Debt settlement can be termed as a negotiated agreement in which a creditor accepts less than the full amount of the debt. The unique selling point of this debt relief option is that it can be accounted as a legal way to settle debt even if the option comes with a higher risk, however, the risk is far low when compared to the aftermath of bankruptcy and so-called other alternatives in the market. Regardless of all the risk surrounding this debt relief option, it is perhaps the ultimate way to get out of debt once you find all the doors closed to bring your finances back on the track. If you own a business and facing a debt situation, you will need to understand how the option works in order to negotiate your outstanding business debts. Here is a guide that discusses all the major aspects of debt settlement that you need to know:
Understanding the Objective of Debt Settlement
It allows you to settle your debts for less than you owe. As a matter of fact, the whole goal behind opting for the scheme of debt settlement is to pay off your debt lesser than what you actually owe. Most debt settlement companies use this basic advantage of debt settlement to promote their firms and you need to find the right ones among the unethical ones. When it comes to understanding the basic concept of debt settlement, the main aspects that you need to find answers to is how long the procedure will take to accomplish its goal, which is to settle your debts. Also, you must evaluate how much less the payment is and how much price you need to pay to the debt settlement firm once all your debts are settled.
There is no documented data regarding how much of your dues you will not have to pay. The financial experts say that if everything goes well according to the tactics laid out by the reputable debt settlement companies, you will be lucky enough to experience almost half of your debts getting reduced. Speaking of the total estimated time of the procedure, according to debt.org, it can take up to 36 to 48 months while the interest on the debt keeps on piling during that time.
What are the Charges Included?
While you find the proposition of getting your debts reduced by almost fifty percent, there are some of the additional charges before you total up the final bill. These charges include:
- A twenty-five percent fee that is charged for the total amount of debt forgiven. For instance, if you owe a debt that is estimated at fifteen thousand dollars, it means there will be a fee of around $3,750 dollars.
- The IRS regards any forgiven debt as income, so assuming that you had $15000 forgiven by the creditors, you will pay taxes on the forgiven amount.
- The creditors will report your debt settlement policy to the respective credit bureau agencies, which tend to be a negative on your credit report for seven years. This results in having a negative impact on your credit score and it also boosts the interest rate that you will be paying for loans in the future and credit cards.
Finally, when you make an addition of all the charges after three years, you will identify that a good section of your money is going to the creditor for settlement and a hefty fee to the company while a decent amount of money in taxes to the government. Moreover, your credit report is kind of stained with debt settlement for seven years. Perhaps this is the best-case scenario you can expect to be into particularly when you find a reputable debt settlement company, which you can easily identify after going through online debt settlement reviews.
Knowing the Debt Settlement Negotiation Procedure
Even though the outcome of a debt settlement is not much favorable for most businesses, it is somehow a less painful experience than filing for bankruptcy. At least debt settlement provides you with the opportunity for starting afresh, unlike bankruptcy that completely decimates your credit report for several years. With that being said, here are some of the few steps through which you can easily settle your debts:
- The first step that you need to work out for settling your debts is finding a reputable debt settlement firm or attorney to represent your case in front of the creditors and collectors. There is no way you cannot do it by yourself, but then it would be great to have an expert by your side to achieve your debt settlement goal effectively which is to reduce the significant amount of debt that you currently owe. Besides, a debt settlement firm will bring experience on the table that is required to negotiate debt settlements. Also, a professional debt settlement company will encourage you to save money immediately to ensure that you have enough money while offering the lump sum money.
- The next step is to meet with the creditors and plead for forgiveness on the debt and seek if they are also willing to settle and approve your offering. If your account is marked overdue for more than six months in motion, the debt will be handled by the collection agency that works with their own objective of retrieving as much as possible from the borrower.
- It might take around three years to create your savings account with enough money to go with an offer in front of your creditors. Generally, the debt settlement firm asks you to cease making any payments and instead transfer all the monthly payments to your firm to build an escrow account. During this phase, your interest on the loan keeps on growing along with the increase in your account balance.
- Be patient while making an offer to the creditors as they have no obligation to accept any offers related to debt settlement. Hence, it could take months and maybe years to reach an agreement with your creditors.
Finally, if you are wondering a debt settlement might destroy your credit score, you can simply request your credit card company to report the debt settlement as paid in full to avoid lethal damage. Debt settlement can help you in finding your way to start with a new beginning and make your business debt-free again.
Kelly Wilson is an experienced and skilled Business Consultant and Financial advisor in the USA. She helps clients both personal and professional in long-term wealth building plans. During her spare time, she loves to write on Business, Finance, Marketing, Social Media. She loves to share her knowledge and Experts tips with her readers.