FoodFindsAsia.com | To deal with small business debts you may feel that debt settlement is the most feasible option. However, right from the payment to the effects in your credit score you will need to know the cons first to balance it with the pros of debt settlement and then go ahead. It is also recommended that you weigh you other options before you finalize on settling your debts with your creditors.
Ideally, there are four basic factors apart from the risks that you should consider while you determine the best way to settle your business debts. These are:
- Payment: When an agreement is reached by the settlement company with your creditors you will make the payment from your savings account created earlier either in a lump sum or in installment payments. Ideally, the first settlement happens within three to six months.
- Cost: The debt settlement will collect their fees when your debt is settled because in 2010, the Federal Trade Commission has made it illegal for any debt settlement company to charge service fees upfront.
- Fees: The fees charged by the debt settlement company may vary from 15% to 25% of your total registered debt amount that you owe as well as the rules of the state you live in. Apart from that, you may also have to pay a monthly fee to maintain the savings account.
- Savings: You can save as much as 30% in debt settlement including its fees. However, this is applicable only when you stick to and complete the debt settlement program.
A lot of debt settlement reviewssay that a majority of debtors opting for debt settlement fail in the end as they cannot complete it due to several reasons including their inability to save enough money to settle their debts.
Risks of debt settlement
A debt settlement will come with serious costs and risksincluding:
- You can fail to keep up with the agreement reached for a new repayment if you fail to arrange for the money to deposit every month in your newly created savings account dedicated to accumulate the amount required to settle your debt.
- Your credit score will also be damaged and will plummet significantly because debt settlement means you will stop making payments on your outstanding debts to the creditors directly. That means late payments; accrued interest and other charges will continue to show up in your loan accounts. The creditors will inform the credit bureaus about it and all these will be recorded in your credit reports thereby causing your credit scores to drop significantly.
- Furthermore, there are also some risks in the future because each debt settled will be listed on your credit reports and stay there for seven long years from the date your loan account first became delinquent. This will not only hurt your credit scores but will also make your efforts of getting a loan in the future very difficult if not impossible.
- Add to that, while the debt settlement process or the negotiation is on you may still hear from your creditors or the debt collectors. Since there is no guarantee that your creditors will want to work with or agree to the terms requested by you or the debt settlement company, you may even be sued by your creditors during the process apart from being contacted by the debt collectors.
- Your loan amount will continue to rise due to the accrued fees and interest as it will stay delinquent. This unnecessary and additional interest and late fees will result in a higher balance that will make your life and finance incredibly difficult to manage should you fail to stick with the debt settlement program till its completion.
Lastly and most significantly, the cost of debt settlement may prove to be even higher as the forgiven debt amount will be considered as your taxable income by the IRS or Internal Revenue Service. The creditors will send a 1099-C form to you as well as to the IRS. However, there are few exceptions such as when you are insolvent meaning your liabilities exceed your total assets when your debts were being settled by the debt settlement company with your creditors, but exceptions does not break the rule.
Considering alternative options
With all these risks and other factors to consider, it is prudent for you to spend some more time to find some other alternative to debt settlement when you want to come out of the financially unstable condition. Be it your personal or business finance management, these alternatives are much better an option as these will save your credit score from being damaged and also save you some money and reputation of your business.
Furthermore, the fact that you will need to be diligent whether you go for debt settlement or any other approach to get rid of your debt makes it all the more feasible to try out these alternative debt payoff options.
- Debt management plan: You will be better off paying a nonprofit credit counseling agency to formulate a debt management plan and also help to improve your credit score in the process.
- Debt consolidation: If you consolidate your debts into one monthly payment and reduce your interest rate, you will pay off your debt faster. This process will also prevent your credit score from being wrecked.
- Bankruptcy: Bankruptcy is a process in which you resolve your business debts under protection from a federal court. A Chapter 7 bankruptcy will erase most of your debts within three to six months and wipe your slate clean. It will also allow you to protect your assets if that was pledged as a collateral security. It will stop calls from the collectors and also prevent the chances of you being legally sued. Though your credit score will suffer like debt settlement, but research shows that it rebounds quickly.
Lastly, go for DIY debt settlement especially if you owe a small amount of money to only one or a few creditors. This will save you time and money if you are successful in the process.