How Much Does Business Debt Settlement Cost? 6 Steps to Build the Cash Budget

There are two cash outflows when settling debt: the settlement and the firm’s fee. The firm’s fee is typically somewhere between 15% and 25% of the debt that is being enrolled. So, for example, if a $10,000 debt is settled for $5,000 and the firm charges $2,500, the total cost is $7,500. So when you budget for the debt settlement, be sure to budget for both amounts of cash, and not just the amount of the settlement payment. There are two more costs to plan for: the tax that may be owed on the forgiven debt, and the cost of waiting too long. There are six steps to building the cash budget.

Step one, make a list of your debts and decide which can be settled. A debt settlement may only be an option for unsecured debt, because lenders are less willing to settle a debt that is secured. If you have debt that is secured with collateral that can be seized and sold, lenders can potentially just take it back from you, reducing the incentive to settle. Things like credit card, medical and personal loan debt are usually good candidates for settlement.

SBA loans are structured differently from these debts, so negotiating with the private lender is often easier than negotiating with the SBA. If you have an SBA loan and are having trouble, contact the private lender as soon as trouble starts, before the loan goes into default. After default, an offer in compromise to the SBA typically requires closing the business and selling collateral.

SBA loans are often issued with a personal guarantee from each owner with 20% or more ownership. This means each guarantor is personally liable for the whole balance of the loan, not just for a share of it. Each may settle the debt based on the guarantor’s own ability to pay, rather than the ability of other guarantors to pay.

Once you’ve determined which debts can be settled, the next question is what the settlement payment itself will be. The SBA, for example, generally won’t consider an offer in compromise under $5,000 unless you can document hardship. An offer must reflect what the SBA could realistically collect by garnishing or seizing assets. If you have assets, an extremely low offer is unlikely to be approved.

When you send in an offer in compromise to the SBA, the SBA will decide whether or not to approve the offer based on the paperwork you send. Form 1150 is the actual offer, and the hardship is stated on that form, but the SBA also wants a Form 770, which is a list of your personal finances. You also have to show where the cash for the offer comes from. The process can take months, and there is no guarantee that an offer will be approved.

After you come to an agreement about the amount of the settlement, the next thing to figure out is how to pay it. There are two ways to do it: In a lump sum, or in installments. Usually, the lump sum payment is due within 90 days of the settlement being accepted and is more likely to be approved. Installment plans are usually up to 36 months, which reduces the monthly outflow but makes it more difficult to get the debt settlement accepted. If a monthly installment offer is made and accepted, miss a payment and the full original balance, minus any payments made, could come back.

The settlement payment is not the firm’s fee. The firm’s fee is on top of that. Some firms charge a percent of the savings instead of a percent of the debt being enrolled.

There is an FTC phone sales rule that says that consumer debt relief firms can’t charge a fee until after one of your debts is settled, you agreed to settle that debt, and you made a payment. A word of warning, though. The rule specifically exempts calls made to a business, so do not assume that the rule applies if your call was about settling a business debt.

The next step is to spread the cash out over time. Usually, a professional settlement program takes anywhere between three and four years. So you will save up the funds gradually over this time.

Step five is to set money aside for taxes. The lender that cancels $600 or more of debt must file Form 1099-C. A sole proprietor reports taxable canceled debt on Schedule C line 6. You can exclude canceled debt from your income up to the amount liabilities exceeded assets using the insolvency exclusion on Form 982.

Step six is to price in the cost of waiting. Usually the SBA allows 60 days to respond to the demand letter. Miss the deadline and the SBA can send the debt to Treasury for collection. If this happens, the options narrow because Treasury can garnish 15 percent of disposable pay and take your tax refunds, and there is no need to go to court for them to do that. Its collection fees may be added to the debt.

A word about Covid EIDLs. Since September 2025, if your Covid EIDL is delinquent, the SBA will send your debt to Treasury’s Cross-Servicing Department for collection, and, according to Treasury, they can’t send the debt back to the SBA.

Putting the budget together can be a complex process. It’s best to assemble your profit and loss statement and balance sheet, your bank statements, receivables and payables, and then check to make sure all of the numbers are consistent. An accountant can help with this. Then add together the settlement, fee and taxes and that is your total cost.