How much does a business debt settlement company charge? It is one of the first questions business owners ask us at Delancey Street, where we negotiate merchant cash advance, loan and other business debt, and the answer makes more sense once you know what you are paying for. Debt settlement is an arrangement where a debt is paid for less than the full amount owed. The creditor has to agree to settle for less. And the agreement has to be in writing. Sometimes the settlement amount is paid all at once, but sometimes it is paid over time. A creditor is under no legal obligation to accept less than the full amount owed. But settlement for less is far more common than you would think. A debt settlement company works on your behalf to negotiate with your creditors to settle for less than the amount owed. Naturally, working with a company to do it comes at a cost.
Percentage of the Amount You Saved
There are no fixed fees charged by a settlement company. You won’t get a quote from a settlement company like a mechanic gives for an auto repair. Most settlement companies charge their fee as a percentage of the debt you enroll, or as a percentage of the amount you saved.
Take the first model. This fee is pretty much fixed and the company has little incentive to perform. For example, if the amount enrolled is $50,000 and the fee is 20%-25% of the enrolled amount, the fee at settlement will be $10,000 to $12,500 regardless of the amount saved. In almost all cases, this fee structure is the more expensive.
When the debt settlement fee is a percentage of the money you save through negotiation, the more they save you the more they make. As a rule of thumb, a successfully settled debt will save 40%-60% of the enrolled amount. In the same example, a fee of 20%-25% of a 50% saving on a $50,000 balance means you will pay the settlement company $5,000-$6,250 at the time of settlement. With this type of structure, the company’s interests are aligned with yours.
Monthly Payments into an Escrow Account
When you do a settlement, you’ll make regular monthly payments into an escrow account maintained by the settlement company. At the same time, interest and late fees on the delinquent accounts will continue to accumulate and damage your credit score. But after you’ve demonstrated your inability to pay, creditors become more inclined to make a settlement. Being four or five months delinquent can actually be a good time to bring a settlement company into the picture. While the creditor continues to control the account, it knows a charge-off is getting closer and is unlikely to recover any significant amount of its original investment. Therefore it’s more likely to accept less than full payment. A little of the pie beats no pie at all. Once the escrow account reaches a target level, which can take as long as three years, the company starts making offers. The creditors are not required to accept.
Offers are often accepted and savings can be significant. But don’t assume that settling with creditors is the best approach. It is not always. You have to weigh the savings against the fees, taxes, and credit damage. And there are some companies out there that provide services that cross a fine line between debt settlement and financial scams. Settlement companies can’t collect upfront fees by law. If a company guarantees a settlement or charges before it settles it is violating FTC rules. A company that charges a flat percentage of the amount saved is playing fair. Consider this a good place to start. Some companies also have monthly fees for handling the escrow account.
Is It Worth It
The IRS taxes settlement savings over $600, unless you qualify for the insolvency exemption. You are insolvent if your liabilities exceed your assets. If you are insolvent, your savings are not taxed. For an owner who is solvent, though, the tax bill can make settlement an expensive proposition.
So is it worth it? If you are already behind in your payments and your credit has been damaged, then probably yes. You’ll likely save money. Plus it would make a lot of sense from a tax perspective if you are insolvent (or close to it). If you are not already behind and your credit is intact, then it may not make as much sense. You would have to stop paying in order to settle, which would hurt your credit score. And if you are solvent, then the tax bill and fee can easily eat more than half the savings. So if you are solvent and not seriously behind, settle only if you have $50,000 or more in debt. The downside is that “settled” accounts will stay on your credit report for seven years, so weigh that against what you actually keep. Remember: Your true net savings from a settlement is your gross savings minus any tax due, minus the fee.
Here’s the bottom line: at Delancey Street, our fee is a single percentage of the total amount of debt we enroll. This rate is quoted in writing before we start working on your case. That puts the number in front of you before you commit, so you can run the math above for yourself. Our senior advisors negotiate with your funders and lenders for less than the total balance due. We don’t give you another loan. The first consultation is free and confidential. If we determine your case is unwinnable, or if a cheaper option is available, we’ll tell you on the first call. We are not a law firm. When a path to bankruptcy, such as Subchapter V, is the best option, we refer you to an independent attorney vetted for this work.
