Business Debt Settlement
When you stop the payments on your merchant cash advance agreements, it puts you in an even greater financial and legal bind. Your merchant cash advance funders will likely accelerate your repayment if you default, and sue you in court for the loan. Once you miss a payment they may demand the entire balance due immediately. This is known as an ”event of default”. A confession of judgment is registered with the county clerk and entered as a judgment in record time. At that point, the funder can garnish your bank accounts. UCC-9-406 notices are given to your customers and they are directed to pay the merchant cash advance funder directly, as opposed to the company. If you’ve taken multiple MCA advances, often the lenders will have included a ”cross-default” clause that lets them all move to freeze your accounts.
Business Debt Relief Firms
Most settlement firms are not law firms, so they cannot represent you in court. They also sometimes hand you off to a law firm to defend you in court, which can cost you additional money. Now you’ve paid a settlement firm for work they can’t do and will pay a lawyer for the actual legal defense.
The FTC outlawed debt settlement companies charging a fee before settling consumer debts. The advanced fee ban (but not the ban on misrepresentations) in the Telemarketing Sales Rule does not cover debt settlement calls placed by a merchant cash advance settlement company to a business. For example, a business debt settlement company says they can settle $100,000 in MCA debt owed for $60,000. They then charge you an “enrollment fee” of $15,000, then $1,000 each month for 12 months, which totals $27,000. Then they want 35% of the savings as a success fee, which is $14,000. In all, this example settlement company is charging $41,000 to settle a $100,000 debt for $60,000. Merchant Cash Advances are a trap for businesses, which is why so many business debt relief firms exist. Generally MCAs are sold as purchases of future receivables, not loans, so they often fall outside consumer protection laws. Many firms sign up desperate owners, collect fees up front, and then do little negotiating before the business collapses.
In its ”Debt Adjuster” law, Hawaii offers consumer protections to a “debtor,” which is defined as an individual or individuals, and the law is not expressly applied to a company or LLC debt. The law exempts attorneys licensed to practice in Hawaii and nonprofits that charge only nominal fees.
Red flags are another thing to watch for. Beware a firm that guarantees to settle your debt for a certain amount or percentage (some funders refuse to settle as policy). Some debt settlement firms are unscrupulous and tell you to cut off all contact with your merchant cash advance lenders. Don’t deal with a “senior debt specialist,” but a licensed and experienced attorney, if available. It’s a bad sign if a debt settlement company tries to push you to deposit settlement funds into an account they control. Before you sign with any debt settlement firm, do research using the Hawaii Department of Commerce and Consumer Affairs (DCCA) ”Business Check” tool. It shows complaints filed with the Office of Consumer Protection and the Regulated Industries Complaints Office (RICO).
Even with a good debt relief firm, the FTC warns your creditors have no obligation to negotiate with them or to accept an offer. While you are waiting for settlements that might not happen, your funders can continue to seek payment by suing you, or even garnishing your bank accounts. In Hawaii, a creditor generally has six years to sue on a contract debt.
SBA COVID EIDL Loan
If part of your debt is from the Small Business Administration, an SBA COVID EIDL loan, note that after 120 days delinquent the SBA may refer it to the Treasury Offset Program, and once in Treasury Cross-Servicing SBA no longer services it. An Offer in Compromise requires SBA Form 1150 plus Form 770 or a business financial statement. Tax-wise, if part of a debt is forgiven, the IRS generally considers that taxable as ordinary income. The creditor may send you a Form 1099-C for $600 or more of forgiven debt. It’s possible to exclude it on Form 982 if you were insolvent and to the extent of insolvency.
Legal Leverage
Instead of a ranking, the better approach is to focus on who gives you legal leverage in dealings with your funder. In terms of legal leverage, the easiest cases to settle are when the attorney finds the merchant cash advance is actually a usurious loan, and the funder settles rather than lose it all. It’s tempting to let a good sales person take charge of your situation, but the best thing they can give you is information. Ask for it in writing. Before signing with anyone, talk to a licensed attorney with experience handling MCAs.