Business Debt Consolidation Companies: 5 Questions That Separate the Services

With dozens of business debt consolidation companies, the task of finding the right service to meet the specific needs of a small business owner can seem daunting. There are big differences among companies that promise to solve your business debt problems. Five questions uncover the key differences. Will they get you a new loan, or just negotiate with your creditors? Can they stand with you in court? When do you have to pay them? Do they tell you to stop paying your creditors? And how is this consolidation going to keep your business cash-flow in the green?

To many business owners “debt consolidation” means replacing a number of smaller loans with one large loan. Many companies that promise “debt consolidation” actually work by negotiating lower payments with creditors, without offering or taking out a loan. SBA 7(a) loans can refinance existing business debt, with amounts up to $5 million, but a business owner can’t get one if it has access to other reasonable financing.

Many business owners don’t have the qualifications for an SBA loan, but need to consolidate debt into one monthly payment. A business debt consolidation program will negotiate with creditors for better payment terms and amounts. A good negotiator can get more than one Merchant Cash Advance to come to terms. The trick is showing each one how much less it will recover if it forces the business to shut down. Having good cash flow projections helps.

Protect You in Court Against Litigious Creditors

Many MCA contracts come with harsh remedies, like broad rights to seize cash from your bank account and “confessions of judgment”. When a funding company decides to sue or a merchant cash advance freezes your account, there is a temptation to just ignore it. In some cases, this can actually make your situation worse. If you don’t answer a funding lawsuit, the court can rule against you. The judgment can then be used as leverage to garnish your business bank account.

You need to make sure that the debt settlement firm you partner with has an attorney that will back up their service and who is prepared to protect you in court against litigious creditors. Some companies that offer debt relief don’t employ attorneys. They can make phone calls and write letters, but they can’t defend you if a funding company sues, or a merchant cash advance freezes your bank account. A lawyer will know the service rules to make sure the suit was filed correctly, how to get the case dismissed if the rules weren’t followed, and how to challenge predatory terms in court.

Next, ask the company: will you charge me before settling the business debt? The Federal Trade Commission’s Telemarketing Sales Rule says you can’t be charged a fee until a debt is settled, you agree to the settlement, and you’ve made at least one payment on it. The rule only covers interstate telemarketing, not face-to-face meetings. But law firms are not exempt from the rule. Those that work primarily over the phone and across state lines could still fall under the rule.

One of the first things you may hear when you talk to a debt settlement firm is “stop paying your creditors”. A creditor that isn’t being paid doesn’t see any progress on the account, and could decide to sue you. Stopping payments alone doesn’t fix the problem, and could get you into worse trouble. And the Consumer Financial Protection Bureau warns that debt settlement can leave you deeper in debt than when you started. Its tips for spotting a predatory company include a guarantee that a certain percentage will be cut, or that you’ll never have to pay the debt again. You should beware if the company tells you to stop communicating with your creditors, or if it asks you to pay a fee before settling your debts.

Your consolidation program shouldn’t add to your financial problems. A good debt consolidation program gives you a revised payment schedule tailored to your business’s income and cash flow. A detailed financial assessment will make your proposals stronger when talking to a creditor. If you have a Merchant Cash Advance, a good debt settlement professional can negotiate for the debits to be turned into less frequent installments that match your real sales. It helps to have a CPA to work out how the changes will actually affect your business.

Your plan should also cover taxes on debt forgiveness. At the time a debt is forgiven (at least $600), in most cases, the creditor sends a 1099-C form to the IRS, and the taxpayer is expected to declare the amount as income for that year. The exception is if you were insolvent at the time of the forgiveness - that is, your debts exceeded the fair market value of your assets. In that case, the amount you were insolvent is not taxable. Also, any debts forgiven as part of a bankruptcy discharge are not taxable as income.

Before picking up the phone, gather up copies of your bank statements, the emails and letters you’ve received about defaults and collection actions, and notices about lawsuits. You’ll need these to know where you stand, to work out the best strategy, and to have the details when you talk to an expert. Before you sign any agreement, it’s worth taking time to be sure you’re getting the service you need. If the company can’t answer your questions, find another company that can help.