Where You Stand
Once you know that you’re at the point where you can’t pay a bill, like a supplier or vendor, the worst thing you can do is to sit around and worry and wonder what’s going to happen. The situation may already involve a lawyer or the vendor may already be threatening to sue you. Even if you’re seriously considering giving up and shutting down the business or giving it away, before you do anything else, find out where you stand. This kind of situation is more complicated than you might think. Speak to an attorney in your state who specializes in debt and bankruptcy. If you can’t afford one, get help through the Legal Aid Society. Knowing where you stand will give you peace of mind and will very likely save you money in the long run. At Delancey Street, we hear this question from owners all the time. We are a business debt settlement company, not a law firm, so when a supplier dispute turns into a legal question, that is a conversation for your attorney.
The first thing to ask yourself is if you actually signed a personal guarantee making you personally liable for the debt. With a vendor, unlike a credit card company, you may not have signed one. In other words, you may not have any personal liability for the debt. So go back through your past records and see what you actually signed. Also, the contract will tell you exactly what the vendor is allowed to do. And here’s another thing: Does the vendor have a lien on any of your assets, under the contract or by law? That matters a lot.
The type of business entity you were running when you took on the debt matters. If you were operating as a limited liability company or a corporation, and you did not personally guarantee the debt, the vendor should not be able to sue you personally. One example of the corporate shield comes up in the common situation where you run a business that’s incorporated as ABC Inc., and you’ve signed a contract to buy $100,000 worth of product, but your business can’t pay for it. Your company can be sued, but generally speaking, you personally can’t be unless you signed a personal guarantee. If you were running as a sole proprietor or a general partnership, however, you would generally be personally liable for any obligations of the business. That doesn’t change when you form an LLC, unless you cancel the old contract with the vendor and form a new one with the LLC.
The business world can be tough on your health, and a lot of owners who are in trouble have serious health problems of their own. Sometimes they’ll wonder if going on disability gets them off the hook. Legally, it doesn’t - the disability has no impact on the obligation to pay the debt. So if you are liable and gave a personal guarantee, you can still be sued. Disability income is usually safe from garnishment, but with a personal guarantee a creditor can potentially go after your other assets. Before you do anything else, one more thing to check: How old is the debt? It is possible the statute of limitations for collecting it has already passed. Ask your attorney.
Five Options to Talk Through with Your Attorney
Once you know where you stand, here are five options to talk through with your attorney.
The first is a payment plan. In a workout, you and the supplier sit down to determine a repayment plan, without either going to court. With the right help, you may be able to avoid court with negotiated payment plans. If it works, you may not have to go to bankruptcy. It’s a way to keep things out of the courtroom.
The second is selling. If closing your business is too painful to contemplate, you should take an inventory of the various assets, equipment and products or inventory you have. Before closing the business, find out what the business, its assets and its inventory are worth. You may have more value to offer than you realize, and that could help you in working out an arrangement with creditors. If the business itself has value and could be sold to a third party, for instance, that money could be used to help settle debts.
The third is handing the business to a new owner. Simply handing over your interest in the business to someone else doesn’t pass on the debt as well. You need to negotiate a written agreement in which the new owner assumes responsibility for the debt and you convey your interest, and the new owner agrees to indemnify you. With any arrangement like this, you want to be sure you’re released from all further obligations, and that’s a complicated legal agreement. It’s the kind of thing you definitely want to have a lawyer look at.
The fourth is real estate. If the business owns real estate, you could give the real property to the vendor to pay off the debt. This happens all the time with real property. Make sure the agreement says that once the debt is satisfied there are no further obligations and you are released.
The fifth is bankruptcy. If you truly cannot pay the debt, you may have to consider it. But you may not have to go that route, and a good lawyer will help you choose the best option for you. When bankruptcy is a better path, like Subchapter V, we let our clients know and get them in touch with appropriate counsel.
Settling Debt for Small Business Owners
In our work settling debt for small business owners, we see too many people who can’t pay their suppliers. They’re so overwhelmed they think their only choices are closing the doors, or walking away. But there are ways of resolving debt without going to court, and the options above are worth weighing before you give up. We negotiate with lenders and other business creditors, for less than the full balance. Our program is a way to resolve debt without taking on another loan, and if we can’t help or if a cheaper option exists we’ll say so on the first call. At Delancey Street, your first consultation is free and confidential.
