Can a Business Debt Settlement Company Really Help? 5 Ways to Test the Service

Do debt settlement companies work? Yes, some. For debt-strapped small businesses, a debt settlement service can lead to a repayment deal. The key is knowing who to work with. It’s also important to read the fine print before you sign a deal with a debt relief company. Know what fees you’ll pay, what the company guarantees, and how to get help if you need it. Like any financial transaction, business debt settlement comes with fees and risks that are worth understanding before you jump. Is it worth it? Here are five ways to find out.

What You Are Buying

1. Pin down what you are buying: To settle business debt, a debt settlement company will typically try to negotiate a debt payoff at less than the total amount you owe. A good debt settlement provider will strive to negotiate lower payment terms with your creditors. When interviewing companies, ask them to clearly explain their services and what their fees are for. The definition of “debt relief” covers a range of different services, including debt negotiation, legal representation, the holding of money for future settlements, and even new financing to pay off old advances. Debt settlement negotiation is only one part of debt relief. It does not necessarily include legal defense in the event you get sued. If the provider is going to hold money in order to pay future settlements, ask what protections you have. If they are proposing a new loan to pay off the old advances, ask what your total payments will be to pay off the new loan.

2. Follow the money: When you set up automatic payments to a debt relief provider, you may see the charge labeled “program payment.” Be advised that this is not proof that the money is going to a funder. It may be a fee or a savings towards a future settlement offer. Ask the provider to show you an itemized statement of exactly where your money is going. A debt settlement statement should show every deposit you made to the provider, each fee they charged, and every payment to a funder, including the date, the amount, and the creditor who received the funds. Be sure it lines up with your bank records. Check with your funders on what they have received and when. Ask which debts actually changed and when. A trustworthy debt settlement company will not have a problem with providing you this account. If they aren’t willing to do that, consider it a red flag.

3. Find the real price: If the debt settlement company promises it can cut the amount your creditors want in a settlement, that is not the full cost. The relief company will charge fees for their services, and you may need to continue making payments to your creditors. To get the total cost of a debt settlement offer, ask the company to put in writing exactly what their fees will be. Also ask them how much will you owe if the debt settlement service is not able to get you a deal with any or all of your funders. Under a federal regulation, a company selling debt relief by phone may not charge you a fee until they settle or change a debt, you agree to the deal, and you make at least one payment to the creditor. Ask the provider if they follow that rule. If you are successful in having any debt canceled, you may have to pay federal taxes on that amount. If the amount is $600 or more, you may receive a Form 1099-C in the mail from the creditor. There are exceptions to the tax rules, for instance if you can claim insolvency. Talk to your tax advisor on what your tax obligations are.

4. Ask what happens if you stop paying: The Consumer Financial Protection Bureau warns that most debt settlement companies tell their clients to stop paying their creditors. If you do this, you will get charged more late fees and interest every month and may end up deeper in debt. Not paying your bills also means you risk defaulting on your agreement. This is risky and can expose you to legal action by funders. Ask the provider how they will handle this scenario, or if you are expected to deal with it on your own. Be very careful of promises that you will not be sued. Ask the debt settlement company if there is a chance that their program may fail to resolve your debt and leave you worse off. Try to pin down exactly how they will handle problems along the way.

5. Read the reviews with a skeptical eye: It is always smart to do your homework on any company you do business with. When you read review sites, find out who paid for the reviews, what standards companies had to meet to make the list, and if there are ads for the companies that are supposedly being reviewed. Don’t take comments like “excellent service” at face value. Seek out specific feedback about how the company handled issues and took care of problems. Do the reviewers give details about how the company performed in key areas, such as negotiating with a creditor, or making payments? Reputable debt settlement companies are willing to answer questions, provide detailed disclosures, and stand by their claims in writing.

Monitor the Performance

If you’ve already started a debt settlement or debt relief program, be sure to monitor the performance. Keep an eye on where your payments are going. If you find yourself facing a legal claim or lawsuit that is related to business debt, try to speak to an attorney.

What You Need to Fix

Either way, make note of any money you’ve already paid and who it went to. List the creditors, what’s owed, and when payments are due. Take note of whether a debt is past due or facing legal action. This creates a picture of what you need to fix.