How to evaluate a business debt settlement firm

Firms that offer to negotiate business debt, particularly merchant cash advances, contact owners at exactly the point when evaluating anyone carefully is hardest. The questions below are all answerable in writing before you sign anything with one.

What exactly is this company

Ask whether it is a law firm, a company that employs or contracts lawyers, or a non-legal servicer. Then ask for the name of the specific attorney who will handle your file, the state bar they are admitted in, and their bar number — and check it on that state's bar website. If no lawyer is involved, ask who will be communicating with your creditors and in what capacity, because negotiating on your behalf and giving legal advice are different activities with different rules.

The fee structure, in writing

Fee models include a flat fee, a percentage of enrolled debt, a percentage of "savings" against the balance, and monthly retainers. Each behaves differently:

• A percentage of enrolled debt is charged on the size of the problem rather than on the result.
• A percentage of savings depends entirely on how savings is defined — against the accelerated balance, the original balance, or the amount actually paid. Get the definition.
• A monthly retainer continues whether or not anything settles.

• A fee of 20% of enrolled debt is $36,000, owed on the size of the problem.
• A fee of 30% of "savings" measured against the accelerated balance is 30% of $90,000, or $27,000.
• The same 30% measured against the current balance is 30% of $30,000, or $9,000.

One settlement, one firm, three fees between $9,000 and $36,000, decided by a definition in a paragraph most people skim. Note what the first line means as well: $150,000 settled plus a $36,000 fee is $186,000, which is more than the $180,000 owed before anyone was engaged.

Ask when the fee is earned, what happens if nothing settles, and what happens if you leave after three months. Get the answers in the engagement agreement, not in an email.

Fees before results

The FTC's Telemarketing Sales Rule prohibits debt relief services sold by telephone from collecting a fee before a debt has been settled or otherwise resolved (16 CFR 310.4(a)(5), text at law.cornell.edu). The rule's debt relief provisions are framed around consumer debt, so whether it reaches a firm working on business obligations is a legal question that depends on the facts and on how the rule's coverage applies. The practical consequence is that a protection you might assume exists may not, and you should evaluate the fee structure on its own terms.

Where your money sits

If the arrangement involves accumulating funds toward settlements, ask whether those funds go into a dedicated account in your business's name that you control, or into the firm's account. Ask who receives any interest, what happens to the balance if you terminate, and how long a refund takes. An account you cannot see or withdraw from is a meaningful risk on its own.

What they claim

Any specific promise about outcome deserves weight against the firm rather than for it. Nobody controls whether a holder settles, at what number, or how quickly. Statements worth noticing: guaranteed percentages, "we can stop the debits", "your contract is unenforceable", or an assurance that no lawsuit will follow. A firm making a legal claim about your contract should be able to say which clause and which state's law it relies on.

What they tell you to do about payments

Many strategies involve stopping payments. A firm that recommends that should tell you plainly, in writing, that it is likely to be an event of default under your agreement, what remedies that permits, and that the personal guarantee is unaffected by their involvement. If that conversation is skipped or minimised, weigh it heavily — you carry those consequences, not the firm.

Communication and control

Ask whether creditors are directed to them, whether you may still speak to the holder, whether you receive copies of all correspondence, and how quickly they respond to a lawsuit or a levy. Ask what happens if you are served: does the firm defend, refer, or step back.

The contract with the firm itself

Read it with the same care as the funding agreement. Look for the cancellation right, refund terms, an arbitration clause, a power of attorney and its scope, an indemnity, and any clause assigning them rights over your communications with holders.

Independent checks

Search the entity name in the Secretary of State registry, check for a licence where your state regulates debt adjusters or settlement providers (coverage of business debt varies by state), look for enforcement records at ftc.gov and your state attorney general, and read complaint narratives rather than ratings.

The alternatives, stated plainly

Owners resolve this three ways. Some negotiate directly with the holder, which costs nothing and works more often than the marketing around it suggests. Some hire a lawyer in their own state hourly or on a flat fee for a specific piece of work. Some engage a firm. This page does not recommend any of the three; it exists so that if you choose the third, you choose it with the questions answered.

This is general information rather than legal advice, and nothing here endorses or discourages using any category of firm. Whether a particular arrangement is right for you depends on your contracts, your state and your finances, and a lawyer licensed in your state is the person to review both the funding documents and the engagement agreement.