When your business is doing well, you have no problems making your payments, and everyone’s happy. You are a good customer. But when bad things happen to good businesses (as we all know), suddenly your credit account balance starts to climb, and you can’t pay anymore. When you can no longer pay as agreed, your relationship with the creditor changes, and the creditor wants you to know that.
Now, not all debt is bad debt. If you borrowed money for an expansion that made you money, then that was good debt. If you borrowed money for an expansion that lost you money, then that was bad debt. So if you can’t pay, what do you do with your bad debts? With bad debts, you have four options:
- (1) try to work out a settlement with the creditor,
- (2) try to work out a settlement with the collection agency,
- (3) file bankruptcy, or
- (4) just walk away.
Cut a Deal
The first is to cut a deal with the creditor. What you’d really like to do is pay your creditors back in full and save face, but sometimes, you just can’t pay. However, that doesn’t mean you just want to walk away. So what you can do is “cut a deal”. Now you can try to work out a payment plan with your creditors. “What I really need is this much time to pay, and this much payment,” you’ll tell them. The creditor may give you more time, reduce your payments, or even reduce your principal. “I’m unable to pay this much, but I can pay this much,” you’ll tell the creditor to settle your account. Again, they may agree, but they may not. You just have to try. However, if you find yourself unable to make payments, you may find the creditor is more willing to negotiate than you realize.
After awhile, the bad debt gets so past due the creditor sells it to a collection agency. That’s better for a settlement. The collection agency bought your bad debts for pennies on the dollar. Maybe 10 cents, maybe 20 cents. Anything it gets over that is gravy for the collection agency. That is good news when you come to the negotiating table. The bad news for you is the effect this has on your credit rating. So you call the collection agency and you say, “I can’t pay the amount of the bad debt, but I can pay you this much.” They may say no. But, maybe they’ll say yes. If you can put together a lump sum of around half the balance and offer that, you may find they are very willing to listen. The key, though, is to have that lump sum ready, and to be willing to suffer the consequences on your credit rating. If they do agree to terms, get all of them in writing. You never want to rely on anyone’s word. Make sure the agreement says they will consider the debt paid in full and report it to the credit agencies that way.
File a Chapter 7, 11 or 13
The third option is bankruptcy. No one wants to file, but depending on your goals you could file a Chapter 7, 11 or 13. Chapter 7 bankruptcy is a “liquidation” bankruptcy. The advantage of Chapter 7 bankruptcy is that you may discharge most of your debt, but you may have to close your doors while a bankruptcy trustee sells your assets to pay your creditors at least something. Chapter 7 can be the end of your business. Chapters 11 and 13 are reorganizations. Reorganization, on the other hand, is a form of bankruptcy that is meant to help companies, including your small business, stay open while also repaying their creditors. You pay back part of the debt over time and keep the doors open. Which one fits depends on your situation. Talk with your lawyer.
Walk Away
The last option is to walk away. If you have few assets, the creditor is unlikely to spend time or money trying to collect from you. Depending on your situation, this just might be the easiest choice. Of course this would be a detriment to your credit.
Remember, any option will result in a negative hit to your credit, so be sure to weigh that risk into your decision. Whichever path you take, it will take a few years to get a decent credit rating again, but sometimes that is just the cost of doing business. No one wants to be a bad customer. But when bad things happen to good businesses, it can happen to anyone.
About Delancey Street
Delancey Street is a premier, and award winning, business debt settlement company that helps business owners nationwide. Our goal is simple: help you escape debt in a safe and legal manner. Based out of New York, we can help in 49 of 50 states. We tell you how it is; because your business and future is on the line.
