Commercial Debt Negotiation
Offloading all or a portion of your personal debt via settlement can seem like a daunting task when you feel like you’re in over your head with debt. But one of the great truths in business is that everything is negotiable. Even when the price or terms of something seem set in stone, getting a discount is often as easy as knowing whom to ask and how to ask for it. When it comes to the balances you owe on your credit cards, for example, there might be an opportunity to negotiate what you actually owe. With a little bit of knowledge and guts, you can sometimes cut your balances by as much as 50% to 70%.
The Basics of Debt Settlement
Debt settlement is an agreement between a lender and a borrower for a large, one-time payment toward an existing balance in return for the forgiveness of the remaining debt. Someone who owes $10,000 on a single credit card, for example, may approach the credit card company and offer to pay $5,000. In return for this one-time payment, the credit card company agrees to forgive or erase the remaining $5,000 still owed. Although a debt settlement has some serious advantages, such as shrinking your current debt load, there are a few downsides to consider. Failing to take these into account can potentially put you in a more stressful situation than before. First, debt settlement generally requires you to come up with a substantial amount of cash at one time. This is what makes the debt settlement attractive to your lender because, instead of receiving minimum monthly payments for the next few years, it’s getting a much larger payment now. You’ll need to stop and consider where the funds are going to come from and how that money could be used elsewhere in your personal finances, and you want to make sure a large payment now isn’t going to leave you in a tight spot a few months down the road. Second, you risk having your credit card account closed completely after the settlement is complete. In other words, your lender may drop you as a client because of your poor track record of paying back what you owe. Third, debt settlement can affect your credit score adversely. This, in turn, will make it harder for you to borrow money at good interest rates or even to get credit at all in the future. If you decide that a debt settlement is the right move, the next step is to choose between doing it yourself or hiring a professional debt negotiator. Keep in mind that your credit card company is obligated to deal with you and that a debt professional may not be able to negotiate a better deal than you can. Furthermore, the debt settlement industry has its fair share of con artists, rip-offs, and scams, which is why many people choose to try it on their own first. Debt settlement can adversely impact your credit score, making it more difficult to borrow money at affordable interest rates in the future.
Whether you use a professional or not, one of the key points in negotiations is to make it clear that you’re in a bad position financially. If your lender firmly believes that you’re between a rock and a hard place, the fear of losing out will make it less likely that they reject your offer. On the same note, if you’ve been making your minimum payment (or more) on time every month, you will look like someone who is attempting to walk away from your debt obligations. Your debt settlement offers should always be directed toward companies with which you’ve fallen behind on your payments.
The Negotiating Process
Start by calling the main phone number for your credit card’s customer service department and asking to speak to someone, preferably a manager, in the “debt settlements department.” Explain how dire your situation is. Highlight the fact that you’ve scraped a little bit of cash together and are hoping to settle one of your accounts before the money gets used up elsewhere. By mentioning the fact that you have multiple accounts on which you’re pursuing debt settlements, you’re more likely to get a competitive offer. Last but not least, once you’ve finalized your debt settlement with your lender, be sure to get the agreement in writing. It’s not unheard of for a credit card company to verbally agree to a debt settlement only to turn over the remaining balance to a collections agency. Be sure the written agreement spells out the amount you have to pay in order to have your entire balance excused from further payment.
Commercial Debt Management
No matter what industry you work in, economic fluctuations can have a direct impact on your company’s bottom line. As such, your company may find itself straddled with a large amount of debt that is difficult to pay off. When managing corporate debt becomes more of a priority than the company’s profitability, many look to the protection they believe bankruptcy can provide. Although bankruptcy does offer a certain amount of protection, its effects are far more destructive than companies expect. Not only is it an expensive process, but it also ravages a company’s credit while also discrediting them in the face of vendors and creditors. Fortunately, at Business Capital, we offer a number of effective business debt negotiation, commercial restructuring and debt management solutions all designed to help companies return to profitability. When it comes to excessive commercial debt, the first priority is to get creditors to stop calling. This requires skillful business debt negotiation through which some form of payment plan or settlement is agreed upon. For over 10 years, our experts have honed such business debt negotiation skills, helping countless companies come to terms that were beneficial to both parties. Imagine paying as little as two to three percent of your company’s debt a month. Some companies are wary of turning their commercial debt management over to an outside company because they feel as though they are relinquishing a certain amount of control.
Negotiating Debt Settlements When You Go Out of Business
When a business closes, it usually has a good-sized pile of debts—to landlords, suppliers, utilities, service providers, and possibly a bank or private lender. After you notify these creditors of your upcoming closure (which can limit your liability), you’ll want to make plans to either pay these bills in full, settle them for less than full payment, or consider filing for bankruptcy. The fourth possible approach—ignoring your debts and hoping your creditors will ignore you—might be tempting, but don’t go that route. It will probably result in your spending the next couple of years hounded by collection agencies, repo people, lawyers, and lawsuits.
Negotiating Deals on Your Business Debt
Assuming you can’t pay all your creditors in full, the question becomes: How little will they settle for? As you might guess, it depends on the type of creditor, the legal details of the debt, and the attitude of the creditor. For example, if your business is an LLC or corporation without any personally guaranteed debts, a creditor will know that it doesn’t have the option of collecting from you personally, so it may be more willing to accept a small portion of what your business owes as complete payment. But if you owe a debt personally, or worse, a friend or relative consigned for it, the creditor has much more leverage. But no matter what the legal status of your debts, in our experience, if you can pay 30% to 70% cash on the barrelhead, it’s worth trying to settle them. Many creditors, knowing that they will have a hard time collecting the debt once you are out of business, may agree to settle your debt for 50, 60, or 70 cents on the dollar—or even less if you hire a lawyer to negotiate for you. Keep in mind that it won’t help you much to settle one or two small debts for a reasonable amount while not being able to settle larger ones. So it might make sense to tell your creditors that your offers are contingent upon all of your creditors agreeing to settle their debts. If you can’t pay all (or most) of your debts, consider bankruptcy. Bankruptcy lets you wipe out debts you have no hope of paying and if your business owes a pile of debts it can’t pay, bankruptcy could offer the fresh start you need. To decide whether bankruptcy or a bankruptcy-like alternative, such as an assignment for the benefit of creditors, is your best course of action.
Prioritizing Your Debts
First, if you’ve pledged an asset that you own personally as collateral, and you want to keep it, you’ll want to pay that debt first. You should then pay:
• any wages and benefits owed to employees, and
• loans for which you are personally liable (in particular, court judgments).
If there is money left over, then you can pay suppliers, credit card companies, lease deficiencies, and bills for random business expenses—advertising, travel and entertainment charges, dues and subscriptions, and repairs and maintenance. Let’s look at how you might handle each type of creditor.
Negotiating with Secured Creditors
Before you turn over any property to a secured creditor, try to negotiate with the creditor to release you from owing a deficiency (the difference between what you paid the creditor and what you owed on the lease or contract). If you aren’t able to negotiate a release you and you owe the creditor money, the deficiency is now like any other unsecured debt (it’s no longer secured because you returned the collateral).
Negotiating with Unsecured Creditors
After you notify your unsecured creditors that you are going out of business, they will start calling you, demanding to be paid. Often it’s best simply to explain that you are preparing as fair a settlement offer as you can and will be in touch. Even if it takes a few weeks to be sure how much you owe and how much cash you have to divide among your creditors, it’s worth the time to get it right. After you’ve collected outstanding A/R and sold off inventory and equipment, you should have at least a small amount of cash to use to discuss settlements. If you have just a few creditors, you can explain your terms personally or by phone. Explain that your business doesn’t have the money to pay the creditor in full but that you can offer a partial payment to settle the debt. If the creditors accept, great. Get each creditor to sign a release for the entire amount in exchange for your partial payment, and you’re done. The release is critical without it, you have no proof that the debt has been satisfied. Creditors could sue you or the business for the remainder of the debt, which would be expensive and time-consuming to defend, even if you end up not being liable for the debt. If you have more than a few creditors, offering a settlement in writing is often your best course of action. In your letters, spell out what you can pay as settlement of the debt in full, that you’re offering each creditor the same percentage, and that you’ll need all creditors to agree to sign a settlement releasing the debt before you can make the payments. If some creditors want to negotiate for substantially more or are threateningly uncooperative, it’s time to involve a lawyer. This will immediately raise the seriousness of the negotiations, because the lawyer will be able to convincingly let the creditors know that you may file for bankruptcy if settlements aren’t reached. Creditors know that the costs and delays inherent in bankruptcy would mean they will almost surely receive less than you are offering and they wouldn’t get the money for many months, so most will accept your settlement. A bankruptcy lawyer can also advise you on whether or not it makes sense to fully pay a creditor who refuses to accept less. Similarly, if a creditor makes a request for payment that you dispute, a business attorney can tell you what your next steps should be. Debt forgiveness can be taxed as income. If creditors agree to settle your debts for less than the amount you owe, the IRS and state tax agencies may view this debt forgiveness as taxable income. (In other words, you don’t have to pay the money, so it’s like getting the same amount as income.) This could result in your actually having positive taxable income, rather than an operating loss, in the year you close. Owners of corporations and LLCs won’t be personally liable to pay these taxes, but sole proprietors and partners should talk to a tax adviser to see whether this income can be applied to previous years’ net operating losses or otherwise wiped out.
Debt Settlement Companies
Debt settlement programs typically are offered by for-profit companies, and involve the company negotiating with your creditors to allow you to pay a “settlement” to resolve your debt. The settlement is another word for a lump sum that’s less than the full amount you owe. To make that lump sum payment, the program asks that you set aside a specific amount of money every month in savings. Debt settlement companies usually ask that you transfer this amount every month into an escrow-like account to accumulate enough savings to pay off a settlement that is reached eventually. Further, these programs often encourage or instruct their clients to stop making any monthly payments to their creditors.
Debt Settlement Has Risks
Although a debt settlement company may be able to settle one or more of your debts, consider the risks associated with these programs before you sign up:
• These programs often require that you deposit money in a special savings account for 36 months or more before all your debts will be settled. Many people have trouble making these payments long enough to get all (or even some) of their debts settled. They drop out the programs as a result. Before you sign up for a debt settlement program, review your budget carefully to make sure you are financially capable of setting aside the required monthly amounts for the full length of the program.
• Your creditors have no obligation to agree to negotiate a settlement of the amount you owe. So there is a chance that your debt settlement company will not be able to settle some of your debts even if you set aside the monthly amounts the program requires. Debt settlement companies also often try to negotiate smaller debts first, leaving interest and fees on large debts to grow.
• Because debt settlement programs often ask or encourage you to stop sending payments directly to your creditors, they may have a negative impact on your credit report and other consequences. For example, your debts may continue to accrue late fees and penalties that can put you further in the hole. You also may get calls from your creditors or debt collectors requesting repayment. You could even be sued for repayment. In some instances, when creditors win a lawsuit, they have the right to garnish your wages or put a lien on your home.
Beware of Debt Settlement Scams
Some companies offering debt settlement programs may engage in deception and fail to deliver on the promises they make — for example, promises or “guarantees” to settle all your credit card debts for, say, 30 to 60 percent of the amount you owe. Other companies may try to collect their own fees from you before they have settled any of your debts a practice prohibited under the FTC’s Telemarketing Sales Rule (TSR) for companies engaged in telemarketing these services. Some fail to explain the risks associated with their programs: for example, that many (or most) consumers drop out without settling their debts, that consumers’ credit reports may suffer, or that debt collectors may continue to call you.
Avoid doing business with any company that promises to settle your debt if the company:
• charges any fees before it settles your debts
• touts a “new government program” to bail out personal credit card debt
• guarantees it can make your unsecured debt go away
• tells you to stop communicating with your creditors, but doesn’t explain the serious consequences
• tells you it can stop all debt collection calls and lawsuits
• guarantees that your unsecured debts can be paid off for pennies on the dollar
Here are some simple guidelines on how to settle your debts by yourself:
• Know the law: There are a lot of free legal resources online and in your area you can consult. Get to know Utah’s and collection law before you start negotiating.
• Contact your creditor: Then contact your creditor and let them know you want to settle your debts. Convince them that you cannot continue making your current monthly payments and that you might end up in bankruptcy.
• Offer a lump-sum settlement: Whenever you negotiate with the creditors, try and offer a lump-sum settlement. Creditors are more likely to accept your proposal if they are sure they can get the agreed on amount. If you can’t afford to make a lump-sum settlement, try and get the creditor to agree to a repayment plan.
• Make sure your creditor reports your debts as “settled”: Once the settlement process is over, make sure your creditors report your debts to the Credit Bureaus as “settled” or “paid”.
Free Initial Consultation with Commercial Debt Negotiation Lawyer
It’s not a matter of if, it’s a matter of when. Legal problems come to everyone. Whether it’s your son who gets in a car wreck, your uncle who loses his job and needs to file for bankruptcy, your sister’s brother who’s getting divorced, or a grandparent that passes away without a will -all of us have legal issues and questions that arise. So when you have a law question, call Ascent Law for your free consultation (801) 676-5506. We want to help you!
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States
Telephone: (801) 676-5506