Before contacting a debt settlement company, you should know that attempting to settle unsecured debts is riskier than restructuring them. The main reason for this is because through a restructured agreement, a lender is not being asked to except a lesser amount than the full balance. Restructuring merely extends the term, allowing you more time to pay off your debt.
What Does a Debt Settlement Company Do?
Debt settlement companies work with unsecured debts such as credit cards, merchant advance loans, business lines of credit, private student loans and vendor debt. They settle debts lenders or creditors directly through a negotiation process. This process can be long and stressful because a settlement is not agreed to at the beginning of a debt settlement program.
In most instances, a debt relief company will ask you to go into default on your payments and open a new bank account at a different bank. Although, this advice is not legal, it’s a common request from debt settlement companies. Changing banks can be a nightmare for someone. But, if all goes as planned, you can get out from under your debt for a fraction of what you owe.
But, if all doesn’t go well, you could end up further in debt than when you started. So, why would someone go such a risky route to resolve their unsecured debt? The answer to that depends largely on a person’s financial health and hardship situation.
Advantages of Settling Unsecured Debts
We will first explore some advantages of going the settlement route to try and resolve unsecured debts.
- Pay off unsecured debts at a significant reduction
Depending on the desperation of ones financial situation, you could pay as little as 25% or even less to clear your debts.
The severity of ones financial hardship will be the biggest determiner in how much you will ultimately save.
- Lower payments while paying your debt faster
This is one of the biggest advantages of a debt settlement program. You get to see your debts go away faster while freeing up cash-flow.
- Avoid bankruptcy
No one wants to file bankruptcy. If all goes well with coming to a settlement agreement with your lenders, you can avoid filing bankruptcy.
- Start over with no debt
This is the ultimate reward of going through a debt relief program. By lifting the black cloud of high-interest debt that’s been hanging over your head, you can focus on your life and family stress-free. You can also look for more affordable funding options for projects or business funding moving forward.
- Less, to no negative credit impact
Merchant cash advance lenders typically do not report to the credit bureaus. Since MCAs are not loans in the technical sense, settling MCA’s will not negatively impact your credit.
Credit card companies do report to the credit bureau, though, so settling such debts as these will negatively impact your credit during the duration of your program and even a little beyond.
Disadvantages of Settling Unsecured Debts
We will now look at the disadvantages of going the settlement route to try and resolve unsecured debts.
- A debt program’s not for everyone
Debt settlement is reserved for extreme financial hardships that justify going this route. Under the next heading, we will cover some extreme hardship scenarios that may qualify you for such a program.
- Will likely pay more income tax
Let’s say you have a pre-enrollment balance of $100,000 that you get settled for $50,000. Your lenders will write off the $50,000 you saved as a loss for them and report the loss to the IRS. This may require you to add the $50,000 as income an applicable schedule and pay income tax on it. You can see more details about tax implications by visiting the IRS page Topic No. 431 Canceled Debt – Is It Taxable or Not?
- Debt settlement fees – no guarantee
Most debt settlement companies will charge a fee based on a percentage of your enrolled debt amount. This fee will sometimes be capped to a certain percentage based on state regulations. MCA debt relief companies can charge upwards of 25% of your enrolled debt amount with no guarantee on effectively settling your debt.
- A business debt settlement program can last years
Debt relief companies do not pay out to your lenders as you pay in. They will hold your money in an escrow account while your loans go further and further into default. They will use the length of your default as bargaining leverage when negotiating your settlement. This can be a stressful time during your program and can push your lenders into taking legal actions they have available to them.
They can file a UCC-1 lien. This can give your lender the right to confiscate equipment vital to operating your business. They may not go this route if they deem the equipment they can lay claim to is not of suitable replacement for the amount you owe. See more details by visiting Value Penguin’s page “What is a UCC-1 Filing? How Do UCC Liens Work?”
If you signed a Confession of Judgement, they may file a judgement against you. In such case, you may need to hire an attorney to plea your case for you. To see more information on an MCA judgement, visit Business Debt Law Group’s page “Merchant Cash Advance Lawsuit”.
- You debt may grow
If the business debt settlement company you hire is unsuccessful in resolving your debt(s), you may owe more than when you started. Since your loans will stay in default status for quite a few months at a minimum, if they are not successful at settling them, your debts will have most likely grown significantly from accrued interest and late fees.
Debt Settlement Company Qualifications
As we mentioned above, there are circumstances when using a debt settlement company makes sense. Below are some such circumstances.
- If you have already gone into default on your loans for quite a few months or longer due to extreme hardship.
- If you will soon to have no choice but to default on your loans due to extreme hardship.
- Your business has closed down and you no longer have a revenue stream from it. This would most likely justify bankruptcy more than debt relief.
A Debt Settlement Alternative – Restructuring Probably Makes More Sense
The best alternative for enrolling with a debt settlement company is enrolling with a debt restructuring company. This is a much safer option and way less stressful.
Safer because restructured terms are agreed to in the beginning of the program and your lenders are paid as you go. Your lenders are also not being asked to accept less than you owe. They are only being asked to legally restructure your term.
Less stressful because you are not hanging in default with your lenders during a restructuring program. They will typically agree to stretch your term out by double or triple, significantly lowering your payment and freeing up your business revenue. Typically, they will also agree to receiving payments weekly instead of daily.
Qualifying for business debt restructuring is easier as well. This is because you do not need to prove hardship to the same degree as with a relief option.
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