Merchant Cash Advance lawsuits, collection and judgment defense are topics that we commonly help small business clients with and discuss in these blogs. However, MCA debt settlement is an important topic within the merchant cash advance field that needs to be discussed and understood as well. Settlement negotiation is a normal part of any litigation matter including merchant cash advances. In fact, most litigation matters, and MCA matters ultimately settle before reaching trial. Negotiating a settlement is based on a number of factors including legal leverage as well as practical reasons. Settling often saves both parties from having to spend funds on lengthy litigation and taking on the risk involved with litigation.
There is a stark difference between retaining an attorney to defend and ultimately negotiate a settlement for a small business in a MCA litigation or pre-suit matter as opposed to retaining one of the so called debt-settlement companies. Debt settlement companies are common but until recently, few were enrolling clients that had Merchant Cash Advances. Our negative general opinion on debt settlement companies has not changed. Their process has always been to enroll clients who default on their debts and ask the client to send funds into an escrow account for multiple months until a certain amount could be saved to settle the matter. Then and only then would they begin to negotiate with the creditor in an attempt to settle. There are multiple problems and red flags that arise when using this model especially when it comes to MCA matters.
The first red flag is requiring clients to send their money to an “escrow” account controlled by the settlement company. There is absolutely no reason that a company should be holding any of the client’s funds for settlement at any time as the client should be perfectly capable of making payments on the settlement when it is reached. This is simply a tactic to make sure that the company’s fees will be paid. The second problem, most specifically when dealing with MCA matters is waiting for the funds to accrue in the escrow account before negotiation begins. Anyone who has ever done business with MCA’s knows that they are extremely aggressive and will pursue collection and litigation almost immediately after a missed payment. This event puts the debt settlement companies in a situation where they either do nothing because the fees have not accrued or where they retain a random attorney to “defend” the business. From our experience, these attorneys are usually somewhere outside of New York which is a problem to begin with given these cases are usually litigated in New York. The bigger problem is that they are retained to do the bare minimum in a case, which usually means filing an answer to prevent default judgment and hope that the debt settlement company can settle the matter. This approach doesn’t work in these situations as MCA cases involve far more litigation than simply submitting an answer which these attorneys are unprepared for. The attorneys hired are usually not experienced with MCA matters and most of these cases lead to judgment against the business. This is also partially because if a favorable settlement is to be reached there must be some legal leverage obtained by the business in the litigation. The attorneys retained by the debt settlement companies are not able to obtain such leverage and the negotiators working at the debt settlement company are not able to negotiate reductions. This ultimately leads to suggestions from the DS company of paying the full balance over a short period of time.
As if these reasons were not bad enough, debt settlement companies charge clients an exorbitant amount of fees when taking on these cases. We have seen fees range from 18%-30% of the reduction of the balance in these matters, which is a heavy amount. Their pitch is that these fees are charged on the back end, but this is done so that the client does not feel like they are paying in the beginning only to get walloped at the end with a heavy fee. The sad part is that we are seeing these companies take these fees even when they are unable to properly settle or represent clients which is a direct contradiction of the federal laws in place to prevent such situations.
Last, and worst of all is a new tactic that we have had multiple clients telling us about in recent months. Clients have been explaining that debt settlement companies reach out to them offering services to help them only to find out that the debt settlement companies had been advised to contact them by the MCA company collecting or are somehow linked to the MCA company. This leads us to believe that the MCA companies are purposefully creating or are working with some debt settlement companies to collect the debt that is already outstanding to them. This is a concerning trend that we have been hearing about from multiple clients.
Small and medium businesses should be extremely careful when attempting to resolve MCA issues especially if they are hiring a debt settlement company to do so. It is always our recommendation to retain a highly experienced attorney who focuses on MCA matters and knows how to negotiate and obtain a favorable settlement while also protecting the business from lawsuit as well as potential UCC liens.