If your business is in trouble with debt, you need to seek help. If your bills keep piling up and you do not foresee how the payments can be made, debt settlement can be a great solution for you. According to an article in the Hufffington Post, before you can engage the services of debt settlement companies, you need to have a clear understanding of how they work and how they can help you.
Debt settlement is not the same as debt consolidation. It is important to note, however, that many companies tend to offer both solutions, which can be confusing to the layman. Here is a quick definition of both:
- Debt consolidation – With consolidation, all your debt is combined and then you take out one large loan, pay them off, and then make payments to the consolidator. Many times the monthly payment is lower and the interest is also reduced. This solution is often offered to those struggling with credit card debt or some other unsecured debt.
- Debt settlement – This is where the company, working on your behalf, negotiates with the creditors that you owe and offers to settle the debts owed for less than what they actually are. This is used when the debt is owed to one creditor but it can also work with multiple creditors if the debts you owe are substantial.
There are several pros and cons to each of these, but what you need to consider is how they can help you eliminate debt and also how they will impact on your credit score. For purposes of this article, the focus will be on debt settlement and how it can help you with your business debts.
Are You in Over Your Head?
There are several indicators that bankruptcy is just around the corner. They are:
- You are unable to meet your payroll obligations.
- Debt collectors are hounding you every day.
- You are behind on equipment lease payments.
- You can’t keep up with car or mortgage payments.
- You bank accounts, personal and business, are in the red.
- You are using your personal assets to get a business advance.
If this is how you are currently operating your business, it’s time to consider business debt settlement.
Advantages of Debt Settlement
- The one main advantage is that you end up paying less than what you actually owe. This makes it a great choice if you want to eliminate your business debt. This option works by negotiating with your creditor so that you can settle the debt for less than the actual figure owed. An example is if you owe a creditor $12,000, you can offer to pay $6,000 in one payment.
- Choosing to deal with the debt instead of trying to ignore your creditors means that calls will finally come to an end and you can have peace of mind.
- By settling with your creditors, you don’t have to worry about being sued.
- With time, your credit history will get better.
Most times the creditor has to consider the offer and then decide whether or not he will take it. If the offer is accepted, the payment is made and you repeat the process with all other creditors. You continue accruing charges in the form of interest and late fees, if they apply, until the settlement is finally agreed on.
Disadvantages of Debt Settlement
Some of the disadvantages may include the following:
- Long process – The timeframe usually runs two to three years before it can be settled. During this time, you may accrue penalties and late fees.
- Credit score impact – Even though you will be getting out of debt, the fact that you cannot pay the full debt appears on your credit score as a negative. According to an article in Forbes Magazine, it can take up to 7 years to remove this black mark from your credit report.
- Refusal by the lender may leave you liable to pay the full debt. It is imperative that you work with an experienced company that can help you negotiate with tough creditors. However, you need to remember that the creditor is under no obligation to accept your offer.
- Tax implications – Confirm with the debt settlement company whether the amount of debt forgiven is considered income, in which case you will need to pay taxes on it.
- Company fees – The debt settlement company will charge a fee to do the job. Luckily, what you will owe them will most likely be way less than what will be forgiven. Usually, the fee is a percentage of the final settlement.
Prior to going this route, you need to ensure that it is the very best solution for you. Many times those faced with bankruptcy will see it as the lifeline that it is. It frees you and the business from having to pay off large amounts every month that drain the business of cash flows. Then you can focus on building the business and making sales.
Why Get a Debt Settlement Company
Negotiating debt settlement requires experience. The company can help you know how to determine an affordable payment plan. You need to look at the income you are making and the expenses incurred by your business before figuring out how much you can set aside to pay off debt. The steps to take include the following:
- Can you pay a lump sum or do you need to make several payments? Usually, the creditor is looking to get most of the payment upfront so a lump sum is quite attractive.
- You can structure your payments to include a lump sum and subsequent installments until the full amount is settled. Just make sure that what you offer to pay is affordable for you.
- Many times when the offer is accepted, you are given a timeframe during which you should settle the amount. Make sure you comply with that timeframe.
Remember that there is always a possibility of a counteroffer. The company you work with will help you negotiate the counteroffers until you settle on an amount that works for both parties.