script type="application/ld+json"> { "@context": "", "@type": "Product", "name": "Delancey Street", "aggregateRating": { "@type": "AggregateRating", "ratingValue": "5", "reviewCount": "10" } } The Pros and Cons of Debt Settlement for Small Businesses | Delancey Street


Should Your Small Business Consider Debt Settlement?

Debt is a harsh reality for many small business owners. When the bills start piling up, and revenues can’t keep pace – you need a way out, fast. Debt settlement could provide that escape route, but is it the right choice? Let’s examine the potential pros and cons.

What is Debt Settlement?

First, the basics: debt settlement involves negotiating with creditors to pay back less than the full amount owed on things like credit cards, personal loans, and certain vendor accounts.

A third-party debt settlement company often handles negotiations on your behalf. You stop paying creditors directly, and instead pay into an escrow-like account managed by the settlement firm. Once a settlement agreement is reached with a creditor, the funds are released to them from your account.

Sounds simple enough – but there are major implications to consider.

The Potential Upsides

Reduced debt burden: The obvious pro here is that successful debt settlement negotiations allow you to pay back only a portion of what you originally owed – often between 25-50% of the total. For a struggling business buried under a mountain of debt, that reduction could be a lifeline.

Stop collection calls: Creditors are bound by settlement agreements once reached, meaning no more incessant calls, letters, or threats of legal action over the settled accounts.

Avoid bankruptcy: If you’re teetering on the edge, settling debts gives your business a path to solvency without the major credit hit and other consequences of bankruptcy.

The Potential Downsides

Credit score damage: Debt settlement is considered the same as defaulting or not paying in the eyes of credit bureaus. Your business and personal credit scores will likely suffer a major blow – especially if accounts go delinquent during negotiations.

See also  Fort Worth Business Debt Settlement Lawyers

Tax implications: Any amount of debt forgiven through settlement is considered taxable income by the IRS. So while you reduce what you owe, you could face a hefty tax bill.

Upfront fees: Most reputable debt settlement firms charge fees equaling 15-25% of your total enrolled debt. You’ll need to weigh those costs against the amount potentially saved.

Lawsuits: If negotiations fail with uncooperative creditors, they may choose to pursue legal action to recover the full debt. Are you prepared for that scenario?

Evaluate All Options First

Debt settlement should only be considered as a last resort for businesses unable to pay their debts in full through alternative methods. Carefully examine:

– Can you negotiate directly with creditors for interest rate reductions or payment plans instead?
– Have you cut all unnecessary spending? Downsizing operations may free up funds.
– Applying for a debt consolidation loan could roll multiple payments into one potentially lower amount.
– If all else fails, bankruptcy helps discharge certain unsecured debts, but its credit impacts are severe and long-lasting.

Make the Call Based on Your Circumstances

There’s no one-size-fits-all answer. Debt settlement’s pros and cons depend heavily on the amount you owe, your remaining cash flow, and what creditors are willing to accept. Speaking to a professional debt relief firm, bankruptcy attorney, or CPA is highly advised before pursuing any debt settlement strategy.

They can walk through your exact financial situation, outline all available options, estimate potential tax burdens – and help you determine if debt settlement is truly the best path forward for your small business.

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Our team is available always to help you. Regardless of whether you need advice, or just want to run a scenario by us. We take pride in the fact our team loves working with our clients - and truly cares about their financial and mental wellbeing.

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