The pandemic has been very hard on small businesses, and many won’t survive. Our firm is offering a Covid Escape Plan, which allows business owners to wind-up their operations and close shop. As part of that process, we negotiate with creditors. Creditors can be landlords, vendors, franchisers, and/or banks. The goal is to reduce the liability owed by the business so that the business owner can cease operations without an impact on his or her personal finances.
I think there is a bit of a misconception about how the process of negotiating with creditors works. Many individuals believe that I can make a quick phone call and resolve the bill for pennies on the dollar. Unfortunately, that is never the case. Creditors can be very difficult to work with and rarely offer hefty discounts.
How much of a discount can we expect?
There is no exact figure as to the amount of discount you can expect. I find that it is much easier to negotiate large settlements, as opposed to small ones. For example, it would be much easier to negotiate a settlement for a business that owes $80,000 to their landlord than a business that owes $2,500 to a vendor. I have no idea why this is. I imagine it’s because the amount someone is collecting is a motivating factor towards settlement. If I owe you $80,000 and I offer you $40,000 today, that’s $40,000 in your pocket. You can do a lot with $40,000 so you might be tempted to take that offer. This is especially true when creditors often owe money to other people, which is frequently the case during these trying times.
Compare that to a circumstance where I owe you $2,500, and I offer you $1,250. There probably isn’t much you can do with $1,250 right now. You’re likely to hold out for the full amount because the risk is fairly low given the small amount owed.
Also, consider what a collections firm gets as part of the deal. Collections firms frequently take 33% or more of what they collect. Therefore, my $1,250 is only $825 – not an inspiring settlement.
As a general rule, I usually shoot to get a settlement of around 50% of what is owed. Sometimes you can do better, but it is rare. Normally, bills settle for 25%-50% off. Please understand, that figure may not apply to your business. Every case is different.
I also want to mention that discounts are usually only available when your business is actually struggling. If you’re doing ok but hoping to save some money, creditors can usually see right through that. They may ask for proof of your struggle if they sense you’re not being truthful. Remember, these people are almost never stupid, and, as a rule, I never assume they are.
If you make a reasonable offer and negotiate in good faith, you can usually reach a favorable settlement.
What does the process of settling bills look like?
My process differs depending on the number of bills outstanding. If you owe many different creditors, I usually start the process by sending letters to each creditor with our starting offer. This offer is usually pretty low, and the letter spells out why we’re struggling and how we owe a bunch of people.
If you only owe one creditor or that creditor is a sophisticated negotiator, like an attorney, I will call them. I can usually discuss the issue with them one-on-one and cut through a lot of the bullshit. That’s not to say they will negotiate a lower settlement; it just means that we can reach an agreement slightly faster.
Once I have made my initial offers, we usually have to wait for responses. Frequently, we’re dealing with middlemen who need to take the offer to their client or boss. Some people respond very quickly – say, in a week. But other organizations are extremely slow and can take two to three weeks to respond. Once we have a response, there is usually a bit of a back-and-forth until we reach a reasonable settlement. There is no magic to it. We just put in the time, working to get the creditor down to a number that makes sense to our client.
Once a settlement is reached, we need to prepare releases for each creditor. It is imperative that a release gets signed for each settlement. No checks get sent until the creditor releases our client from liability, in writing. Trust me, it makes everything easier in the end. The process of drafting and sending releases doesn’t take long, but we frequently wait a week or so for signature from the creditor.
The entire process usually takes four to six weeks to complete, depending on the number and reasonableness of creditors.
It also makes life a bit easier if you were current with your collectors prior to the slowdown. I find that people are much more willing to work with businesses that were good partners before the pandemic. If you have been avoiding bills for years, you probably won’t get much sympathy now.