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Can Sole Proprietors and Partnerships Get Business Debt Relief?

Can Sole Proprietors and Partnerships Get Business Debt Relief?

Many small business owners are struggling with debt during this difficult economic time. As a sole proprietor or partnership, you may be wondering if there are any options for getting relief from business loans, credit cards, and other financial obligations. The short answer is yes – there are a few potential avenues to explore.

Filing Bankruptcy

One option to deal with overwhelming business debt is to file for bankruptcy. There are a few different types of bankruptcy that may apply to sole proprietors and partnerships:

  • Chapter 7 bankruptcy completely liquidates the business assets to pay off as much debt as possible. Any remaining unpaid debt is discharged, providing a fresh start. However, you would be forced to close down the business.
  • Chapter 11 bankruptcy allows you to reorganize your business finances and pay back debt over time through a court-approved repayment plan. This allows you to continue operating the business while working out a manageable debt solution.
  • Chapter 13 bankruptcy is intended for sole proprietors and partnerships with regular income. It provides 3-5 year debt repayment plans to catch up on owed payments while still operating the business.

The main downside of bankruptcy is that it damages your business and personal credit for years. And there is no guarantee all your debt will be eliminated. But it may be a last resort if you cannot keep up with payments.

Debt Settlements

If bankruptcy seems too damaging, debt settlement may be an alternative route. This involves negotiating directly with creditors and collection agencies to pay a lump-sum that is less than the amount owed. Typically you would stop making monthly payments, allowing the debt to become delinquent, to motivate the creditor to accept a reduced settlement offer.

The pros of debt settlement is avoiding bankruptcy and paying less overall. But it requires having enough cash on hand to fund the settlements, and it will still negatively impact your credit. You also risk getting sued if negotiations break down with creditors.

Hardship Programs

Many lenders have hardship assistance programs to provide temporary relief. Options like forbearance, modifications, waiving fees, reducing interest rates, or extending repayment terms are sometimes available for borrowers under financial distress.

Eligibility terms and relief options vary widely depending on the lender. Most require detailed financial documentation to verify hardship. And assistance is typically only temporary, from 3-12 months. But it allows you time to improve cash flow without damaging your credit or shutting down your business.

Federal COVID Disaster Loans

During the COVID crisis, the SBA introduced special low-interest Economic Injury Disaster loans to support small businesses. These loans have very long repayment terms up to 30 years, and payments can be deferred for the first year.

Sole proprietors and partnerships directly impacted by COVID can potentially still qualify for these disaster loans and take advantage of the borrower friendly terms. This can provide a lifeline to stabilize things while supplementing with other debt relief options.

The Bottom Line

Getting small business debt relief as a sole proprietor or partnership can be a challenge. But exploring bankruptcy filings, debt settlements, hardship assistance programs, or federal COVID loans could provide viable options before having to shut down operations. Every situation is different, so consult experienced legal and financial advisors to map out the pros, cons and feasibility of these potential debt relief strategies.

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