Flat Fee vs. Percentage of Savings: Comparing MCA Settlement Costs

Percentage of Savings or a Flat Fee

To settle a merchant cash advance, you can pay either a percentage of savings or a flat fee. Neither label tells you which is cheaper by itself. Add every fee on top of the payment to the funder, and compare that to what you originally owed. Paying a percentage of savings means you only pay once your debt is reduced. Paying a flat fee means you owe the full fee even if your debt isn’t reduced.

Let’s say a debt settlement company charges 25 percent. After paying $600 to settle a $1,000 debt, you owe them $100. That’s 25% of the savings in your settlement, $400. You’ll likely hear about “savings” in quotes, or with a capital S. That’s the amount you didn’t pay, reduced from what you owed when you signed up.

Every debt is different, and not all creditors are open to cutting balances, so you should be careful how you weigh savings and fees. That said, payments that only arrive when debts are reduced are less risky than payments owed from the start. In any case, you should confirm in writing that the percent rate is the same for every debt you enlist.

The FTC describes an example where a $600 fee is charged on $3,000 of enrolled debt, and says the consumer should owe the company $200 once one-third of their debt is settled. Beware of big fees. The biggest debt settlement company in the US charged as much as 25% of the debt you enrolled, the CFPB alleged.

The FTC protections - no fee before settlement, and only by percent of savings or percent of debt - generally don’t apply to business calls. So some debt settlement firms charge for enrollment in the program or for other expenses, sometimes 10% to 15%. That means a $100,000 debt could incur a $10,000 to $15,000 fee just for the privilege of joining the program.

If a debt consultant says, “We enroll $100,000 debt for $15,000 and charge $1,000 a month for 12 months and 35 percent of savings,” that looks like $15,000 to enroll, $12,000 in monthly fees, and $14,000 on a $40,000 debt reduction. Always add all the fees: $41,000 in this example. Keeping track of costs in debt settlement is hard. There’s what you owe, what you pay to the funder, and what you pay to the settlement company. A debt of $100,000 settled for $60,000 to the funder plus $41,000 to the settlement company makes $101,000. That’s more than the original $100,000.

Of the $41,000 you pay in this example, only $14,000 of it is owed after the debt reduction is confirmed. That’s the amount that depends on results. As for the rest, $27,000 is flat-fee for the program or for other costs. That’s money you owe even if your debt hasn’t changed, which goes to the debt company, not your debt.

Costs That Aren’t Counted

Settlement plans also have costs that aren’t counted. Your settlement firm probably says to stop paying your lender. One missed payment can mean default, which can make the full balance due all at once, with a collection suit likely to follow. Most debt settlement companies are not law firms. That means they can’t represent you in court, even while your accounts are on hold. To be legally represented in court, you need to hire a lawyer separately, and that means more costs on top of whatever you pay your debt consultant. And in New York, a funder can freeze your bank account within days. One confession of judgment filed with the county clerk can be all it takes. (Careful: if you have more than one MCA, defaulting on one can trigger a default on all your other advances, which could multiply the problem.) Your customers can get notices that their payments should be sent to the funder instead of you. Your money stops coming in.

In most programs, the funds you contribute while saving for a settlement go into an account controlled by the debt settlement firm. And because you can never tell which debt will settle for what, you can never tell how much of your money will go toward the debts you owe, versus being eaten up by fees.

If you settle a debt for less than the original balance, the IRS may treat it as taxable income. There are exceptions, like the insolvency exclusion or bankruptcy. But both of those require Form 982.

Debt Settlement Offers

When you try to compare debt settlement offers, you should ask, “How do you measure savings?” The government says honest savings start from your enrollment balance and are only after fees, counting anyone who drops out. You may ask if you can quit anytime and get your money back. Ask how much you’ll owe if you cancel mid-program. To compare what you owe, ask for every fee in writing. What’s the total of any charge by your debt settlement firm? Who gets paid what? A simple budget is enough, showing each fee. Ask if the funder of your debt will settle, or if your debts have to go to court for a deal. Watch for a guarantee - no one can promise 50% or 80% off the original balance. Everything about debt negotiation depends on the funder, and your settlement firm has no control over your lender’s decisions.

The most powerful argument in debt settlement is legal leverage. A merchant cash advance that is actually usury can be challenged in court. This is how debt settlement works best: not with just any settlement, but with a settlement that is negotiated by someone who understands the law and has a strategy. Be careful with debt consultants offering a quick fix, or saying they can handle the details, but they can’t. Instead, find an attorney before you stop making payments, so you can have a strategy, a game plan, and some professional advice from someone who can defend you in court.

Whatever you call it, flat or percentage, a fee high enough to leave you paying more than you originally owed, no matter what the reduction, defeats the point of settling.