Is business debt relief better or worse than closing the company?
Lots of small business owners eventually come to a crossroads where they have to decide whether to file for bankruptcy, try to settle their debts, or just close up shop. It’s a really tough spot to be in, and there’s no one-size-fits-all answer. Let’s take a look at some of the pros and cons of each option, so you can hopefully make the best choice for your specific situation.
Weighing bankruptcy
Filing for bankruptcy protection stops all collection efforts in their tracks. Creditors can’t sue you, garnish your wages, or try to collect what you owe while you’re in bankruptcy. That gives you breathing room to sort things out.
-There’s a few different types of bankruptcy filings for businesses – Chapter 7, Chapter 11, and Chapter 13. I’m not gonna get into the nitty gritty details here, but basically Chapter 7 liquidates the business to pay off what it can to creditors. Chapter 11 restructures the debt so the business can stay open. And Chapter 13 sets up a repayment plan (kinda like debt consolidation for personal debts).
The main downside is bankruptcy stays on your credit record for 10 years. That can make it really hard to get financing if you try to start another business later. Some people see bankruptcy as shameful too, although that stigma isn’t as strong as it used to be.
Here’s a detailed guide on how bankruptcy works for small businesses if you want to read more.
Trying debt settlement
Debt settlement is where you hire a company to negotiate with your creditors and try to get them to agree to take less than the full amount owed. This can work because creditors often decide getting something is better than nothing, which is what they’d get if you file bankruptcy.
-The pros are you may be able to settle for pennies on the dollar, and you avoid the credit damage of bankruptcy. The biggest con is it only works if you have the lump sums to pay the reduced settlements all at once. The creditors won’t agree to take less unless you can pay it immediately.
Another risk is shady debt settlement companies. The CFPB warns to avoid any company that guarantees they can make your debt disappear or stop all collections. Legit companies will be upfront that it may not work.
You can try DIY debt settlement by calling creditors yourself and negotiating. But having a pro who knows the system can really help. Just do your homework to find a reputable one.
Simply closing up shop
If your business debts are just too overwhelming, you may decide the best move is to simply close up the company for good. This avoids the credit damage of bankruptcy. And if your business is structured as an LLC or corporation, your personal assets should be protected from business debts.
But creditors can still come after the business assets, like equipment and inventory. And they can sue the business entity itself. You’d want to talk to a lawyer about how to properly wind down.
-The biggest risk of just closing is you remain on the hook for the debts personally if your business wasn’t properly structured to limit liability. Creditors can garnish wages or put liens on personal property.
Here’s a guide on closing a business while avoiding personal liability.
Questions to ask yourself
There’s a lot of things to weigh when deciding between bankruptcy, debt settlement, or just shutting down. Here’s some good questions to ask yourself:
-- What’s my personal liability? If you incorporated or formed an LLC, your personal assets are probably protected. If you were a sole proprietorship, you’re likely on the hook personally for business debts.
- What are my long term plans? If you ever want to start another business, bankruptcy may be off the table because of the 10 year credit impact. Debt settlement may be a better option.
- How much can I afford to pay? Creditors are more likely to settle if you have lump sums ready to pay. If you can only afford small monthly payments, bankruptcy may work better.
- How old are the debts? Debts fall off your credit report after 7 years. If you have really old ones, it may not be worth settling.
- Who are the creditors? Some creditors have policies not to negotiate settlements. Know who you’re dealing with.
- Can I DIY it? Debt settlement may be successful even without paying a company. But navigating bankruptcy is complex.
- What are the tax implications? Settled debt may be taxable income. Different bankruptcy chapters have different tax rules.
There’s definitely more you’ll want to explore about your specific situation before deciding. Talking to both a bankruptcy attorney and debt settlement company can help weigh the pros and cons for your business.
Don’t beat yourself up
One last thing I want to say – don’t feel guilty or beat yourself up, no matter how your business debts shake out. So many great entrepreneurs have been through this too.
Business is tough, and sometimes things just don’t work out through no fault of your own. The important thing is to deal with it responsibly.
And remember, you can bounce back! Plenty of super successful business people filed bankruptcy or had other dark financial times earlier in their careers.
So don’t despair. Learn from the experience, take care of business, and look ahead to brighter days. You got this!