Welcome to Delancey Street. We are a nationwide business debt settlement company that helps clients all over the country escape predatory merchant cash advances and more. Business relief is what we do. Read this as a view from inside the industry, not a neutral article.
Two industries that share a name
The phrase debt settlement company covers two industries that share a name and almost nothing else. One focuses on household debt. The other works on money a company borrowed or advanced against its revenue. Mixing them up can lead to bad decisions, bad assumptions, and sometimes bad outcomes.
Business debt and consumer debt sit under different rules
It’s important to understand that business debt and consumer debt sit under different rules. Let’s start with the legal frame because it explains most of the differences you will feel. The Fair Debt Collection Practices Act defines debt as an obligation primarily for personal, family, or household purposes. Business debt obligations typically fall outside that definition. So the federal collection protections that people talk about online often don’t apply to the calls your company is receiving for business debt relief.
The FTC’s debt relief rule under the TSR works the same way. It bans advance fees for debt relief services sold by phone, but it is built around consumers and consumer debt relief specifically. Our reading is that a business-to-business engagement is not automatically covered by that ban. That is interpretation, not a settled rule you should lean on, and state law can still reach commercial debt relief practices. This is important because as you consider doing research on business debt settlement companies, every single company has a different practice when it comes to fees and how they collect.
The FTC Act and small businesses
Having said that, you should not read that as anything goes when it comes to commercial finance. The FTC Act still reaches unfair and deceptive acts that include commerce and acts aimed at small businesses. In 2022, the FTC obtained an order which banned certain merchant cash advance companies and their owners from the small business financing and debt collection industries, with more than 2.7 million returned. The allegations included misrepresenting terms and personal guarantees, forcing confessions of judgments, funding less than promised, and personally threatening business owners. So while there are protections that exist, it just arrives through different doors than it does for consumers, and this is important, especially as you consider what rights you have.
Documents, not a payment plan
What does the work actually look like when you hire a business debt settlement company? First and foremost, a serious business debt settlement company starts with documents, not with a payment plan. Business debt is not a one-size-fits-all type of area. Every single situation is different, every single lender is different, and every single lender has a different contract with different terms and conditions.
It’s important before you sign up with a business debt settlement company that they’ve read every single funding agreement that you’ve signed, every amendment, every personal guarantee, and have reviewed over one year of bank statements. The goal is to hire a company that truly understands your business and what you’ve been through financially.
The outcome here is to learn three things:
- what each creditor is actually entitled to
- what your company’s real cash position is after paying expenses like payroll and vendors
- which creditors are likely to move first when enforcing liens and filing lawsuits
Negotiation is not one call
After that, typically the business debt settlement firm will take over creditor communications, work to slow the collection process, and negotiate. Negotiation is not one call. Negotiation consists of a series of offers, counteroffers, document exchanges, creditor by creditor, and every single creditor has their own appetite and approach when dealing with this. Some will initially outwardly refuse to negotiate at all, but in the end, they all negotiate. The issue is when they decide to do it.
A written agreement, not a verbal deal
The finish line for you as a business owner is a written agreement which states the new amount, the payment terms, and what happens to any enforcement actions such as liens, judgments, or personal guarantees. Many business owners make the mistake of engaging in a verbal deal, but unfortunately a verbal deal is not a settlement. Any money you send without a signed release is just a payment on the existing debt and the terms and conditions you signed under that existing debt agreement.
Licensed attorneys when things escalate
At Delancey Street, we have a network of licensed attorneys who step in when things escalate because the legal steps in a commercial debt restructuring are state specific. This is a structural choice, not a promise about outcomes. Each creditor will get different results depending on the creditor situation, their loan portfolio, and more importantly, your exact situation as well. For example, how much cash your business has, how much principal you paid down, things like that, which are unique to your exact situation.
Merchant cash advance debt is its own animal
Now, when we talk about merchant cash advance debt, it’s fair to say it is its own animal. Most business debt settlement work today involves a merchant cash advance. An MCA is disguised as a purchase of future receivables, not a loan. That framing truly matters because if it’s not a loan, state usury caps are not supposed to apply.
The reconciliation clause
Having said that, there are some weaknesses, for example, the reconciliation clause. A properly drafted MCA lets the merchant, a.k.a. you, ask for a reconciliation when the actual deposits are coming in below the projection used to set the initial daily or weekly payment.
Davis versus Richmond Capital Group
New York’s First Department allowed a usury theory to move forward in the Davis versus Richmond Capital Group case, specifically pointing to reconciliation clauses that were discretionary. There were allegations that the reconciliation clause was refused, and there were allegations that payment rates did not look like good faith terms.
The practical lesson you can take away as a business owner contemplating business debt settlement is that courts will examine whether reconciliation actually functions. That doesn’t mean that every single MCA is a loan. It means that the funder’s conduct is crucial in evidence, and evidence changes what a negotiation is worth and what the final settlement will look like.
Two other mechanics that drive the urgency
There are two other mechanics that can drive the urgency when you decide to hire a business debt settlement company.
Confession of judgment
First things first, the confession of judgment. This is something that was very popular before and now has become less and less commonly used. Confession of judgment lets a funder enter a judgment without litigating first. New York amended CPLR 3218 in 2019 so that a confession must be filed in the county where the defendant resides, at the execution of the contract, or at filing. This closed the old practice of filing against out-of-state merchants in a handful of New York state counties. Having said that, filing against New York domiciled businesses is still possible.
UCC filings
The second thing that funders will do is use UCC filings. With a UCC filing, a funder can send notices to your credit card processor or your customers and intercept any revenue that was normally destined for you. Often, this can strangle a company faster than any lawsuit would. In the past, we have found that credit card processors like Stripe and Clover, when they receive such a notice, will halt depositing any revenue into your bank account and will freeze it until a resolution is received.
SBA debt runs on a different track
Another thing to consider when contemplating business debt relief is SBA debt, which runs on a different track. SBA debt does not behave like MCA debt, and treating the two is a common mistake. When an SBA loan defaults, the lender will liquidate, the guarantee is purchased, and the file will move towards the agency. Settlement will happen usually through an offer in compromise, which is submitted on SBA Form 1150 with Form 770 financial statements for anyone looking for relief.
Under the SBA’s servicing and liquidation guidance, an offer is generally considered after the collateral has been liquidated, and the amount being offered offers a reasonable relationship to what could be recovered through formal enforced collection. If the file passes to Treasury for cross-servicing, collection fees representing 20, 10, or even 30 percent can be added on top of the balance. So the bottom line is that timing is the whole game.
Where leverage is coming from and what it costs
Now, with all of these different debts, what’s important is where leverage is coming from and what it costs. When it comes to MCA debt, settlement leverage is simple and blunt. A creditor is accepting less than what is clearly owed to them because it’s a better alternative than what they would collect on their own. For them, what they are looking at is what will happen if they proceed with formal litigation against a company that might have thin assets, a slow court calendar, and with other creditors already in line.
In practice, though, what that means is payments have to stop or change while a deal is being negotiated. Unfortunately, that is considered a breach and a default of the agreement, and it will invite lawsuits, judgments, account restraints, or other notices sent to your credit card processor. Any company that is describing this as risk-free or not bringing up the risks at all is not describing the actual mechanism and actually doing you a disservice.
Other issues that deserve your attention
There are a few other issues that also deserve your attention when contemplating hiring a business debt settlement company.
Personal guarantees
First, personal guarantees. Settling the company’s debt obligation does not release a guarantor unless the written agreement says so.
Taxes and cancellation of debt income
The second implication is taxes. Forgiven debt is usually considered a cancellation of debt income. Exclusions do exist for bankruptcy and insolvency, but they are claimed on Form 982. They require real supporting facts, and typically you will need a CPA to handle this.
Fees
The third thing to contemplate is fees. Business debt settlement companies typically charge a percent of the enrolled debt as a fee. It’s important you ask, how is that percentage being calculated, when is it earned, and what happens if a creditor never settles at all?
Questions worth asking any firm
Below, we’re going to talk about some questions that are worth asking any firm, including us.
- Who actually negotiates, and are attorneys involved where state law requires them?
- What happens if a funder is going to sue me in week three, and is that representation included or billed separately?
- Is the fee based on enrolled debt or on savings, and at what moment is it earned?
- Will you show me the actual written settlement agreement and release before the money moves, or will you just send the money anyways?
- And more importantly, what’s your specific plan for personal guarantees and for UCC filings?
Settlement one option available to you, not the only option
Before you go through with settlement, you should compare it to other options, such as a single term term loan, negotiated forbearance, or reconciliation, or Subchapter V reorganization, or even an orderly wind-down. Pre-default work is usually cheaper, and easier, than post-default work, because no one has accelerated a balance, or filed anything against you yet. What this really adds up to, is that business debt settlement is a viable pathway possible. We recommend hiring a business debt settlement company and getting a risk free consultation to learn about your options.
