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Business Line of Credit Debt Settlement

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Betsalel Cohen
UpdatedMay 16, 2024
Key Takeaways:
  • A creditor is not required to notify the debtor when charging off an account.
  • Hire a debt negotiation firm if you are not a born negotiator.
  • Consult with a bankruptcy attorney to learn if bankruptcy is a viable option.

I cannot pay my business line of credit. What are my options?

I received a $50K unsecured business line of credit from Wells Fargo in 1994 for a business established in 1987 - which closed in 2005. This line of credit helped me to grow the business and keep afloat during the lean years, but I found it impossible to stay in operation with the economy as it was. I kept current on payments until 4 months ago after they had jacked up the interest rate and added fees for over-limit and late charges making it impossible to make payments. I tried to contact someone at the bank early on to make some concessions - I always felt it was important to pay my debt. I wasn't able to reach anyone to talk to - all they wanted was for me to make a payment. I finally stopped paying - hoping to be contacted for reasonable payment schedule. I received a call on Monday stating that the account was charged-off. I never received any written notification that this was happening. I was offered a settlement -24,500 of a $58,000 balance (which includes interest and fees) - but had to decide in three days. Full payment of this settlement had to be paid by end of this month. Period. In these last two day, I've tried desperately to find ways to make this payment - but with the consequence of a 1099-C and the penalties on taking out of my meager SEP IRA - there is no way I can come up with that amount in less than a month. I told the rep in Recovery today that I couldn't come up with full payment in a month and didn't know how much I could come up with. I tried to negotiate something - she seemed unwilling to work with me. She told me she was sending it to WF Legal (as opposed to a 3rd party) and that I should contact a third-party. Can you tell me what I should expect now?

The 40-cents-on-the-dollar offer from Wells Fargo is a good one — if, as you mentioned, you could afford it.

I see two solutions for your $58,000 business line of credit debt. Before I discuss your options, let us define several terms and discuss your rights and liabilities.

Business Line of Credit

A line of credit gives you the right to draw on funds up to a credit limit. For a business, this type of loan helps to finance short-term working capital needs, such as inventory purchases or to pay operating expenses. A line of credit is appropriate for businesses with seasonal operating expenses or variable working capital demands. A line of credit is not appropriate for large long-term investments such as buying property, new equipment, or fixed assets.

Generally speaking, a business line of credit is unsecured debt. Unsecured debts are not tied to any asset, and include most credit card debt, bills for medical care, signature loans, and debts for other types of services. However, a business line of credit can be a secured debt, which would be tied to an asset such as fixtures, equipment, or inventory.


A charge-off does not mean a debt is forgiven. When a debtor stops paying on a debt, a creditor will attempt to contact the debtor on the telephone and via the mail. When the number of days since the most recent payment reaches 120-180 days, the account is no longer considered current and the creditor is required by generally accepted accounting principles and federal guidelines to charge-off the debt. Charging-off a debt does not mean the debtor is no longer responsible for the debt, or that collection efforts cease.

The charge-off date has almost nothing to do with the statute of limitations for debts or when a debt must be removed from a credit report. At the charge-off point, the creditor will transfer the debt to a late-accounts department, or has the option to sell the debt to a collection agent. The creditor is not obligated to notify the debtor the account is charged-off. The collection agent will buy the debt at a discount. However, the collection agent has the right to collect the entire balance due plus interest. Charge-off is sometimes called write-off.

Settlement Offer

Debt settlement, also called debt negotiation, is a process by which creditors (the lenders) agree to forgive a part of a balance, saving the debtor (the borrower) up to 60% of what was owed. The debtor must pay the new agreed-upon sum only and no more. In some cases, the debtor may continue to make monthly payments until the newly agreed balance is paid. In others, the debtor must make a lump-sum payment. The forgiven balance is considered taxable income by the IRS and is noted on a 1099-C. The settlement may be noted on the debtor’s credit report.

The settlement offer is a result of a negotiation. You can negotiate directly with your creditors, or hire a debt settlement service to negotiate for you. In most cases, professionals will have better luck negotiating a settlement than individuals. They know how much each creditor is willing to settle and what terms they will agree to. They also know which creditors will not settle debts. Creditors are not required to negotiate, so be prepared to do some strong negotiating if you attempt it yourself.


If you cannot reach a settlement agreement, then the creditor may decide to file a lawsuit against you for breach of contract. If it takes this route and you do not mount a viable defense, the creditor will be awarded a judgment. The judgment-creditor will then have the legal means to demand a wage garnishment (if allowed in your state), account levy, or a lien on your real or personal property. See the resource Collections Advice to learn more.


As implied above, your best course of action is to continue negotiations with your creditor, Wells Fargo. Expect Wells Fargo (or any other creditor) to negotiate aggressively and set seemingly arbitrary deadlines. Debt collectors and other negotiators have incentives to settle cases quickly and for favorable amounts. For this reason you may be able to negotiate a better deal at the end of the month than at the beginning.

You may want to hire a debt settlement negotiation firm to handle the heavy lifting for you if you are not a born negotiator.

As you continue with your negotiations, consult with an attorney in your state who has experience in bankruptcy. Use the information you learn from this consultation in your negotiations as leverage, and explain that although you would rather not take this step, the consequences of a failed negotiation will result in Wells Fargo receiving little or nothing in the bankruptcy discharge.

I hope this information helps you Find. Learn & Save.



Dealing with debt

Debt is used to buy a home, pay for bills, buy a car, or pay for a college education. According to the NY Federal Reserve total household debt as of Q4 2023 was $17.503 trillion. Auto loan debt was $1.607 trillion and credit card was $1.129 trillion.

According to data gathered by from a sample of credit reports, about 26% of people in the US have some kind of debt in collections. The median debt in collections is $1,739. Student loans and auto loans are common types of debt. Of people holding student debt, approximately 10% had student loans in collections. The national Auto/Retail debt delinquency rate was 4%.

Each state has its rate of delinquency and share of debts in collections. For example, in North Dakota credit card delinquency rate was 3%, and the median credit card debt was $474.

Avoiding collections isn’t always possible. A sudden loss of employment, death in the family, or sickness can lead to financial hardship. Fortunately, there are many ways to deal with debt including an aggressive payment plan, debt consolidation loan, or a negotiated settlement.



MMark, Oct, 2011
I have been negotiating with Wells Fargo over a $50,800 business line of credit debt. I stated off offering them 10% on the dollar. The countered with 80%, then said they would not consider anything less than 50%. However, I was told that to get relief of $25,000 or more I would have to send them serveal years of business and personal tax returns, and that they would "see" if I was eligible for that size of a writoff. Is this just a negotiating ploy, or would they really have such a limit?
BBill, Oct, 2011
You need not disclose your finances to the negotiator on the other side of the table, but then again, your opponent need not negotiate with you either. If your financial situation is dire, you have no reason not to make a full disclosure. The negotiator across the table from you can make an argument to his or her boss and say, "Hey, $5,080 is all we can get from this person and holding out for $40,000 is a futile. Let's take five grand and move on to the next file." Without a disclosure, you are leaving the negotiator in the dark, and will continue to push because he or she is not sure of your assets.
AAdam, May, 2014
Why will the collection agency go after an individual business owner for a business line of credit (unsecured), when the corporation defaults or is out of business?The so called "Personal Guaranty" that a president or manager has to assume for a corporation's debt doesn't make any sense. Can you shed some light on this?
BBill, May, 2014
You ask a hypothetical question, so I'll share a vague, general answer. Much depends on how a business is organized. Is the business a: • Sole proprietorship • Partnership • Some form of corporation

If the business is a form of corporation, is it set up properly and according to state law? Is it adequately funded? Did the company officers follow the corporation's charter and state law in operating the business. Is the corporation just an alter-ego for a shareholder?

Much also depends on the contract the officer or owner of the business signed. If the business is a form of corporation, did he or she promise to take liability for the loan if the corporation defaulted?