Small Business Debt Relief Companies: 5 Checks Before You Hire One

If you’re a small business owner drowning in debt, every relief company sounds the same. Before hiring anyone, check five things. Can they settle the kind of debt you have? When do they get paid, and what do they promise to do? Will they look at your numbers and ask if your business can survive? And finally, what will waiting cost you in fees, lawsuits, and taxes?

First, Your Debt

First, your debt: If you’re a sole proprietor, this won’t be a surprise. You’re personally liable for all of your business debts. But even LLC owners are personally liable for nearly all credit cards and lines of credit they’ve signed. Check your paperwork if you’re not sure.

If you’ve personally signed for it, it settles like personal debt, often for 40-60 cents on the dollar. Of course, there are exceptions. Debts owed only by the company, SBA loans, and merchant cash advances require specialists. Someone who understands what the lender can and can’t do in each of these situations will do better than a generalist.

Some debts, like merchant cash advances in default or with a confession of judgment, need the attention of an experienced business attorney. An SBA loan needs somebody who knows the SBA’s own rules for settling them. Some debts require a Chapter 11 bankruptcy. Red flags: a firm that lumps them all into one program, or one that doesn’t ask what kind of debts they’re dealing with. If the settlement company doesn’t mention these specialist situations, ask why. Each situation has its own solution, and an honest company knows the limitations of its program.

If you’ve got a merchant cash advance, the finance industry says it isn’t a loan; you sold future receivables. A $50,000 advance at a factor rate of 1.3 means paying back $65,000 in daily payments the funder pulls from your account. Try to pay it off early and you’ll pay the full 130% regardless. Worse, if you fall behind, the funder may have a confession of judgment letting them get a court order against you without even suing you. The bigger problem is stacking--getting a new advance from another funder to pay the old one.

For SBA loans, after the loan has defaulted and the bank has sold all the collateral, you can usually make an offer to settle the rest for less. The SBA has its own form, SBA Form 1150, called an Offer in Compromise. But know this: the process is governed by SBA rules and timelines, not the usual settlement rules.

If a COVID EIDL loan has been 120 days late, it may be sent to the Treasury Offset Program. A payroll tax debt carries personal exposure. If you miss payroll tax payments, talk to an accountant, not a settlement firm.

Scam Signs

When they get paid: If you pay the company in advance, are they really fighting for you or just looking for the next client? The FTC has a rule for debt relief, called the Telemarketing Sales Rule, that bans charging fees before a debt is settled, the client agrees, and the client makes a payment to the creditor. But this rule doesn’t cover all business calls. “Front-loaded” fees or “retainers” make it easy for a firm to take your money and run.

According to the FTC, calling an upfront fee a “retainer” doesn’t make it legal, and hiring a lawyer doesn’t make fees legal. Putting client money in a “settlement savings account” doesn’t make it legal either. Money in these accounts should be your money to take out at any time, and you should be able to get it back within seven business days of asking for it. Make sure that’s in the contract before signing up.

The FTC lists scam signs, and guarantees to settle all your debts is on the list. “We can stop all collection lawsuits and legal actions,” is on it too. Collection lawsuits can’t always be stopped by settlement, and no honest company will tell you different. And as of 2024, the FTC bans false statements about what they can do for your business on sales calls.

The FTC also warns about companies who sign you up without taking a close look at your finances. An honest company takes an honest look at your situation. It needs to. Your numbers tell them whether the business is viable. A business that can’t survive takes a different path than a business that’s recovering.

If the business no longer works, closing it doesn’t make the debt problem worse, because you’re on the hook either way. Stacking another cash advance or draining retirement to keep it alive does. A firm that skips the viability question is skipping the bigger questions, too.

What Waiting Costs

What waiting costs: If a program asks you to stop paying creditors, late fees and penalties can pile up while your debt’s being settled, and a creditor can sue you. Here’s the rub: most business credit cards aren’t covered by the CARD Act’s limits on rate increases on existing balances. So the cost of waiting on business debt is more expensive than you think. Settlement before a judgment, and before interest hikes, is often a better deal for you.

If a debt is forgiven or settled, the IRS generally treats that as taxable income. At $600 or more canceled, the lender sends you a 1099-C. One exception to the general rule is if you’re insolvent right before the debt gets forgiven (more debts than assets). That exception is claimed on Form 982. Make sure the company mentions that before you sign up.

Remember: your debt was the result of a business decision, not a character flaw. It’s a chapter in the story, not the whole story. If that chapter’s going badly, choose your next step wisely.