When cash flow dries up and the lender keeps calling, the promise of a quick fix can be tempting. That is exactly what debt settlement companies sell. While this may seem like a straightforward solution, the truth is more complicated. Many of these companies rely on misleading advertising. In many cases, they end up hurting their customers rather than helping. But before you consider working with a debt settlement company, you should carefully weigh the risks and potential downsides.
John’s Story
Take one of our clients. John Smith (not his real name) owns a small business that was facing significant cash flow problems. A friend referred John to a company, and John wanted to restructure his existing loan with extended terms and lower monthly payments. He believed the company was reputable. The company promised to negotiate John’s existing $100,000 debt down to $50,000, with extended terms and lower payments. The company’s fee was 35% of his debt, or $35,000. John signed up. The debt reduction never materialized. In fact, things had only gotten worse. With the fee included, he now owed $135,000. When he tried to resolve it or get a refund, they tried to make excuses, and then they went silent.
The whole ordeal was very frustrating for Mr. Smith. Not only did he take on an extra $35,000 and end up with a much larger debt, but the stress took a real toll on his own well-being and on the stability of his business.
John’s story isn’t unique. The Consumer Financial Protection Bureau (CFPB) and seven state attorneys general recently sued a business for operating an illegal debt-relief enterprise that allegedly swindled more than $100 million from financially struggling families. The lawsuit alleges deceptive practices and false promises. Consumers who have fallen on hard times are often easy targets for scams. So are business owners. The reason you hear about these scams is that debt settlement companies prey on struggling small business owners who need help but may not know where to turn.
Debt settlement companies make all sorts of promises of quick relief. What they often leave out is that you could find yourself facing a bigger problem. They will tell you what you want to hear, not what you need to know. They will often encourage you to stop making payments to your creditors. As soon as you stop paying your creditors, you are opening yourself up to a whole new array of problems. The problem is there is no guarantee the lender will reduce your debt. All the while you are accruing additional late fees. Your business could also find itself in breach of contract, risking legal action against it, and your credit score can take a serious hit.
Although a debt settlement company might spend months negotiating with the bank to get a good deal, you might not get the settlement offered at all. And when a lump-sum deal does go through, the settled loan does not look like a financial success, because it is still a default. What you may not know is that settling your debt can have a long-term impact on the way you get funded. The next time you need capital, a default can jeopardize your ability to borrow money, and that puts the stability and growth of your business on the line.
On top of that, these companies frequently charge hefty upfront fees with no guarantee of any debt reduction. A debt settlement company knows a business is struggling and it knows they can make money by swooping in and relieving the owner of their last reserves of cash in exchange for the promise to ultimately do the work for which they have been hired. Many debt settlement companies deceive borrowers into signing up for services that cost far more than they’re worth. Many claim to be able to provide a quick fix, but you often end up with nothing to show for it. Beyond the fact that these companies add more expense to an already high-cost situation, they’re also interfering with your credit, and the repercussions can be costly.
There is an ethical side to this as well. These companies often take advantage of vulnerable consumers. Businesses are no exception. The big “gotcha” moment is that the debt settlement company is not a neutral party and they don’t have your best interests at heart. Remember, the debt settlement company isn’t doing you a favor; they’re in it to make money. While these companies may make a quick buck, the end result often harms the very owners who hired them for help. After all, a poor business decision like this can be difficult to recover from.
So what should a business owner do instead? Contacting your lender and communicating about the situation is a much smarter solution than reaching out to a third-party debt settlement company. By talking to them directly, you have a shot at finding a solution. It’s important to approach your lender as soon as you realize you won’t be able to pay. You’ll need to explain your situation. Just be honest. If you are facing delinquency, or will be, let the lender know. The more up front you are, the more likely you can work out the details. Beyond your lender, you can use a reputable source like the National Foundation for Credit Counseling. Or you can consider a legitimate debt consolidation loan to pay off your debts in full. A reputable debt consolidation company will be upfront with you about how much it can really help, and will offer a structured repayment program. They will not encourage you to go delinquent on your bills.
Don’t rush into signing up with any company. As with any business investment, the best defense is knowledge and caution. Do thorough research and due diligence before you take any action, and find out exactly what is involved in any transaction. Be wary of any company that charges upfront fees, promises guaranteed results, or advises you to stop making payments to your creditors. Those are red flags - don’t ignore them.
In the end, debt settlement companies can lead to a situation worse than the one you started with. If you have gotten to this point where you are seriously considering hiring a debt settlement company, it is very important that you fully understand the risks involved. This could make the difference between your business’s survival and failure. Dealing with your finances well - rather than jumping to quick fixes - is the best approach for your long-term financial health and peace of mind.
