The Entrepreneurs’ Guide to Debt Management

Like it or not, debts are part and parcel of life in the 21st century. Entrepreneurs and citizens in general have fallen into debts so deep that it has become a global pandemic. There are so many factors, like failed financial expansion plans, reduced sales and losses, and any one of them could plunge you and your business deep into debt. If you find yourself neck-deep in debt, don’t lost heart! You are not alone, and you are not helpless. There are a number of effective methods, following which you can relieve yourself of all your debts.

A businessman managing his business debts

The First Step is Evaluation

Before you can prepare or undertake a relief strategy, you have to understand how liable you are for the debts your business is suffering. If your business is a LLC, that is a limited liability company, the business is liable for all its debts, and nothing you own, like your personal accounts, home or car, has been kept as collateral. Hence your creditors can never come after your personal property seeking repayment, you are secure. However, if your business is a partnership or a sole proprietorship, or by legal ruling or signing of a contract you have made yourself legally liable for its debts, then everything you own is at risk.

Some other decisions need to be made in case of a proprietorship, as follows.

Do You Wish to Close Down the Business?

This is a big choice and should not be taken hastily. If you intend to close down, there are a number of things you can do to clear your dues. The first, easiest but not the most prudent thing to do is absolutely nothing: wait and watch. Several creditors will come after you a few times, but once they will realize that you have no way to pay them off, might just shrug off the debts. The others could get legitimately angry and end up suing your firm, and come after you for what you are worth.

Here are some options you could consider while closing down the business.

Filing for Bankruptcy

You could file for personal bankruptcy under Chapter 7, which wipes out a large number of outstanding debts, from credit card debt, judgments and many others, provided you do away with all valuable business assets and maybe some of your personal property to settle the debt.

Selling the Business

The next more logical option is to sell the business. If you are able to find a buyer, and are not inclined towards keeping the company, this is the best option, but it is not easy at all. If your profits are non-existent, but your business is popular, or has a good public profile, you may still find buyers, as heritage value counts for something.

Liquidating the Business

And finally, you could liquidate the entire business, which is, shut it down, sell everything of value from shares to assets, and then use the money to pay off your debts. Many creditors would prefer taking over the company as it would make more sense than a lawsuit, and they could make profits in the future. Also if you liquidate it yourself and pay off your debts you won’t need to file for bankruptcy, which is good for your credit report.

Are You in Favor of Keeping the Business?

This is the trickier of the two. Salvaging a sinking ship is not an easy task. It is possible that your business was actually making profits, but has been crushed by a poor expansion plan or deal gone wrong. In such a case, chapter 7 bankruptcy would demand that you shut down the business, so it is not at all favorable.

"Well, now we know what not to do."

Keeping Everything: Does It Work Out?

The next probable option is Chapter 13 bankruptcy. This allows you to keep EVERYTHING, and states that you give up a portion of the income the firm makes in the next three to five years to pay off the debt. This is great but not favorable for small businesses as you will always have a bankruptcy trustee breathing down your neck and ensuring that most, if not all your money goes into repayment, and this can be very difficult for small businesses with poor cash influx.

Chapter 11 Bankruptcy: Is it Viable?

The other option is Chapter 11 bankruptcy, which entails that the business owner runs the company according to a set of procedural rules provided in the bankruptcy code. To apply for Chapter 11, you must hire an attorney to prepare a comprehensive list of disclosures, and he holds follow-up meetings and negotiations with groups of creditors on your behalf. The bankruptcy is valid only if he can get all groups of creditors to approve it, or get a judge to overrule all their grievances and pass the plan. Unfortunately, Chapter 11 bankruptcy will cost a lot, sometimes as much as $100,000 just to sanction the attorney. It is a complex and long-drawn process.

Negotiating with debtors and creditors

Negotiation between Debtor and Creditor: The Best Choice?

The last and most convenient resort is to negotiate a workout, which is exactly similar to Chapter 13, except for the fact that it is between creditor and debtor instead of having a bankruptcy court involved. This involves you dealing directly with each creditor, putting forward individual offers to each, appealing for reduced debt amounts or time negotiation. This however needs financial security and involves payment of a lump sum which you might need to procure by taking another loan, thus adding a new debt to your itinerary. You may opt for debt consolidation or debt settlement depending on your unique financial requirements.

It is not easy for an individual to work out all the kinks and save his business from drowning in debt. The right thing to do is hire a debt settlement firm to mitigate debts by sketching out a solid plan and then implementing it for you.