Pitfalls to Avoid With Do-It-Yourself Business Debt Settlement
Falling behind on business debt payments can be scary. You may be tempted to try settling the debts yourself to save money on fees. However, DIY debt settlement has serious risks. As a business owner, you need to understand the pitfalls before attempting it.
Know Your Rights
The Fair Debt Collection Practices Act (FDCPA) protects you from harassment by debt collectors. Collectors cannot call before 8 am or after 9 pm unless you agree. They also can’t threaten violence, use profanity, or repeatedly call just to annoy you. If collectors cross the line, you can sue them. Learn your rights under the FDCPA here.
-Get Organized
Make a list of all your business debts with account numbers, balances, interest rates, and minimum payments. Also note which accounts are with original creditors versus collection agencies. Getting organized helps you know who to contact and how much you really owe.
Research State Laws
Debt settlement regulations vary by state. For example, Texas requires debt settlement companies to be licensed while Arizona has no special rules. Check your state laws regarding do-it-yourself debt settlement to avoid surprises.
Calculate a Realistic Offer
A debt collector may initially ask for 70% to 100% of the amount owed. Be ready to start lower, around 20% to 50% of the total. Calculate an offer amount you can realistically pay in a lump sum. Remember, collectors often accept less than half the original debt.
Get Terms in Writing
Verbal agreements mean nothing in debt settlement. Always get any deal in writing before paying anything. The agreement should spell out the lump sum amount, deadline to pay, and assurance the creditor will remove negative marks from your credit report. If they won’t put it in writing, walk away.
-Open a Separate Bank Account
To save up for settlements, open a new checking account your creditors don’t know about. Automatically transfer a portion of your income to this account weekly or monthly. Never commingle settlement funds with operating accounts creditors can access or freeze.
Consider Tax Implications
If a creditor forgives $600 or more of business debt, they may issue a 1099-C form reporting the amount forgiven to the IRS. Depending on your situation, cancelled debt may be taxable income. Consult a tax pro to understand the potential tax costs.
Get Professional Support
A business lawyer can review settlement agreements to spot red flags. An accountant can advise you on the financial and tax implications. And a therapist or coach can help you handle the stress. Don’t go it completely alone.
Send Payments by Certified Mail
Always send settlement payments by certified mail with return receipt requested. This creates a paper trail proving the creditor received your payment. Never send cash, and make checks payable only to the creditor, not any individual person.
Follow Up in Writing
After paying the settlement amount, follow up in writing to confirm the creditor has zeroed out your account balance. Keep all records showing the debt is legally satisfied in case of errors or disputes later.
-Prioritize Debts Wisely
If possible, settle secured debts like equipment loans first, since the creditor can repossess collateral. Similarly, settle debts with the highest interest rates to stop accrual and compounding. Leave low-rate debts until last.
Don’t Settle New Debts
Creditors are more likely to settle older delinquent accounts that have been charged off. If the debt is less than 6 months past due, you’ll pay closer to the full balance. Let newer debts age before attempting settlement.
Beware Debt Relief Scams
Beware any person or company asking for large upfront fees to settle your debts. Advance fees are illegal. Get help only from reputable non-profit credit counseling agencies.
-Consider Other Options
Debt settlement has risks, like getting sued or owing taxes on cancelled debt. Consider all options like credit counseling, debt consolidation loans, or bankruptcy. Settling debts yourself is challenging – know when to seek professional guidance.
While do-it-yourself debt settlement may seem like an easy way to resolve business debts, the risks and pitfalls are real. Arm yourself with information, get organized, and seek legal and financial advice to make the process manageable. With eyes wide open, you can negotiate settlements and move your company back toward financial health.