Business Debt, Now What?

Business debt is the hot trend no one wants to be a part of. Thanks to the global pandemic and resulting economic crisis, many businesses are having problems paying their bills. It would be great if you could take out some sort of insurance policy to help you pay bills in times of crisis. Unfortunately that doesn’t exist. So, if you find yourself in debt, what can you do?

1. Know Your Company Structure

Your options for handling debt and your personal liability will vary depending on the type of company you have. A sole proprietor is personally responsible for all business debt. Partners in some partnerships also have personal liability. This means that creditors can come after your personal assets to pay off business debt.

On the other hand, if the business is organized as a corporation or limited liability company, owners and stockholders are shielded from personal liability. Some tax obligations will pass to owners if your business closes. Creditors can also try to “pierce the corporate veil” and seek payment from shareholders if you pay personal expenses with business funds. If you sign a personal guaranty when borrowing money or gettin credit you are personally responsible for paying the debt. This is one reason we strongly encourage our clients to include a personal guaranty in their credit application.

Before you decide how to handle your debt and the future of your company, it’s important that you understand your personal liability.

2. Pay or Reduce Your Debt

We know it’s easier said than done, but there are many options for paying your debt. Negotiating discounts, consolidating loans, crowdfunding, and arranging payment plans are possibilities. We also strongly urge clients to make sure they get all of the money they are owed before taking out additional loans. If your clients or customers owe you money, consider talking to a collection agency like ours for advice on how to solve the problem.

3. Declare Bankruptcy

If you can’t amicably negotiate debt restructuring with your creditors, Chapter 11 bankruptcy is an option. Companies need to have some working capital before filing in order to survive the bankruptcy process during which the court determines how much creditors will receive. However, a 2005 study found that approximately 40% of Chapter 11 bankruptcies switched to Chapter 7 where the company closed and assets were sold with proceeds going to creditors. Before declaring bankruptcy, talk to a professional to understand the likely outcome.

4. Get Sued

Another option is to allow yourself to get sued. You can then deal with the court ordered judgment collection process at a later date. You should know that once a judgment is issued the creditor can get a lien. Once we have a lien for our clients, we can do a bank levy and that will take out all the money in the bank account on that day up to the total amount owed (which includes court costs, interest and attorney fees awarded by the judge).  We can also garnish payments from the debtors’ customers and garnish their credit card and Paypal accounts. Typically you can get a better deal by being forthright and negotiating with your creditors prior to litigation. But if you can’t come to terms this does give you extra time to try to turn things around.

If your formerly successful business is suddenly in debt you may feel overwhelmed. As a business owner, you’ve put a lot of time and energy into your company. It’s natural to feel depressed when faced with difficult circumstances. However, it’s important to remember that you are more than your business. Not every bad thing that happens to your business, especially during a pandemic, is your fault or under your control. Knowing your options and taking control of your business debt can help you, your family, and your employees.

At The Kaplan Group, we know how difficult times are right now. We’re here to support you and your business. Let us know how we can help.

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