Debt Settlement in Minnesota
Settlement Works Best for Unsecured Loans
Business debt settlement is not the right move for every small business owner. The rules of thumb are that settlement works best for unsecured loans. Unsecured debt includes business credit cards, vendor debt, lines of credit, and merchant cash advances. Secured debts, like equipment loans or mortgages, have collateral lenders can seize.
Some lenders prefer debt settlement to getting next to nothing in bankruptcy court. Settlement is usually worth a look for business debts of $7,500 and up; debts in collections are often easier to settle. The federal Small Business Administration rarely settles on SBA loans. Secured debt and recent tax debt are seldom eligible for debt settlement.
Minnesota Debt Settlement Law
Minnesota has its own statute that covers debt settlement. Minnesota’s debt settlement law is written for personal and household debt, meaning purely business debt may not have the same protections. But any business servicing a Minnesota consumer is covered even if it is out of state. Debt settlement providers in Minnesota must register with the state Department of Commerce. You can search for them on the department’s online License Lookup, which includes Debt Settlement as a category.
Minnesota caps provider fees at 15% of the total enrolled debt if the debt settlement firm gets its money from the debt, or at 30% of the savings actually negotiated if the debt settlement firm takes fees from the savings. A federal rule keeps a debt settlement provider from charging you until a debt is settled, you agree to the settlement, and you make at least one payment to the creditor. And Minnesota requires a contract that allows you to cancel any time with 10 days notice.
Some promises are too good to be true. Minnesota warns of debt settlement outfits that make promises it can’t keep, such as saying a program will stop garnishment, lawsuits or phone calls, or that a plan won’t hurt credit. Providers that charge upfront fees before any work happens, or that pressure you to sign before answering all your questions, should raise red flags.
Minnesota’s Attorney General warns that stopping payment on your debts at a debt settlement firm’s suggestion can trigger late fees, creditor lawsuits and possibly bank account garnishment. Creditors usually have six years to sue over a debt.
With a debt settlement plan, you start putting aside savings until there’s enough to negotiate with creditors. The problem is, creditors can sue for the money anytime. A debt settlement firm can’t keep you from being sued, but once a suit starts, settling is often still possible. If you signed a personal guarantee, you can put personal assets at risk when your business struggles.
Settlement providers who break Minnesota debt settlement law are liable to their clients for actual damages plus statutory damages of up to $5,000. In Oct 2024, the Attorney General made two debt settlement providers pay $1,081,756.59 for taking upfront fees and not registering with the state.
Due diligence goes beyond checking the state’s license list. Look over reviews from previous clients. Ask for proof of certifications of the company’s debt experts. And trust your instinct if anything feels a bit off.
There are down sides to debt settlement, even with a good provider. Personal credit scores will likely drop on a plan, and business credit scores may also take a hit. And when a debt gets settled, the difference between the original debt and the debt you actually paid is usually taxable income, unless insolvency, bankruptcy or some other federal tax code exclusion applies.
A debt settlement plan can take at least two to four years. Some providers may be able to reach a settlement in a few months, but a single debt at a time can add up to a lengthy program. You usually don’t have to close down your business just to do a debt settlement program.
Several Paths Out
When you owe too much to too many vendors, debt settlement is not your only path out. You may be able to call creditors, ask for lower rates or extra time, and set up a payoff plan yourself. If your credit is good, look at a debt consolidation loan. If you got an SBA loan, call the lender and ask about a modification.
Defaulted SBA loans are federal debt, meaning the government can garnish wages, tax refunds and bank accounts without a court order. It is still worth a shot to propose an Offer in Compromise to the SBA or to the IRS. But approval is not a sure thing. You can also ask the IRS for an installment plan.
If debt settlement doesn’t fit your situation, business bankruptcy may be a better option. Chapter 11 bankruptcy lets a business keep operating while working out a court-approved plan to pay creditors. If debts are $3,424,000 or less, and at least half of the debt is from your business (and the business is not mainly owning a single property), Subchapter V lets you reorganize your debt under a stream-lined bankruptcy plan. It can be worth consulting a small-business bankruptcy lawyer who knows which path will cause least harm to your goals and future.
Whichever path you take, make a list of every debt, including how much you owe, what interest rate you’re paying, and your minimum monthly payment. Compare it to the cash flowing in and out, and how much you have on hand. If any provider won’t give straight answers or pressures you to sign, leave. It’s your money to save and your future to protect.