Debt settlement is often considered the only way out of debt, especially when you have creditors up to your neck and a bank account that has fewer zeros every time you look at it. It is the option that may give you the chance to pay less money compared to what you owe a creditor or creditors. It is applicable to unsecured debts and the other option after settlement is filing for bankruptcy.
In debt settlement, it is always advisable for you to work with a debt settlement company. The debt settlement company takes charge of the situation by instructing you to stop making payments on your bills. So, instead of paying the creditor, you deposit money into an account created by the debt settlement company.
Of course, a target is set at the start. So, when you have raised enough money or reached the set target, the settlement company negotiates with the creditor. The negotiations will have arguments based on your inability to pay up the full amount due to financial difficulties. Since bankruptcy is the last option after debt settlement, your creditors will most likely take the lower offer – they may lose everything if you file for bankruptcy.
The debt settlement company will ask you to relinquish your accounts with the creditor as they try to negotiate with the creditors. Creditor debt is payable in a lump sum.
The difference between debt settlement and debt consolidation is that, there is no loan and all your bills are piled into one. Under consolidation, you owe your creditors the full amount and you are in a position to make the payments. In the settlement, you do not have the financial capacity to pay the whole amount, so you are using a debt settlement company to get the creditors settle at a lower figure.
Debt settlement is therefore an effective debt management system when all others fail but you don’t wish to file for bankruptcy. Unfortunately, it comes with risks. These risks include:
- High fees
The debt settlement company expects you to pay up their service fees. At the same time, these companies charge a percentage of the eliminated fee. There could also be late or default payment fees.
- Tax implications
If the creditor(s) agrees to settle with you, their financial reports will show the reduction in debt owing. This is an expense to the creditor and an automatic income to you. So the IRS will expect you to make some payment to their account. Keep in mind that you cannot escape the IRS because the creditor must divulge such details as a requirement of the law.
- Lower credit score
Debt settlement will negatively affect your credit score. The details of your debt see the light in the books of the leading credit bureaus. So, naturally, your inability to make full payments will lower your credit score.
- Falling for scams
Unfortunately, the biggest risk of debt settlement is falling for a scam. Though there are stringent laws on these unscrupulous exploiters, a few fall off the cracks. To be safe, choose a company that provides all information on their fees and application procedures. Stay away from companies or sales agent that are too aggressive or the ones asking for payment upfront. Check debt settlement reviews of companies before signing up.
Are there alternatives to debt settlement?
Yes. They include:
If your financial situation is dire but you can salvage it, talk to a credit counselor. The counselors will advise you appropriately and even get you into a debt management program with your creditor. There are several not-for-profit organizations offering free and professional credit counseling services. Call them. This is a perfect solution if your business has very low profit margins.
Under a debt management plan, you will still pay the full amount but with reduced monthly repayments. The good thing about credit counseling is the fact that it doesn’t hurt your credit score as long as you make all your payments in time. Credit counseling fixes your credit when you are finished making the debt repayments.
One of the leading causes of high debt is poor financial planning and spending. Does your company have to employ all those employees? Are your monthly expenses reasonable? By taking a closer look at your expenses, you will realize that there are hooks which you could pull out to save more. Something like high-end Cable TV in the office isn’t necessary.
If your personal finances are leeching your business income, make amends. Cut down on unnecessary luxury spending and if you can, take a second job. This way, you won’t have to ‘borrow’ money from your business.
Talk to your creditors and ask for a waiver of penalties and late fees
The biggest chunk of your debt is probably the high penalty fees or the late fees. If this is the case, talk to your creditor and ask for waivers. If they agree, you’ll find that you’ll be making lower and affordable monthly payments. This option will most likely work if you have a good record with the creditors.
File for bankruptcy
Bankruptcy is the last option in debt management. When you file for bankruptcy, it shows that you are at the end of the rope, though this strategy tarnishes your credit score and stays there for 10 years. It is still worth noting that this is an alternative that gives you a fresh start.
There are two ways to go about bankruptcy; Chapter 7 and Chapter 13. The Chapter 7 case is suitable for your business debt as well as other unsecured debts. The debts may be discharged in a matter of weeks.
While being in debt is a terrible thing, a few tweaks in your finances and taking on the right approach increases your chances of getting out of debt. There is no easy way around it. Find the best approach and more importantly, make financial planning and spending changes.
Note that debt consolidation isn’t an option here because debt consolidation works best for persons with the financial ability to repay their debts, but only in need of a way to manage the payments. Debt consolidation involves taking another loan to pay off the multiple bills. This leaves you with one consolidated loan. Apart from the lower interest rates, you will still remain responsible for your entire debt.