It is not uncommon for startup owners to turn to second mortgages or high-interest personal loans to bankroll their businesses. The challenge is that too much debt can lead to serious financial trouble, especially if business owners generate revenue and, instead of putting the money back into the business, are paying down debt or the debt becomes delinquent and their businesses fail.
Not to mention that if you are sole proprietor or a small startup, your personal credit will be a major factor influencing your company’s access to capital. Having too much debt can negatively impact your credit standing and in turn negatively affect the type of funding you can receive or trigger negative repercussions. For instance, according to the U.S. Small Business Administration, about 71% of banks use small business owners‘ credit scores as the deciding factor to approve or decline a loan
Whether you are facing student loan debt, credit card debt, medical debt, or small business loan debt – you need to do your research and know your options to become debt free, says Daniel R. Gamez, who owns and operates the Gamez Law Firm in La Jolla, California.
Debt is a heavy burden that can feel paralyzing, but it doesn’t have to be that way, says Gomez.Â “It’s important to know that even though you might feel trapped, there are options.Â In a few years from now, you can be back on top again.Â Â Make sure you consider your realistic financial situation and your goals for the future.â€ Also, he adds,Â “just as you would research any big purchase, you should do the same when making a decision regarding your financial future.â€
As an attorney, Gomez focuses exclusively in debt settlement, and is licensed to practice in all state and federal courts in California, and Texas.
Here he outlines the pros and cons of the three most common debt-relief options.
1. Bankruptcy. A Chapter 7 bankruptcy completely eliminates your debt, but you must have little or no disposable income.Â Â A Chapter 13 bankruptcy is a reorganization of your debt.Â The debtor must have income or assets and pays back a portion of the debt on a payment plan. This option allows you to eliminate your debts for a smaller percentage than you owe and even allows you to strip a lien from your property if the fair market value is less than what is owed. Â The advantage of declaring bankruptcy is the obvious benefit of being free of debt in a relatively short period of time (usually 3-6 months).
But there are long-term ramifications to consider with a bankruptcy.Â It will be difficult to get a mortgage if you don’t already have one.Â Your credit will suffer for 7-10 years. Â Â You will lose all your credit cards. Also, in most cases, you can’t declare bankruptcy if you have previously declared it in the last six years.Â So if you find yourself in financial trouble in the future, bankruptcy will not be an option again for many years to come. Â Of note, if you have student loans, it is almost impossible to get student loan debt dismissed in bankruptcy.
2. Debt Consolidation. Another debt-relief option to consider is debt consolidation, which combines your debts into a single loan at a lower interest rate.Â Â Debt consolidation can be beneficial in that your credit won’t suffer, since you will be paying off your debt.Â You will, in fact, be paying off your entire debt.
3. Debt Settlement. The significant difference in debt consolidation and debt settlement is that with the latter you do not pay your entire debt.Â Â In a debt settlement, a negotiation is made with your creditor to reduce the total amount of debt that you owe.Â Â The savings can be significant: Depending on the type of debt and age of delinquency, settlements can reduce your debt by as much as 60-80%.Â A debt settlement is a viable option for student loan debt, credit card debt, medical debt, small business loan debt, 2nd mortgages and Home Equity Lines of Credit (HELOCs).
Gomez is quick to note that when considering a debt settlement as an option, it is important to make sure you are working with a law firm and not a debt-relief company.Â “Some creditors won’t even talk to a debt settlement company. They don’t have that choice when a consumer hires an attorney. A law firm client signs a power of attorney, which not only permits, but also requires creditors to discuss the accounts with the attorney,â€ he explains.Â “Additionally, if your creditor sues you — your debt settlement attorney can represent you. ”
One downside of debt settlement is that your credit will take a hit in the short-term (if it hasn’t already) until your debt is settled and you pay off the debt, notes Gomez. The good news is that credit experts estimate that your score will rebound in as little as 12 months after completing a debt settlement.