How a Small Business Owner Should Respond to Debt Settlement Offers
Setting up a small business can be an extremely challenging task. Not only do you have to think of a product or service for which there is a big market, but also have enough cash and get the right team in place as well as have the right business model to ensure that the business can be successful in the long run.
These factors are perhaps taken for granted far too often by most entrepreneurs who tend to be blinded by the brilliance of their own idea and think that the rush of customers will make everything fall into place.
According to Bureau of Labor Statistics, about “20% of new businesses fail in their first year, about 50% of small businesses fail in their fifth year, and only 30% survive for 10 years”. Surprisingly, CB Insights opined that “42% of small businesses fail because there’s no market need for their services or products and 29% because of a shortage of money”.
When Is Debt Settlement a Viable Option for Small Business Owners?
When an entrepreneur starts a business, he tends to use his personal savings and credit cards to keep his business operational since no bank or credit union will lend funds at this early stage.
Also Read: How to get Funding for your New Business
It is quite common for entrepreneurs to find themselves in a sea of debt very soon and missing out on the monthly payments because not only are they short of cash but also a large number of monthly statements and different due dates are difficult to monitor. When engaging in cost-cutting and consolidation of debt does not work, debt settlement represents a last resort before filing for bankruptcy.
Debt settlement can be attempted when the borrower realizes that the only way he can stay afloat is by persuading his creditors to reduce the outstanding debt substantially.
Each of the card companies has to be contacted and convinced that the financial crisis is real and reduction of debt is the only way to prevent bankruptcy which would not benefit anyone.
The reason card companies may agree to reduce the debt is that the nature of credit card debt is unsecured, which means that if the customer does go bankrupt, they would not get any of their money back. However, card companies are hard negotiators and debt settlement offers are difficult to obtain.
Debt Settlement Offers – What an entrepreneur should watch out for:
1. Time Limitations
Debt collections cannot be done on debts on which the statute of limitations has expired. It is not uncommon for debt collectors to try and trick debtors by sending them a settlement letter, which if accepted and a payment made would restart the statute giving them more time to sue the debtor.
If you receive an offer, especially one that may have taken very long to negotiate or an offer that comes out of the blue, the first thing you should do is to check for the date of expiry of the statute of limitations. If the statute has already expired on the debt or is about to do so in some time, it may just be worthwhile to wait it out, and so that it becomes impossible for debt collectors to recover the debt any more.
However, since the statute of limitations varies from state to state, you need to check out carefully, the time limit applicable in your state. If the debt is wiped out from your credit report, your credit score will also improve automatically.
2. Scam Offers
Many entrepreneurs are poor money managers and tend to forget the details of their debt. This forgetfulness is sometimes taken advantage of by unscrupulous debt collectors who send fake settlement letters, often for debts that are fictitious, in an attempt to swindle them.
If you receive any unsolicited debt settlement offer letter, the first thing you should do is to check whether the details of the debt mentioned is pertaining to you. You should also check out debt settlement ratings available online to find out if the collection agency is legitimate.
It can sometimes be very difficult to spot fake debt settlement offers, however, if you see incorrect grammar, wrongly spelled words, mistakes in your name, and especially if the payment has to be made by wire transfer, prepaid cards or some other methods that are not traceable, it should set you on high alert.
3. Available Options When You Want to Settle
If you receive a legitimate debt settlement offer, and you find the terms to be attractive, you can accept it and settle your account in full.
However, before you do it, you should read the offer letter very carefully or even consult your lawyer to ensure that you cannot be pursued for the forgiven debt at a later point in time by the creditor or a collection agency. If you think that the debt reduction is not adequate, you can try to use the opportunity to negotiate a better deal with the collection agency.
Many times, the debt collector is willing to negotiate further but you should decide on the maximum amount you want to pay before you try to open up a discussion.
If there is an offer that you are inclined to accept, make sure you get it in writing and that it bears the signature of someone who is actually authorized to make the offer. Make it a point to ensure that the offer letter specifies that the amount of debt reduced is actually forgiven and you are not legally liable for it under any circumstances.
Entrepreneurs need to know that they do not have to respond to any debt settlement offers if they don’t want to settle. However, they need to understand that as long as the debt remains unpaid, collection efforts may continue by either the original creditor or its collection agency. The unpaid debt will also appear in the credit report of the borrower and will continue to exercise a negative effect on the credit score. If the debt settlement offer is accepted and the amount is greater than $600, there will be an income tax liability to the IRS as the forgiven amount is treated as income.