An owner asked, “All our debt is in the company’s name. I never personally guaranteed anything. Can we settle?” The short answer is yes. Many businesses wind up shutting down because they’ve piled up more debt than they can handle. At that point, owners are desperate to know whether they are on the hook once the company closes. The good news is, business debt can often be settled in order to keep the business going, or after it shuts down, so that it doesn’t strip the owners’ personal bank accounts. At Delancey Street, we negotiate with business creditors on behalf of owners in exactly this spot, and the first thing we explain is leverage. When you owe money to a creditor, the more leverage they have over you personally, the more likely they are to say no to settling for a partial payment.
So if you own your business through an LLC or a corporation and you never personally guaranteed any of your debts, the creditor knows they have limited ways to collect from you personally, and that may make them more willing to take a small percentage of what’s owed than if they can go after you more directly. On the other hand, if you personally guaranteed the debt, or if it was cosigned by a friend or relative, then the creditor has much more leverage over you personally. A settlement is an agreement to pay less than what you owe in exchange for closing the debt. Without a guarantee, the business is the one doing the settling, and that tends to work in your favor.
How much can you expect to pay to settle a debt with a business creditor? It really varies, depending on the kind of creditor, the legal specifics of the debt, and how tough the creditor usually is about collecting past-due debts. Some creditors are more aggressive than others about having past-due debts cleared from their ledgers. Settlements typically run between 30% and 70% of the total, so if you can scrape together that much cash, you’re in a strong negotiating position.
Sometimes you can settle one or two small business debts at a fair price, but not be able to settle the big ones. And that doesn’t do you much good. So it can make sense to tell creditors every settlement offer you make is going to be contingent on all creditors agreeing.
When You Have to Close Your Business
Once a business is out of business, creditors understand that it is going to be a lot more difficult for them to collect.
When you have to close your business, here’s how to order your bills so that nobody is coming after you later. First, pay any debt that is secured by an asset you personally own and have pledged as collateral, if you want to keep that asset. Then take care of wages and benefits owed to employees and any loans for which you are personally liable. After that, handle the suppliers, credit card companies, leasing companies, advertising, travel and entertainment, dues and subscriptions, and repairs and maintenance.
If your company is closed or closing and you are leasing equipment, see if you can give it back. Returning the equipment to the leasing company before the end of the lease can reduce the amount you might owe for all the remaining payments on the lease. You might face some penalties for returning it early, but it’s a lot easier than figuring out how to pay for the whole piece of equipment.
If you have a secured creditor with a claim on your business assets, you need to try to negotiate a deal before you turn over any of those assets, in a way that leaves you owing nothing more later. It is much easier to hold the upper hand while you still have the asset in your possession.
Unsecured Creditors
After you have gathered up the outstanding accounts receivable and liquidated the inventory and equipment, you may have enough left to start making settlement offers to the unsecured creditors. If you only have a few unsecured creditors, you may be able to call them on the phone, explain the situation, and say you can pay a part of what you owe to settle the debt. If there are more than a few unsecured creditors, however, it’s a good idea to put your offers in writing.
A Professional Debt Settlement Service
Some of your creditors may want more money than you can realistically give them, or may simply be uncooperative. In those cases it may be time to consult with a lawyer, or a professional debt settlement service. Either of these professionals brings the threat of bankruptcy right from the start: they can make a strong case to creditors that you may end up filing for bankruptcy if a settlement isn’t reached. Lenders to a business would rather avoid the expense and delay of bankruptcy, so most will agree to a settlement rather than risk getting less money later. That is the work we do.
Filing for bankruptcy lets you wipe out the business debts you can’t handle and get a fresh start. The downside is that the filing stays on your credit report for up to ten years and pulls your score down with it. Debt settlement might only hold back your score for about half that time, and bankruptcy often means you have to turn over some of your assets. Because of these risks, many people find debt settlement the more appealing option.
We’re Delancey Street, a business debt settlement company that negotiates with merchant cash advance funders, lenders, and other business creditors on your behalf for less than you owe; we don’t sell you another loan. We’re not a law firm; when bankruptcy or litigation is the right thing to do, we refer the owner to an independent attorney. Your first consultation with us is free and confidential; if a cheaper option exists, or if bankruptcy counsel is the better path, we say so on the first call.
