Managing Debt for Small Business Owners and Employees

by Tom De Poy, Money Management International 

Many small business owners are feeling the pinch as inflation strains budgets and interest rates continue to rise. Particularly for those who experienced setbacks during the pandemic, the question of how to manage debt looms large. At Money Management International, a nonprofit focused on financial wellness, we’ve helped thousands of Arizonans for more than six decades and it’s our firm belief that financial challenges aren’t meant to be faced alone. Governor Ducey supports our mission with a significant investment to help small businesses recover and thrive.

Finding the best solution starts with understanding the options, but most Americans can’t distinguish between debt settlement, debt management and debt consolidation. The best way to overcome debt depends upon each unique circumstance, the type of debt and the status of the accounts. Here’s a high-level overview of the primary options.

Self-help: For those with a moderate amount of debt and steady income, it could just be time to buckle down, create a budget and start focusing on repayment. The debt snowball method was popularized by financial guru Dave Ramsey and involves paying as much as you can toward your smallest debt until it’s paid off and then shifting your focus to the next smallest debt, gaining momentum as they disappear one by one.

Debt management: For those with high-interest credit-card debt, a debt management plan from a nonprofit credit counseling agency like MMI may be the solution. A debt management plan closes any included accounts but reduces the average APR into the single digits and consolidates the monthly bills into one. This method is recommended by the Federal Trade Commission and financial advisor Suze Orman.

Debt consolidation: For those with multiple debts who have a good or excellent credit score, consolidating debt into a new loan or a balance transfer credit card can lower interest rates and combine payments into one. However, care should be used to not accrue more debt, and the new account may have a temporary low rate, so it’s best for an aggressive repayment. This approach is frequently suggested by Bankrate’s credit-card industry analyst Ted Rossman.

Debt settlement: For those with severely past-due debt in collections, it may be time to consider a settlement. This is achieved by saving up to offer the creditor less than the full balance owed, or by working with a for-profit debt settlement company. The Consumer Financial Protection Bureau and many state attorneys general warn that using a debt settlement company is a risky option.

Bankruptcy: Considered a last resort by most experts, but a vital protection for distressed debtors, bankruptcy can alleviate debt for those who find themselves overwhelmed and unable to leverage other options. A chapter 7 eliminates the debt entirely, while a chapter 11 or 13 includes a reorganization plan to pay the debt. You should seek the advice of a qualified attorney and be aware that a bankruptcy will appear on your credit report for up to ten years.

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Tom De Poy is Senior Vice President of Money Management International

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