According to the Bureau of Labor Statistics (https://www.bls.gov/bdm/entrepreneurship/bdm_chart3.htm), an astonishing 50% of all new businesses fail by the time they enter their fifth year. Due to inexperience, small business owners often make business projections that are overly optimistic and fail to control their expenses. The shortfall in working capital is usually met with credit cards and personal loans without paying a thought regarding how the repayments will be made. At one point in time, it becomes clear that making the monthly payments on time is impossible and the business owner is well and truly caught in a Debt trap. If tactics like scaling down business operations, drastic cost-cutting, debt consolidation do not work out, it may be time for business owners to consider Debt Settlement. However, debt settlement is not a process that is easily understood, and due to the many myths and misconceptions, there is usually a cloud of confusion that prevents business owners from making smart decisions to resolve their debt crisis. Some of the top myths and misconceptions dispelled:
Debt Settlement Is the Only SolutionEven though debt settlement has been advertised hard and long as the ultimate solution for revolving a debt crisis, it is not necessarily the only one. There are some methods for tackling outstanding debt that business owners are not able to repay as scheduled. The first thing an entrepreneur should attempt is to strengthen the cash flow by scaling up operations without spending much more. They can also try cost-cutting and consolidation of existing debt so that they can make the monitoring and repayment easier and less expensive. Credit counselling is also a viable proposition for getting your business finances back on track through proper money management methods. However, debt settlement is the one route by which, you can attempt to drastically slash down the amount of outstanding debt and achieve financial freedom.
You Need to Engage A Professional Debt Settlement CompanySettling debt entails convincing the creditors of the business that the current business operations do not permit the loan to be repaid as per schedule and unless they agree to forgive a large part of the debt, the only way out for the business owner is to file for bankruptcy. It should be clearly understood that the debt settlement process is extremely time consuming and involves hard negotiation as well as strong skills of presentation and persuasion. There is no reason why any business owner who has the necessary expertise and the time to devote to the process should not be able to undertake debt settlement on his own. However, the hard reality is that business owners are typically technocrats who neither have the commercial acumen nor the time on their hands required for the protracted negotiations with individual creditors. This makes engaging a professional debt settlement company a viable alternative even if there is a cost associated with it. According to the American Fair Credit Council (AFCC), 95% of debt settlement clients receive savings more than fees, and on an average, debt settlement saves consumers $2.64 for every $1 in prices paid.
You Can’t Exit A Debt Settlement ProgramWhen a business owner enrols into a debt settlement program, he authorises the company to negotiate with his creditors to arrive at terms that will enable him to discharge his dues at levels that are substantially lower than the amount owed to them. Entrepreneurs should bear in mind that the debt settlement company can only negotiate to reduce the amounts of unsecured debt and not debts that are backed by collateral like car loans and mortgages. Under the provision of the Federal Trade Commission rules that came into effect in 2010, customers can only be charged fees by the debt settlement company after it has negotiated the settlement terms and the customer has agreed to such negotiated terms. Further, to this, the settlement must have been ratified by the customer by making at least one payment to the concerned creditor. With such a system in place, customers are safeguarded against unscrupulous companies that try to scam the customer by asking for upfront fees and not doing any work after that. To find the most reliable debt settlement companies read the many debt settlement reviews available online. Under the applicable rules, any customer can withdraw from the debt settlement for any reason whatsoever without having to pay any penalty. The customer is also entitled to reject any settlement offer made by the creditor after negotiation by the debt settlement company without giving any reason for doing so.
You Can Rest Easy After the Debt Has Been SettledSure, having your debt reduced significantly can be a great relief. However, there are inevitable consequences that you should expect. The first and perhaps the most enduring effect is the negative impact on your credit score. The debt settlement company will invariably ask you to stop paying your card company and deposit the money in a separate account created for this purpose. Not paying the monthly dues will hurt your credit score as will the report by the card company to the credit agencies about the settlement. If the debt is reported as settled, the entrepreneur can expect the impact to remain for as long as seven years. This will make further loans and new credit card applications difficult. The other effect of debt settlement is that the outstanding debt will continue to rise in the period that you have not made any payments due to the interest and late payment penalties. You will also have to reckon with the fact that if the forgiven debt exceeds $600, you are liable to pay tax to the IRS so the real savings will be diluted substantially.
ConclusionThe decision to proceed for debt settlement should be taken after careful consideration of the benefits and disadvantages. Typically, before going in for debt settlement, it is advisable to consider other ways like debt consolidation and financial counselling. For best results, deal with a reputed settlement company that will act in your best interest and not try to scam you with unnecessary fees and charges.
Marina Thomas is a marketing and communication expert. She also serves as a content developer with many years of experience. She helps clients in long-term wealth plans. She has previously covered an extensive range of topics in her posts, including business debt consolidation and start-ups.