What is business debt settlement? Debt settlement is when the lender agrees to accept less than the amount owed to them to finalize a complete payment. As a result, the small business owner does not have to be concerned with collectors or fear being sued for the debt amount. There are many ways to address unwanted debt by the small business owner. One such method is with a business settlement process through a settlement company.
Debt Settlement Process
Debt settlement works when negotiators call a borrower’s creditors and try to persuade them to allow the debtor to pay one big lump sum to pay off their debt. This lump sum is less than the initial cumulative amount of debt owed. The lender forgives the borrower’s debt due to the effort to pay, albeit it’s a portion. The process can take two to four years to complete.
Debt settlement firms begin by recommending to the borrower to stop paying their creditors’ monthly bills. Alternatively, they are to make deposits to a savings account maintained by the debt settlement agency. The savings account offers a place where the debtor’s funds can increase until there is a significant amount to negotiate with the creditors, even though this is at the monthly bill’s expense. Usually, debt settlement firms start by arranging the smallest debts and leaving more enormous debts to accrue interest or late payment penalties.
Types of Debts
Not all debt can be used for debt settlement. Debts like school loans, car loans, and mortgage loans are typically not included.
The question then is, what can be included in the settlement for a small business owner? Included are unsecured debt from a personal loan, credit card, or other debt that is not attached to collateral. The borrower must be the sole owner of the company and the obligation to be paid back. If the borrower struggles to make payments on a mortgage or is behind on the debt, then a settlement can likely be negotiated. What is taken into account is the company’s insolvency, the loss of a career, or the assumption of personal debt to keep the business from dissolving.
Bear in mind that lenders are not legally obliged to settle a debt with the borrower. It’s also not their first option for recovering funds; however, they can probably get more money in a settlement than from using a collection service or an attorney.
Advantages and Disadvantages to Debt Settlement
The borrower, through a settlement agency, could settle their account for less than the maximum amount. Still, their credit record is more than likely severely weakened, and these debtors are not always safe from being sued just because they’ve enrolled in a debt settlement program.
The advantage here is, the unpaid balance is forgiven, and the borrower could pay less than what was initially owed. Within two to five years, debt settlement can get the borrower out of debt. But they are not assured. A bankruptcy alternative is debt settlement.
The disadvantage in this process is debt settlement agencies will probably persuade the borrower to miss payments so that the creditors will be more likely to settle. The borrower will continue to get collection calls and letters throughout the mediation process. The debtor will also accumulate late fees, penalty interest, and other costs. The borrower’s credit score could plummet, and there could be some litigation faced by the debtor. The cost of late payments, interest, and other penalties could be more than the sum that a settlement will reduce the borrower’s debt. In the end, creditors still have the option to refuse to accept the borrower’s debt settlement offers. Finally, the credit bureau may include a note on the borrower’s credit report that amounts were settled for less than the full sum. This note could impact the borrower in later endeavors.
In the end, debt settlement could help the borrower pay off the debts for a fraction of the sum of the borrower’s original debt. It’s important to note that the borrower will have to contribute to the debt settlement firm the borrower is negotiating with because it does not make regular payments to the creditors. Debt settlement agencies will bundle the borrower’s recurring payments into a lump sum, which they will try to settle the borrower’s debt to the borrower’s creditors.
It is essential that borrowers have a written contract that contains all the possible costs and payment details while dealing with a debt settlement company. Debt settlement firms typically charge a service fee of up to twenty percent of the amount of the borrower’s debt. The creditors could also add on late payment penalties because the debtor missed several of the monthly payments.