Avoid Bankruptcy by Going for Debt Settlement

Avoid Bankruptcy by Going for Debt Settlement

By Karen Anthony

Bankruptcy is the nightmare no business owner wants to ever deal with. If you lack effective debt management strategies or plans for your business, you will be at a high risk of insolvency. It is very important for every business, big or small, to ensure that they are taking the steps and measures necessary to prevent bankruptcy. With larger organizations, there is usually a department and trained staff who deal with debt management. Smaller businesses don’t have the resources or the skilled manpower to manage cash flow effectively. Often times, with the small to medium scale companies, the owners end up making hasty decisions that end up being detrimental to their financial health.

 Downsides to filing bankruptcy

The rule of thumb when it comes to debt management is to never consider the option of bankruptcy as your first course of action. You have to exhaust all other avenues before considering this option. However, there are times when filing for bankruptcy is the only way out. Before you proceed with this option, it pays to start by understanding the downsides.

The main problem with filing for bankruptcy is that the effects will be very detrimental to your credit scores. Yes, your personal credit profile may be protected if you have a limited-liability company, but the credit profile of your business will not be protected. It will be damaged heavily and that shadow will follow you for years.

Restructuring your business will not do much in improving your business’s credit score. Even after restructuring, you will notice that the cost of taking new loans will be extremely high. Lenders will charge you higher interest rates and you will be forced to stick to stringent borrowing limits. What is even worse is that some lenders will deny your loan applications. After filing bankruptcy, expanding and even maintaining your business will be very hard. That is why other avenues of debt settlement should be considered before considering the option of bankruptcy.

What You Must Do in Debt Settlement

Agreeing to pay your creditors less than what you owe them is something you need to avoid as much as possible. This is because it will affect your credit score and be getting future loans will be hard or more expensive. Coming up with a debt management plan can resolve the dilemma. This is why the first thing you need to do even before you start borrowing is to get credit counseling from creditor’s relief. This will help you understand the warning signs and also give you valuable advice on your options.

Debt settlement involves negotiating with your creditors so that you are able to pay less than what you actually owe. Many creditors are willing to negotiate and you can even involve third parties to negotiate on your behalf. All in all, before you go for this option, there are some things you need to understand. Below are a few dos and don’ts when it comes to debt settlement.

  • Don’t wait too long

The worst mistake you can make when it comes to debt settlement is waiting too long to take action. Some businesses wait until their accounts have been charged to take action. This typically happens after 6 months of nonpayment. The charged-off account is the term used by creditors to show that the chances of being paid by their debtors are slim. Being charged therefore means you still have to pay the debt.

If you are lagging behind on payment, you need to talk to your creditor. Your creditor will not go away simply because you no longer show signs of settling the debt. If the debt hasn’t been written off, you can discuss debt settlement with the creditor. Acting early gives you more options such as coming up with a debt management plan which allows you to settle the debt in full as well as salvage your business’ credit score.

Creditors work hard to avoid losses. That is why a good number of them are willing to negotiate with their debtors to get a positive outcome.

  • Don’t ignore the consequences

The first thing you need to pay attention to is the tax consequence. A settlement where debt forgiveness is more than $600 is taxable. What this means is that if you were to repay a loan of $10,000 for only $5,000, a total of $5,000 will be taxable.

You should also note that debt settlement will impact your credit report negatively. The option will limit your ability to borrow in the future. The interest rates will be too high and some debtors may choose not to lend you money. The reason for this is because even after paying the renegotiated amount, the credit report will list the account as either settled or paid for less than the total amount owed. Future creditors will see this and they will be reluctant to lend you money.

  • Show your financial cards

During the negotiations, creditors will ask you to provide documentation of your income. This is done prior to agreeing to settle your account. They will want to see documents on your assets, income and existing debts. They do this to see proof of hardship in settling the debt. You must show that you are incapable of settling the debt.

  • Make promises you can keep

When a creditor agrees that you settle the debt over time, always set a level that you can easily manage financially. Don’t pick plans that are unrealistic. Don’t just think about the first payment but all the payments. The reason for this is because if you are unable to keep up with the schedule, the creditor will refer your account to the collection agencies.

  • Make certain the matter is completely settled

Last but not least, once you pay debt settlement, check to make sure that the payment shows up in the credit report. Some creditors may fail to report the settlement to the credit bureaus. This will leave the account as indefinitely delinquent.

Settling debts is better than filing for bankruptcy. Always consult a financial advisor to review your options before taking any action in debt settlement. The above points will help streamline your actions.

Author: Karen Anthony anthonykaren88@gmail.com

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