Can you settle a secured business debt? Short answer: you can. But should you? That’s a completely different question. Maybe your business has hit hard times. Maybe the costs to keep your business running have suddenly skyrocketed. Maybe your business is so close to the edge it’s hard to fathom surviving another week. You’ve hit rock bottom and you want out. We totally get it. The first thing we recommend to a business owner in this scenario is, “Don’t panic.” That sounds easy to say, right?
A secured debt is something that has collateral backing it up. When a creditor has collateral to fall back on, you might feel like they have the upper hand. The one we see most often is a Small Business Administration (SBA) loan, and if you have defaulted on one, you could be personally liable and your assets could be at risk. Settlement is possible, but you have to understand how these defaults are handled and move quickly. And the hard part of settling a secured business debt doesn’t involve negotiating. It’s the part before that. Again, it’s not so much about the negotiation part as it is understanding how the system works.
You are in default whenever you fail to meet your obligations under the loan agreement. It doesn’t matter whether you aren’t paying or just making partial payments. Paying late or missing payments can all put you in default.
What comes next is a demand letter. This is a letter explaining the default and demanding a certain payment amount. Owners who can’t pay usually ignore it, and that is a mistake; we tell our clients the most important thing they need to do is to pay attention to the first demand letter they receive. Not paying won’t make your debt magically disappear. If you suddenly find yourself in a position where you can’t keep up on your loan, call your lender. Don’t go dark on them. They might not want to deal with you at first, but if you are honest and communicate your situation, they might be willing to help. When you’re faced with a choice between running from the situation or taking an honest, open conversation, be honest. Be open about how and why your business has been unable to pay the debt. The point is to reach some agreement, whether that means curing the default or making other arrangements. If you continue to keep silent and withhold payments, you are just going to get hammered.
An Offer in Compromise
If you can pay some of the debt but not all of it, settlement is on the table. With an SBA loan it is called an offer in compromise, which in plain English means “let me pay you less than what I owe.” An offer in compromise (OIC) is a debt settlement arrangement between a debtor and a creditor. This debt agreement allows the debtor to settle for less than the full amount owed by making a lump sum payment. Not every deal has to be paid at once, though. Some lenders will work with borrowers who can’t make a lump sum payment, as long as their finances show they can afford the installments as promised. An offer in compromise is only as good as the lender is willing to accept it, and they will use your financial documentation to decide if they’ll accept it.
It’s important that you have a clear picture of your finances. Do you have the cash to make the settlement? Think about your realistic options. Can you put up a lump sum payment, and if so, how much of the debt can you pay? How much can you afford to pay in monthly installments? Make a budget, and figure out how much you can really afford to offer. Start collecting your financial documents together, the earlier the better. Settlement isn’t a guarantee.
Negotiate Early
Many owners think that the longer they wait to settle, the better deal they’ll be able to get. This isn’t really true. If you’re looking for a debt settlement or offer in compromise, we recommend not waiting. Negotiate early. You should be able to agree on some arrangement before the Treasury comes knocking. That’s when settlement becomes an extremely complex process. Don’t wait until your account is taken over by the Treasury and a repossession is imminent. Don’t wait; move sooner, not later. Negotiate now.
Why does that matter so much? The SBA does not make the loans, but it stands behind them in the event of default. Lenders are willing to lend to you because the government will repay them a portion of the loan if you default. The lender will try to collect payment on the default, but then will transfer the account to the government if it cannot collect. In practice, if no settlement is reached, the lender demands that the government pay the guaranteed portion, and the loan is taken over by the Treasury. You still owe the loan, but now the U.S. Treasury Department owns the debt. Once the government gets involved, you lose leverage.
From there, the Treasury can repossess the assets you used to secure the loan, and you could face collection methods including garnishing any bank accounts or wages. It can do all of that without filing a lawsuit or getting a judgment. I’ll say that again. The government doesn’t have to sue you to try to collect on the loan. As long as you’re on the hook, it’s fair game. That can happen quickly. This is why it’s so important to move quickly. There’s really no harm in contacting the lender before this happens.
File for Bankruptcy Protection
You can settle the debt, or you can file for bankruptcy protection. Both are viable, but the effects on you and your business are different. If you are in default, and you have not already filed for bankruptcy protection, bankruptcy can help you escape the default situation. But bankruptcy is a big decision. It doesn’t mean giving up, or saying “I give up.” But it can be the right way to get the relief you need to move on. Filing can wipe out your personal liability for an SBA loan. Once you file, the lender and the government cannot seize your assets, garnish your wages, or levy your bank account. Bankruptcy automatically stops all that, and once you receive a discharge, the lender can no longer come after you for repayment. As always, get legal advice from a professional.
There is a catch. While bankruptcy can protect you from a sudden seizure of your assets, it doesn’t necessarily protect the assets you’ve pledged as collateral. The lien stays in place, and that collateral still secures your debt even though you had the advantage of bankruptcy. If you later sell an asset with a lien on it, the money from the sale can go to repay the loan, even after your discharge.
Yes, you can settle defaulted secured business debt, but it isn’t simple. Every business can run into trouble, but once a business can’t pay anymore, that’s the time to seek help, before the file reaches the Treasury. If your business has not yet been sued or seized, it is time to call. Before you completely give up on your business, let’s talk through your options.
