comes after them? If the debts go into a settlement, will the business’ credit rating be strong enough to recover? When thinking about settlement, keep in mind that not all creditors accept it.

When you settle a debt for less than what you owe, you may get a tax form indicating the amount forgiven. You report the forgiven debt as income on your taxes, but you may not have to if your business is in an insolvent position. However, this requires careful analysis and reporting on your taxes and keeping records of your insolvent position. Talk to a tax professional before signing any offer.

If your company owes the IRS, you can make an Offer in Compromise settlement in which you offer to pay a lump sum or a series of payments, that are less than the total owed. When you make a settlement Offer, you pay $205 to make the offer, and a 20% down payment if it is a lump sum offer. As an employer, you must first be making current tax deposits to the IRS. You can make a settlement offer on an SBA loan after the lender sells all collateral. But, the SBA does not forgive COVID EIDL loan balances; they must be repaid.

If your business is not able to execute a settlement agreement, the Subchapter V bankruptcy code is available to small businesses. It has a limit of $3,424,000. Under a Subchapter V bankruptcy, your business may have to commit its disposable income to a repayment plan lasting between 3 and 5 years.

The settlement option only works if the business can keep making the payments. Debt settlement is a complex matter. When considering it, get as much information as possible. Analyze the benefits and drawbacks, make a plan, and work towards an amicable resolution.