Debt settlement for a business credit card is actually the practice of effectively negotiating a settlement amount or pay off with your existing creditors. This debt relief measure could be implemented by you or accomplished through the use of competent third-party companies who would be helping you settle your debts with your creditors and in return, they would get a fee for the services rendered.
Debt settlement is usually used by businesses that are heading for closure. We know that when the business is closing down, it generally, has a reasonable pile of debts to suppliers, landlords, service providers, utilities, private lenders or other financial institutions like banks. Once you notify all these creditors of your impending closure, you choose a debt relief measure, mostly debt settlement to eliminate your business debt and the mental stress and agony associated with it.
However, you must remember two things while opting for debt settlement. Firstly, you need to pay fees for the services provided to the debt settlement company for negotiating a debt settlement on your behalf. Secondly, whenever a portion of your entire debt is forgiven, you would need to pay certain income taxes as the IRS regards it as a taxable income.
Two things to be aware of when seeking debt settlement: There are fees associated with using a third party to work on your behalf to settle your debt. If part of your debt ($600 or more) is forgiven by a creditor, you will be expected to pay income taxes on the amount forgiven since the IRS considers this taxable income.
According to www.fundera.com, “One of the biggest benefits of business credit cards is that they don’t require you to have a certain amount of time in business or established revenue to qualify. That’s why they’re so ideal to finance startup costs, for instance; according to the US Small Business Administration, as of 2017, more than 10% of startups use a business credit card to get things off the ground.”
Moreover, if statistics from the ‘Federal Deposit Insurance Corporation (FDIC)’ were to be believed, Americans paid around $104 billion in terms of credit card interest plus fees during the 12-month period which ended on March 31 in 2018. Remember when credit card balances are overlooked and go unpaid, it is quite obvious that interest and fees could be accruing. Credit card interests could be piling up pretty quickly. We know that the average rate of interest on your credit card would be now around 17%. Before you opt for debt settlement for your business, it is best to identify and rule out the myths and determine the truth associated with the debt settlement process.
Myth: Anyone could consider getting their credit card balance reduced to half
The truth is that reputed and legitimate debt settlement companies would be allowing only some clients to qualify provided they fulfill the eligibility criteria. Debt settlement is for individuals whose business debt has actually spiraled totally out of control. Maybe these business owners must have been in the habit of borrowing funds from one specific credit card to pay off the outstanding on another credit card. Not all borrowers could avail a 50 percent reduction on their credit card balance.
Myth: A debt settlement company would take some money upfront
The truth is that is not true anymore. As per the current Federal Trade Commission rule which came into effect from October 2010, debt settlement firms are actually banned from taking any kind of advance fees or payments from their clients before settling their debts. Moreover, the rule clearly specifies that the money raised by the consumers to pay off the lump sum negotiated amount must be kept aside in an account at some insured financial organization.
It was clarified that the client has complete rights over the funds and the interests accrued. The chosen debt settlement company must not have any affiliation precisely with the firm administering the separate account for debt settlement. The debt settlement company must not exchange any kind of referral fees with the organization administering the account according to the FTC. Moreover, clients could quit working with the debt settlement company whenever they wish and they would not be penalized. The consumer could further claim all savings and the unearned fees of the provider within a week. Always check debt settlement ratings online before choosing a debt settlement company.
Myth: Debt settlement would not damage my credit score
Debt settlement has the potential to damage your credit score. Once you successfully get the settlement or when you skip certain payments, your credit score could be tarnished. Remember settlements, defaults, and other such events would not impact your credit score till they are actually, reported. These settlements or defaults, however, are often related.
Myth: It is quite cost-effective to hire professionals
The truth is that it could be quite expensive to use the services of an accredited debt settlement company. It would be charging you mostly on a percentage basis, generally, a portion of your entire debt or a percentage of the actual amount forgiven. However, a legitimate company would not be collecting any money until a settlement has been made and the client has approved it. A legitimate debt settlement company must never charge any upfront fees. Debt settlement could be costing you even at the tax time. The actual amount out of the total borrowed sum that has been forgiven by the creditors is often taxable.
Myth: Once the Negotiations Are Done, All My Debts Would Be Eliminated
The truth is not all debts would be qualifying for debt settlement and these may include student loans, child support, taxes owed, and alimony etc. Moreover, mostly one cannot actually settle secured debt such as a home or auto loan. But you should not rule out exceptions.
You must keep the above myths in your mind while opting for settling your business debts. However, it is always better to have an entry of ‘debt settled’ than ‘debt unpaid’ in your credit report. It is natural for startups and small businesses to land up in debt trouble but this trouble could vanish in a bubble provided you take the right decision after doing ample research. To state briefly, you may choose debt settlement if it fits your unique circumstances and requirements. Similarly, choose the right debt settlement company after doing a thorough background check. Avoid companies that try to lure you with incredible deals and magical solutions.