When a business gets into financial trouble and can’t pay its debts, it has a few options. One route is bankruptcy – essentially giving up and closing down. But there is an alternative method called “business debt resolution” that aims to resolve debts in a more constructive way. So what does business debt resolution actually mean?
An Alternative to Bankruptcy
Basically, business debt resolution refers to dealing with business debts outside of bankruptcy when a company defaults or becomes insolvent. Instead of simply liquidating all assets, it looks at ways for the business to continue operating in some form while resolving debts in a managed way.The key premise is that liquidating a business is destructive and wasteful. As explained on Second Wind Consultants:
“Destruction of business value is unnecessary. Therefore, it’s unethical as well. Too many jobs and too much economic activity are at stake in the preservation of hard-earned value.”
So rather than go through formal bankruptcy proceedings which would likely result in assets being sold off cheaply, business debt resolution aims to find an alternative solution that preserves at least some of the business value.
How Does Business Debt Resolution Work?
There are a few ways a business debt resolution process can play out. A common approach is for a professional resolution company to negotiate with creditors on the company’s behalf. The goal is to agree on a reduced settlement amount that will satisfy debts. This stops interest and fees accumulating and gives the business breathing room.Another option highlighted by Second Wind Consultants is transferring assets to a new purchasing entity through an “Article 9 short sale”. This allows assets to be liquidated while maintaining operational continuity of the business. Jobs and economic activity are preserved rather than destroyed.The US Consumer Financial Protection Bureau explains that non-profit credit counseling services can also assist with managing business debts. They help develop debt management plans and budgets to alleviate financial pressures.The key unifying theme is finding an ethical way to resolve unsustainable business debt without simply shutting up shop. Preserving economic value is prioritized wherever possible through restructuring and sound financial management.
When is Business Debt Resolution Appropriate?
Business debt resolution methods tend to be explored when a company defaults on debts or enters a zone of insolvency. The business essentially lacks the income or assets to meet creditor demands through normal repayment schedules.This doesn’t necessarily mean the underlying business model is flawed. As Troy Tucker from Blue Sky Business Resources points out:
“These companies still have some fundamentally sound business ideas, they just got over-leveraged…that’s the best model.”
External factors like recessions can easily push previously successful businesses into unsustainable debt despite smart business practices.In cases like these, business debt resolution mechanisms provide an alternative to bankruptcy. Jobs can be saved, creditors can get repaid (at least partially), and economic value can be preserved.
Benefits and Drawbacks
Business debt resolution offers some clear benefits compared to formal bankruptcy:
- Jobs and economic activity preserved rather than destroyed
- Assets liquidated in structured way to maintain business value
- Owners/shareholders maintain control rather than court-appointed administrators
- Debt burdens resolved allowing fresh start
However, there are also some potential drawbacks to weigh up:
- Process relies heavily on creditor goodwill and voluntary participation
- Legal protections of formal bankruptcy absent
- Tax implications often complicated
- Future access to credit could be damaged
The US Consumer Financial Protection Bureau also warns that working with third-party debt resolution companies can be risky. Make sure to research credentials and fee structures carefully beforehand.Non-profit credit counseling services tend to offer safer assistance with fewer conflicts of interest.
At its core, business debt resolution refers to dealing with unsustainable debts outside the bankruptcy process. The goal is to preserve value where possible rather than simply liquidating assets. Mechanisms like negotiating reduced settlements and structured asset sales maintain business continuity as best as realistically possible.For companies defaulting due to temporary factors like recessions, business debt resolution can save jobs and economic activity. However, it does depend heavily on voluntary creditor participation. Formal legal bankruptcy proceedings also offer greater structure and protection.Overall there are pros and cons to business debt resolution approaches. But for businesses defaulting primarily due to external temporary factors, exploring alternatives to bankruptcy can potentially preserve jobs and value. The ethical course of action is avoiding unnecessary destruction of sound business ideas.