Is debt crippling your business? Do you feel like you can close shop at any time? Well, fortunately, you aren’t alone. With the current state of the economy, most businesses are struggling and sorry to say that things are bound to get worse if you don’t get a debt management option or plan that will ease your financial burden. One such solution is debt settlement.
Debt settlement is a debt management or relief option that involves you contacting a debt settlement company. The debt settlement company will negotiate with your creditors on your behalf. The reason for the negotiation is to get the creditor to accept an amount lower than the total amount currently owed. Upon agreement, the creditor gets paid a lump sum amount. This is the agreed amount.
Note that your creditor will not accept less than the owed amount if they have reason to believe that you are in a position to repay the owed amount in full.
How does it work?
The main aim of debt settlement is to reduce the amount of money you owe. It is often applicable to unsecured debts.
There are three ways to go about it.
One: Using a debt settlement company.
You will sign up with the debt settlement company and open a special account where you shall deposit money monthly. The creditor stops harassing you once the debt settlement company contacts them.
A figure worked out by the settlement company will guide in knowing how much you need to have in the kitty before you pay off the debt. When the money reaches a predetermined amount, the company will reach out to creditors and pay the amount owed (less than the original) and you’ll be debt-free. The company determines whether the amount in the special or dedicated account is enough and if it is, they will begin negotiations with your creditors.
Option two: Using a debt settlement lawyer
If you opt for a debt settlement lawyer, you should take note of their fees and the percentage of debt that will be eliminated. This may be expensive.
Option three: Do It Yourself
If you are falling behind in business and maybe personal debt, it won’t hurt to reach out to your creditors. It is a tough call but, if you are genuine, persistent, and willing to work with them, then you will come to an agreement. Before negotiating, learn the tricks of the game as well as the documents required by the creditor.
You should not pursue this option if you are reactive, meek, and unwilling to put in the effort and time needed in the negotiation process.
Who Should Consider Debt Settlement?
Persons facing legitimate financial hardships
Most of the time, debt settlement involves reaching to the human side of your creditors. It is their money and you need to present them with genuine reasons why they should allow you to pay less than what you owe.
Legitimate and common reasons for financial hardships include the death of a business partner, failure in business investment, or unemployment where your salary supplemented your business income. To break it down further, you only qualify for a debt settlement plan if it’s clear that you are unable to repay the debt.
Persons with the right type of debt
Debt settlement will only work if you’rechecking with unsecured debt. You will not get a debt settlement plan if you are ridden with secured debts like mortgage, car loans, or any other debt that has collateral.
Steps you should take before applying for debt settlement (using a debt settlement company)
- Check the Better Business Bureau to determine the trustworthiness of the company. Companies with several complaints are a no-no!
- Avoid companies that ask for money in advance. The online community is full of illegitimate businesses and people. Be careful with who you sign up with. Look up debt settlement reviews online to be safe.
- Get structured fees. Structuring must be on a percentage basis; a percentage of the eliminated debt and not a percentage of the total debt. This is an effective strategy that gets the creditor to reduce your debt.
- Steer clear of companies promising to challenge the debt and declare it invalid. Most of these cases blow up on your face and come with severe consequences against you.
What are its benefits and reasons that should push you to settle?
1. You have unsecured debt
As mentioned above, debt consolidation only works for unsecured debt. So, it is the most befitting option if you have bundled up a big amount of unsecured debts, credit cards or not.
2. Default accounts
Is your debt by default? If so, then it means that you, just like millions of others, lack a means of repaying the debt. If you show your creditor your financial inability and the willingness to pay the pending amount, there is a high chance that the creditor will let you off the hook on the remaining portion.
3. Only option
If faced with a sudden financial need that affects your ability to pay off the initial debt, you will have to get a debt settlement plan. This could be your only option since you cannot qualify for debt consolidation.
4. It’s the last option before a bankruptcy declaration
Filing for bankruptcy is an ugly debt solution and should be the last resort in debt relief. Since bankruptcy hinders future financial opportunities, you shouldn’t just jump at it. Yes, bankruptcy clears all your debt but it declares to the world your financial inadequacies. You will probably lose your assets or the bank can decide to put you through a repayment plan. Either way, this stays on your record for at least 10 years.
Therefore, if you wish to enjoy the benefits of debt reduction or not to suffer the effects of bankruptcy, debt settlement is the only way to go.
5. Debt settlement offers great relief from all your overwhelming business debts.
6. Debt settlement gives you the opportunity to repay all your debt in a shorter duration.
7. The incessant and annoying calls, letters, and emails from your creditors cease as soon as you have a debt settlement plan. This gives you peace of mind.
Finally, which are the risks of debt settlement?
Unfortunately, debt settlement companies charge high fees. The fees aren’t applicable to your debt but to the agency’s account, so you may part with a lot of agency fees.
You may still have to pay taxes for the reduced debt. This is because the creditor has to notify the IRS of the reduction.
Lowers your credit score
Since your creditor will report the reduction to the credit bureau, your credit score will be affected. This will also affect your future employment opportunities and credit availability.
Debt settlement is an effective debt control system, especially when you are financially constrained. Your inability to make the initial repayments as stipulated may make you a candidate for bankruptcy (Chapter 7 or Chapter 130) and settlement proves to be the only way to avoid this path. Note that your secured business loans, as well as student loans affecting your business finances, do not qualify for a debt settlement plan.