How Settlement Funds Reach the Creditor: 5 Checks Before You Pay

Five Things to Watch Out for Before You Pay

After settling an MCA, something you may not have considered is what the process will be to repay the funder. The answer depends on what was included in the contract you signed with the company. With some funders, you will repay the MCA in a single payment, whereas with others there may be different terms for installments and a repayment schedule. When reviewing the agreement, you should be looking for a repayment schedule, whether there are any conditions for repayment, and exactly how the settlement amount is expected to be paid. There are five things to watch out for before you pay.

Remember, signing the contract is not the finish line of getting settled. Unfortunately, this may be overlooked when you are caught up in the urgency of getting the MCA closed. Once the settlement agreement is signed, there may still be conditions on your obligations to follow through with the MCA settlement. To fully resolve the debt, you must still make sure to follow through with your obligations as spelled out in the agreement.

First, it is crucial to have every promise of the funder in writing, and to confirm that every one of your questions has been answered. Before signing the agreement, make sure all of the promises about the settlement have been recorded and included in the agreement. Terms and conditions included in a contract with an MCA should not only cover the repayment of the outstanding amounts of the MCA, but also be very specific and clear regarding how those amounts are supposed to be repaid. It can become difficult if you don’t know exactly when, how, or how much your payments are. And any time that the funder agrees to “hold off” on any collection efforts, you must get that in writing before you pay anything.

But who are you paying? For the second check, make sure that when you repay the settlement amount for the MCA, you are making the payment to the right party. When you speak with the funder, make sure to always get the confirmation of who is receiving payments in writing. Before paying anything to anyone, ask for a name of a contact, the company name, street address, phone number, and state license number if your state licenses collectors. You can then check those details with your state attorney general or regulator. You may also come across the federal Fair Debt Collection Practices Act, but it applies only to debts from personal, family or household transactions. That generally means it will not cover business loans or merchant cash advances, so you will have to do your own detective work.

Third, signing the settlement agreement is one thing, but whether or not the funder continues to take payments from your account daily is another. Part of the MCA settlement agreement should be getting written confirmation that the ACH authorized by the original contract will stop, or be replaced by settlement payments, and on what date. However, because MCAs may include agreements for automatic daily withdrawals, you may have to confirm with the funder to ensure the withdrawals actually do stop, especially if your settlement agreement included a payment plan to repay the settlement amount. You can monitor the situation by reviewing your bank statements to confirm that the amounts taken match the settlement amounts. If you fail to follow the repayment schedule, depending on the terms of the agreement you may face a claim for a larger balance.

You want to know where your money is going. If you enrolled in a debt relief program, there is a chance that the settlement funds you pay go into a “program” account, and are not immediately forwarded to the funder you are paying. So the fourth check is to confirm that the money sent for repayment actually went to the right place. If you worked with a company to get settled, check with the company to make sure the money you send to the company is actually being forwarded to the funder. Under the FTC’s Telemarketing Sales Rule, if a covered company requires or asks you to save in a dedicated account, the account must be held at an insured financial institution, and the money is yours and the interest earned on it is yours. The company can’t own, control or be affiliated with the account administrator. If you have an account specifically for a debt relief program, the company can’t pay itself until a creditor agrees to a settlement, tells you in writing, and you make at least one payment under it. If you cancel the program, the administrator must return your money to you minus any fees it has already earned within seven business days. A catch: debt relief providers, including attorneys, who meet with you face-to-face before you sign up are likely exempt from most of the rule. Make sure to find out who holds the account, and who is responsible for sending the money on time.

For your last check, make sure you have evidence of each step of the process being concluded. After paying off the MCA settlement, you want a record of the full and final settlement of all amounts, a confirmation that you are not responsible for any further amounts for the MCA, and that you have met all your obligations. The contract should explain exactly how and when you get the confirmation and final notice that the MCA is closed. Some of the documents may come due only after all payments are made. Don’t take the funder’s word for what you will receive when you pay off the settlement. If your settlement included filing a UCC termination, cancelling a lawsuit or judgment, or withdrawing a processor or customer notice, your agreement should say who is responsible for each item and by when it will be done.

Taxable Income

Even without a 1099-C, the form certain lenders must file when they cancel debt, the IRS may treat canceled debt as taxable income when you have a debt settled or a creditor writes it off. Some exceptions, like debts wiped out by bankruptcy or from insolvency, may apply, and can be claimed on Form 982. Ask a tax professional.

Keeping an Eye on the Details

Funder terms for settling an MCA and repaying that amount will differ across funders. Make sure to understand the terms of the agreement you sign so that you know what you are agreeing to do to resolve the debt, how long it will take, and who is responsible for each of the steps along the way. If you don’t have a written agreement on how, when and how much you will pay, don’t make a payment. If you don’t know where the money is going, don’t send any money. Keeping an eye on the details is the key to ensuring that both you and the funder have a full and final conclusion to the MCA.