
A business can run into debt at times. In such a situation you as an owner of a small business may feel that if your outstanding balance is reduced it will be most helpful for you as well as your business. However, the true picture of debt settlement doesn’t appear to be as rosy as it may apparently seem. It is for this reason you will need to consider the pros and cons of debt settlement.
While negotiating for a debt settlement your primary objective is to reduce the rate of interest or even the outstanding balance. This is advantageous in the short term only as the long term consequences are much severe. That is why it is recommended that you take this route only when you find that declaring bankruptcy is the only other alternative path.
Advantages of debt settlement
When you consider debt settlement the most obvious benefit of it is that you repay less than the amount you actually owe to your creditors including the current principal, fees and interests. Your debt will then have a high chance to be gone for good. However, there are other advantages of debts settlement as well such as:
- Instead of several monthly payments you will have to pay one monthly payment thereby eliminating the need to juggle several monthly payments. This will in turn raise the chances of savings each month for future debt settlement as you will pay a reduced amount on the whole.
- You will not have to pay for the fees for your debts that you cannot settle. According to the rule of FTC, the debt settlement companies cannot charge you any fees on their futile efforts to settle your debts. That means they will charge you only on successfully negotiated reduced debts and not for all those debts taken up for settlement on your behalf. If they cannot settle any, they will not charge anything for it.
It is for this reason you are advised to hire the services of a debt settlement agency that has higher debt settlement ratings. If you work with such an efficient debt settlement company they will take care of several tasks that are involved in the debt settlement process on your behalf. They will make phone calls, deal with the details of your debts and negotiate you’re your creditors for debt settlement.
Disadvantages of debt settlement
On the flipside, debt settlement also has a few disadvantages as well. Some of the downsides of this process are:
- All your debts may not qualify for debt settlement. Actually most of the unsecured debts will qualify for debt settlement but all secured debts such as your mortgage, auto loan or federal student loans cannot be settled. In addition to that several other types of debt such as gambling debts, child support, and back taxes don’t qualify for debt settlement as well.
- A debt settlement will result in damage to your credit score and will take years to fix it. This is because as a part of the debt settlement process you will be asked to stop making payments on your debt to the creditor. However, the creditor will report it to the credit reporting agencies to record in your credit report, though your scores will bounce back once your debts are settled and you begin paying them off.
- Debt settlement is not a free service as you will be charged to the extent of 15 to 25% of the debt amount handled by the debt settlement company for each of your debts separately. They may also charge you at a flat rate or an hourly rate as well.
- Since the reduced amount is considered to be your income or savings, you will be liable to pay taxes for that as per IRS rule unless you are considered to be “insolvent”. However simple and tempting it may sound to you, be informed that proving insolvency where your total debts are worth more than your total assets is very difficult to prove and determine.
- Creditors are not obligated as per government rule to reduce or settle your debt even if you take help of the best debt settlement company. That means, after going through all the necessary steps for debt settlement the end result may be zero and leave you in the same situation or even worse if you stopped making payments on your debts listening the advice of your debt settlement company. You will eventually find your debt amount to have risen and you are deeper in the debt hole.
- Moreover as pointed out by the FTC, most debt settlement companies try to negotiate the smaller debts first and leave the larger debts continues to grow with the accumulated interests and fees. This will leave you in a worse situation as compared to when you began the debt settlement process.
Lastly, according to FTC, debt collectors may continue pursuing you for making payments while the negotiation process is on. You may even be sued for repayment by your creditors adding legal obligations to the already crumbling situation. The most surprising fact is that even if you save up enough money to settle your debts, if you lose the lawsuit your creditors may even garnish your wages for full payment and even put a lien against your home.
After you settle debts
Once your debt is settled by you or your debt settlement company you can put all your debts behind you and start afresh to rebuild your finances as you won’t have to give up your business. Though it will take months or even years to recover from the situation, you will still be able to revive your credit score.
Just make sure that after the debt settlement you get a copy of the settlement letter you’re your creditor or creditors. This will act as a valid proof that you have settled the debts in case they try to collect from you in the future. This will also help you check your credit report to confirm that the settled debts are described as “paid off”.