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Detroit Business Debt Settlement and Merchant Cash Advance Legal Help
If you own a small business in Detroit and are struggling with debt, you may be considering debt settlement or taking out a merchant cash advance loan. However, these options come with legal implications that you need to fully understand beforehand.
How Debt Settlement Affects Your Business Legally
Debt settlement involves working with a company that negotiates with your creditors to reduce the amount you owe. This can negatively impact your business’s credit score and may result in tax consequences.
Tax Implications
If a creditor agrees to forgive part of your business debt, the amount forgiven is considered taxable income by the IRS. This means you will owe income tax on the forgiven debt. For some businesses, this unexpected tax bill can be another financial burden.
Credit Score Damage
Debt settlement usually involves stopping payments to creditors. This causes your business’s credit score to take a hit. A low credit score makes it difficult to get approved for financing in the future if you need it.
Potential Lawsuits
Your creditors have the legal right to sue you for the unpaid debt balance. When you stop making payments, you increase the chances they may take legal action against your business. Defending a lawsuit is expensive and time-consuming.While debt settlement seems like an easy fix, the negative legal and credit consequences can hurt your business in the long run.
Legal Concerns with Merchant Cash Advance Loans
A merchant cash advance (MCA) provides a lump sum of cash to a business in exchange for a percentage of future credit card and debit card sales. It is not technically a loan, so MCA companies can skirt state laws that regulate loan terms and interest rates. This allows them to charge very high fees.Here are some common legal issues faced by businesses that use merchant cash advances:
Deceptively High Costs
Merchant cash advance companies often don’t disclose the annualized percentage rate (APR). But when you calculate all the fees, it usually equates an APR of 60-300% . These excessively high rates can trap your business in a predatory cycle of debt.
Daily Repayments
Most MCA contracts require you to pay a fixed percentage of your daily credit card receipts. This immediate repayment structure doesn’t take into account seasonal revenue fluctuations or other business cycles. Payments are taken automatically from your merchant account daily.
Personal Guarantees
The business owner usually has to personally guarantee the MCA. This puts your personal assets at risk if the business defaults. It also allows the MCA company to potentially take money directly out of your personal bank accounts.
Aggressive Collections
If your business struggles to make the daily payments, MCA companies can freeze your merchant accounts without warning. Some even show up in person to collect payments or seize assets. Their aggressive tactics can destroy a small business.
Getting Legal Help
As you can see, debt settlement and merchant cash advances both pose significant legal and financial hazards for small businesses. If you already used one of these options and are facing legal issues, get help from a business law attorney right away.Here at Delancey Street, our experienced attorneys can advise you on the best strategies to resolve business debt lawsuits, negotiate with creditors, and escape predatory MCA contracts. We have helped many Detroit companies successfully overcome legal issues stemming from debt settlement agreements and merchant cash advances.
